[Hamza and Divyanshu are students at NALSAR University of Law.]
Recently, the newsletter of Insolvency and Bankruptcy Board of India was released with a shocking statistic that the average duration to conclude a corporate insolvency resolution process (CIRP) approximates 640 days, while the legally mandated limit is 330 days. This prolonged duration is a matter of grave concern and significance, as any delay in conclusion of CIRP leads to asset value deterioration, which is detrimental to the objective of CIRP, i.e. value maximization for creditors. In light of the same, suggestions re-emerged to introduce a green-channel mechanism for mergers in furtherance of a resolution plan to reduce the time taken for its conclusion.
At present, when a resolution plan submitted under the IBC involves a combination meeting the threshold under the Competition Act 2002 (Act), it is mandated to have prior approval of the Competition Commission of India (CCI) before it can be approved by the committee of creditors (CoC). In such cases, while the protection of creditor’s interests requires that the CIRP be completed as soon as possible to avoid value deterioration, the objective of protecting competition in the market will demand a prior scrutiny of the combination by the CCI to see if it is likely to harm competition in the market.
Through this article, the authors argue that the green channel mechanism (automatic approval) for mergers in furtherance of a resolution plan fails at harmonizing these dual requirements and is based on a false location of the site of problem in delayed conclusion of the CIRPs. The article, at first, discusses the problems with the green channel mechanism, and then it proceeds to analyze the significance of the CCI combination in delaying the CIRP. The article then suggests some alternatives to green channel mechanism that would expedite the CIRP without compromising on safeguarding competition in the market.
Green Channel for Mergers in Furtherance of a Resolution Plan
Under the green channel route as introduced in 2019, a combination is deemed to be approved as soon as the request for approval has been acknowledged by the CCI. Thus, it replaces the suspensory regime of the CCI (which required approval before the combination is effective), with a voluntary merger control regime (where prior approval is not required, however, the regulator is empowered to order restructuring or adjustments ex-post facto).
The problem with green channel mechanism arises from the possibility that the CoC may overlook potential appreciable adverse effect on competition (AAEC) while accepting a resolution plan and applying for automatic approval under the green channel mechanism, as seen in some instances. While it is undeniable that in case the CIRP combination was found not to cause AAEC, significant time would be saved that would have lapsed waiting for the prior approval by the CCI. However, in the worst-case scenario that a CIRP combination approved through the green channel mechanism was to be found as resulting in AAEC incurable through behavioral remedies, the CCI will have to order detangling of assets, leaving the entity with no option but to be liquidated.
The CCI, till date of writing, has ordered modifications to 29 mergers and combinations. These modifications, most of which are structural, significantly alter the connection between the acquirer and the target and the other incidental duties and rights. Hence, the green channel mechanism becomes a game of bet, where the CoC may choose to save some time in the conclusion of the CIRP, but at the cost of risking the liquidation of the target entity if the CCI finds that there is incurable threat to competition in the market, or at least, a significant change in the rights and responsibilities if the CCI orders structural remedies.
This will only lead to a downward spiral in the feasibility of the CIRP as the creditors as well as the acquirer would be less likely to commit money to a restructuring plan when they are uncertain if the company will function as per the CIRP after the CCI approval. Hence, a prior approval provides for a legal certainty which is, more so required by an insolvent entity, as a disapproval after restructuring may result in total liquidation.
The CCI Approval Does Not Delay the Conclusion of the CIRP
The premise of the green channel mechanism for the CIRP combinations, is that the approval by the CCI hampers time-bound completion of the CIRP. However, a study of 12 major combinations in furtherance of resolution plan, that were approved by the CCI suggest otherwise. The average time taken by the CIRP to be concluded was 585 days, which is 254 days more than the mandated time under the IBC. The average time taken by the CCI to grant approval to these combinations was a mere 35 days. Hence, it is evident that the CCI approval is not a major cause, let alone the only cause why the CIRP proceedings are not completed in the time mandated under the IBC, and the problem is heavily overstated.
Hence, on an average, the approval by the CCI takes no more than 5% of the CIRP time. Therefore, while it is necessary to explore mechanisms to reduce the time taken for approval by the CCI, the CIRP could be expedited exponentially by locating the real source of delay within the process and not in external bodies like CCI.
Alternative Mechanisms to Expedite CCI Approval
A comparative analysis of the time taken by the CCI to approve the regular combinations in the steel industry with the time taken by it to approve the CIRP combinations shows that the CIRP combinations took an average of 20 days lesser than the regular combinations. This reflects the commitment of the CCI to expedite the approvals of CIRP combinations as given in the Insolvency Law Committee Report 2018, which noted that the CCI had agreed that resolution plans under the IBC would be considered within a period of 30 working days. An alternative to introducing green channel mechanism would be to codify the expedited approval route for IBC-related acquisitions.
Another change could be to water down the mandatory requirement of approval by the CCI before taking approval of the CoC. In the present scenario, where all the interested acquirers are required to take approval from the CCI before the CoC could consider their bid is inefficient in so far as the CoC is not able to simultaneously vote on the bid, and multiple bidders of whom only one will be approved by the CoC are compelled to seek approval from the CCI. If, however, the section was amended to require only the entity which receives approval from the CoC to file for approval before the CCI, the time and resources of both the CCI and other entities would be saved, without having any adverse impact as the combination anyways cannot take effect unless approved by the adjudicating authority. The National Company Law Appellate Tribunal (NCLAT) has moved towards such interpretation (see here, here and here). This approach, however, needs to be codified to provide legal certainty and avoid contradictory opinions by the NCLAT.
Conclusion
With most of the countries including Australia, UAE, KSA, Egypt, etc. moving to a suspensory regime, introducing green channel which in effect replaces the Indian suspensory regime with voluntary notification regime, is counterintuitive. Green channel can be fatal to the CIRP combinations, in so far as it leaves the creditors as well as the acquirer in an uncertain phase, where they do not know whether the CIRP will be followed or not, and resultantly, cannot decide on how much money they want to put in restructuring.
The nexus between the shifting of CCI approval time and the insolvency or solvency of the target entity hangs by a loose thread of attempting to save the time required to complete the CIRP. However, as data would show, the CCI approval plays a negligible role in the delayed conclusion of the CIRP. Although doing away with CCI prior approval is not desirable, the approval can be expedited, by codifying the practice of expedited approvals for CIRP combinations, and by allowing the approval to be taken only for plans that have been already approved by the CoC.
With such measures in place, the CIRP will be concluded within the mandated timeframe, without bringing competition concerns. This will harmonize the objectives of the IBC and the Act, by protecting the market from competitive concerns of such combinations, while expediting the CIRP process to avoid value deterioration for the creditors.
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