Introduction to Section 31(4) of IBC
The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive legislation that aims to provide a time-bound and efficient resolution of insolvency and bankruptcy cases in India. The IBC envisages a creditor-driven process, where the Committee of Creditors (CoC) has the ultimate authority to approve or reject a resolution plan submitted by a resolution applicant. However, the IBC also mandates that certain statutory approvals, such as those from the Competition Commission of India (CCI), are required before a resolution plan can be implemented. The CCI is the regulatory body that ensures fair and healthy competition in the market and prevents anti-competitive practices. The CCI has the power to approve or reject any combination (merger, acquisition, amalgamation, etc.) that may have an appreciable adverse effect on competition in India.
The question that arises is whether the approval by the CCI is required prior to the approval of the resolution plan by the CoC, or whether it can be obtained after the CoC’s approval but before the implementation of the plan. This question has been addressed by the National Company Law Appellate Tribunal (NCLAT) in its landmark judgment in Soneko Marketing Pvt. Ltd. vs. Girish Sriram Juneja & Ors., where it held that the approval by the CCI prior to the approval of the CoC is directory and not mandatory.
Objectives of Section 31(4) of IBC and Competition Act
The main objective of the IBC is to maximise the value of assets of insolvent entities and promote entrepreneurship, availability of credit and balance the interests of all stakeholders. The IBC provides a time-bound process for resolving insolvency and bankruptcy cases, with a maximum period of 330 days for completing the corporate insolvency resolution process (CIRP). The IBC also empowers the CoC to decide the fate of the insolvent entity, by approving or rejecting a resolution plan that proposes to revive or liquidate the entity.
The main objective of the Competition Act, 2002 is to prevent practices that have an appreciable adverse effect on competition in India and to protect the interests of consumers and ensure freedom of trade. The Competition Act regulates combinations (mergers, acquisitions, amalgamations, etc.) that may cause or are likely to cause an appreciable adverse effect on competition within India. The Competition Act requires any person or enterprise proposing to enter into a combination to give notice to the CCI in the prescribed form and manner, and obtain its approval before effecting such combination.
Interplay between Section 31(4) of IBC and Competition Act
The interplay between the IBC and the Competition Act arises when a resolution plan submitted under the IBC involves a combination that requires approval from the CCI under the Competition Act. Section 31(4) of the IBC provides that if a resolution plan contemplates any merger, amalgamation or arrangement with another company, then such resolution plan shall be considered as approved by shareholders if it is approved by CoC. However, a proviso to Section 31(4) states that where such merger, amalgamation or arrangement requires any approval from any authority under any law for time being in force, then such approval shall be obtained before such merger, amalgamation or arrangement becomes effective.
The proviso to Section 31(4) implies that if a resolution plan involves a combination that requires approval from CCI under Section 6 of Competition Act, then such approval shall be obtained before such combination becomes effective. However, it does not specify whether such approval shall be obtained before or after the approval of CoC. This ambiguity has led to conflicting interpretations by different authorities and courts.
NCLAT’s Judgment over Insolvency
In Soneko Marketing Pvt. Ltd. vs. Girish Sriram Juneja & Ors., NCLAT was dealing with an appeal against an order passed by National Company Law Tribunal (NCLT), Mumbai Bench, which had rejected a resolution plan submitted by Soneko Marketing Pvt. Ltd. (Soneko) on the ground that it did not have prior approval from CCI as required under Section 31(4) proviso of IBC. Soneko had submitted its resolution plan for revival of Corporate Debtor – M/s Shree Metaliks Ltd., which was undergoing CIRP under IBC. Soneko’s resolution plan had been approved by CoC with 100% voting share. However, NCLT rejected Soneko’s resolution plan on two grounds: (i) Soneko did not have prior approval from CCI as required under Section 31(4) proviso of IBC; and (ii) Soneko did not comply with Section 29A of IBC, which disqualifies certain persons from being resolution applicants.
Soneko challenged the NCLT’s order before NCLAT on both grounds. NCLAT, after hearing both parties and considering the relevant provisions of IBC and Competition Act, passed a detailed judgment on 15th September 2023, wherein it held as follows:
- On the first ground, NCLAT held that the requirement of approval by CCI prior to the approval of CoC is directory and not mandatory under Section 31(4) proviso of IBC. NCLAT observed that the timeline provided in the IBC for completing the CIRP is very stringent and cannot be extended beyond 330 days. On the other hand, the timeline provided in the Competition Act for obtaining approval from CCI is very flexible and can be extended up to 210 days or more. NCLAT noted that if prior approval from CCI is made mandatory before CoC’s approval, then it would lead to adverse effect on the CIRP and defeat the objective of IBC. NCLAT also noted that there is no consequence provided in the IBC for non-compliance of Section 31(4) proviso, which indicates that it is not mandatory. NCLAT further noted that even if prior approval from CCI is not obtained before CoC’s approval, it does not mean that Section 31(4) proviso is not to be complied with. The approval from CCI is still mandatory before the implementation of the resolution plan and the combination becomes effective. NCLAT relied on its previous judgments in ArcelorMittal India Pvt. Ltd. vs. Satish Kumar Gupta & Ors. and Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors., where it had held that prior approval from CCI is directory and not mandatory.
- On the second ground, NCLAT held that Soneko did not violate Section 29A of IBC, which disqualifies certain persons from being resolution applicants. NCLAT observed that Soneko had submitted an affidavit stating that it was not disqualified under Section 29A of IBC and had also submitted a certificate from a chartered accountant confirming its eligibility. NCLAT also observed that Soneko had disclosed all its financial details and shareholding pattern in its resolution plan and had also submitted a declaration stating that it was not related to any other resolution applicant or connected person. NCLAT further observed that there was no evidence to show that Soneko was acting in concert with any other resolution applicant or connected person or had any common interest with them. NCLAT held that Soneko had complied with all the requirements of Section 29A of IBC and was eligible to be a resolution applicant.
NCLAT, therefore, allowed Soneko’s appeal and set aside the NCLT’s order rejecting its resolution plan. NCLAT directed NCLT to approve Soneko’s resolution plan subject to obtaining approval from CCI within a period of 30 days.
Conclusion
The judgment of NCLAT in Soneko Marketing Pvt. Ltd. vs. Girish Sriram Juneja & Ors. is a significant one as it clarifies the interplay between IBC and Competition Act and resolves the ambiguity regarding the requirement of prior approval from CCI under Section 31(4) proviso of IBC. The judgment upholds the objective of IBC to provide a time-bound and efficient resolution of insolvency and bankruptcy cases, while also ensuring compliance with Competition Act to protect fair and healthy competition in the market. The judgment also reaffirms the principle that prior approval from CCI is directory and not mandatory before CoC’s approval, but mandatory before implementation of resolution plan and effectiveness of combination.
