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Interface of IBC and Competition Law



Abstract:


· What is the purview of IBC and Competition Law.

· Boundaries shared and interrelation between IBC and Competition Law.

· Brief glance of insolvency process overview under IBC.

· How Section 5 and Section 6 of Competition Law are to be dealt with.

· Tribulations previously faced before the ammendment, further ongoing and anticipated pertinent hassels under both acts.

· Whether compliance of Competition Law a bottleneck to Insolvency and Bankruptcy Code?



Object of IBC


The Insolvency and bankruptcy code was introduced on 1st December 2015 and referred to joint committee on insolvency and bankruptcy code.


It was passed by both the houses of parliament and notified in May 2016.

The term insolvency is used for both individuals and organisations. For individuals it is known as bankruptcy and for a corporate, it is known as corporate insolvency. Both refer to a situation when individual and company are not able to pay the debt in present scenario or near future.


The value of assets held by them are less than the liabilities accrued or due.

Insolvency in this code is regarded as a state where assets are insufficient to meet the liabilities, if untreated insolvency will lead to bankruptcy for Non-Corporates and liquidation for Corporates.



Why was this act introduced:


As per ease of doing business report of World Bank the average period required for insolvency process in India is about four to five years.


In certain proceedings this period has extended far beyond imagination of one’s perception.


Therefore Government of India decided to formulate a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate a time bound and hazel free closure or revival of of the businesses.



Why was competition law introduced? :


● CCI was established to prevent practices having adverse effect on competition.

● Promote and sustain healthy competition in market.

● Protect the interest of consumers.

● To ensure freedom of trade carried on by other participants in the market.

Overview of insolvency process for a corporation :

How it is carried on

● Commission of default in payments of debts by corporations/individuals.

● Application with the adjudicating authority(NCLT/DRT).

● Appointment of interim resolution professional.

● Formation of Committee of Creditors(CoC).

● Preparation of information. memorandum by resolution professional.

● Insolvency Resolution plan proposed.

● Insolvency Resolution plan approved by Committee of Creditors or Liquidation.



What is Insolvency resolution plan:


Corporate insolvency resolution is a process during which financial creditors assess whether the debtor’s business is viable to continue and options for it rescue and arrival if any if in this resolution it is decided that business cannot be carried on profitable manner, then it should be wound up, the corporate personality will undergo liquidation.

This means all the Assets of the company will be sold and the Committee of Creditors will receive the money from such liquidation.


The corporate personality’s existence will come to termination after liquidation and Registrar of companies will strike off it’s name.This puts and end to it’s existence as separate legal entity.


The question is what happens when resolution plan for functioning the business is approved by committee of creditors.


After the approval by committee of creditors the business is taken-over/sold by bidding process to any other person or corporate entity.


How did CCI come into picture regarding Insolvency and Bankruptcy code 2016:

There are certain practices which restrict competition in market they are said to have appreciable adverse effect on competition (AAEC)


They are in three forms:


1)Combination under section 5 of competition act.

2)Any sort of anti competitive agreements.

3)Abuse of dominant power by major players of the industry.


As one of the above objects of competition law is to prevent AAEC (appreciable adverse effect on competition) due to combinations under section 5 of competition act

What is combination:


Acquisition of one or more Enterprises by one or more persons or merger or all commission of enterprise shall be a combination of such Enterprise


When a corporate entity bids to acquire another entity which is undergoing insolvency and bankruptcy proceedings, Competition Law particularly Section 5 and section 6 of the competition act empowers CCI to regulate such combinations, therefore the bidder must acquire permission of CCI to proceed to acquire corporates under bankruptcy and insolvency code.


What are factors that CCI lays basis for granting permissions for combinations :

Combination includes merger, amalgamation, and acquisition of shares and acquiring of control. Enterprises entering into combinations have to notify the CCI, which has to decide within 90 working days either to permit or deny such combination if no affirmation or rejection is received, combination is deemed to have been approved.


· Effective competition before and after combination.

· Which competitors might go extinct from market due to such approval.

· Total Market share before and after combination.

· Likelihood of increase in prices or profit margins of products.

· Contribution of such approval to economic development.

· Any other adverse effects on national economy or industrial growth.


CCI is empowered under the act to issue directions, orders and levy penalty to ensure fair competition in market.



On obtaining permission from CCI:


It was presumed that there will be many multiple resolution plans by acquirers submitted for the same corporate debtor, the question arose whether notifying the CCI, prior to the approval of a resolution plan by the Committee of creditors would constitute a ‘pre-mature’ filing since, ultimately there would be only one resolution plan, which would succeed?

This might cause unnecessary large volume of work on CCI



To which a officer of government replied:


1) We are strengthening the system, leaving little room for disgruntled promoters to stall the process on any pretext,”, adding that seeking CCI’s nod will also reduce monopoly risk.

2) Once CCI nods to the combination, the adjudicating authority national company law Tribunal’s (NCLT) work would also be eased to an extent


When to apply for the approval of combination from CCI:


Whether before approval of resolution plan from committee of creditors or after approval of resolution plan from committee of creditors?


There were many questions and confusions raised in above regard, there were also certain practical situations where permission was obtained after approval of committee of creditors and in some cases the permission was obtained prior to the approval from CoC

The paramount concern was “when should a resolution participant approach CCI”

But later on this confusion was cleared by the amendment law given by parliament on 17 August 2018


The amendment clearly stated the ascent of CCI is indispensable and shall be accorded before committee of creditors finalizes resolution plan


If the bid of a prospective buyer crosses the threshold limit given under Section 5 of the competition act the bidder would strictly comply for obtaining the permission of CCI before finalisation of resolution from committee of creditors, and if the bid amount does not cross the threshold specified under Section 5 then the bidder is not required to get CCI approval regarding section 5.



Certain cases illustrated before ammendment of 17th August 2018:


Previously there were certain cases being notified to the CCI both prior to the approval and post to the approval of the Committee of creditors . For instance, in the acquisition of Binani Cement Limited, they were the first few initial proceeding that were examined by competition Commission of India there were two resolution plan applicants namely,

1)Dalmia Cement Limited

2)UltraTech Cement Limited


Both of them filed separate notifications with the CCI prior to receiving an approval from the Committee of creditors . The CCI accorded an approval, finding no violation ofAAEC to both Dalmia and UltraTech. However, the approval to UltraTech was accorded by the CCI post the Committee of creditors approval of the Dalmia resolution plan, thereby making CCI’s approval of UltraTech irrelevant and disembodied .


In another case it was observed acquisition of Electrosteel Steels Limited by Vedanta Limited the CCI was notified post the approval of the resolution plan by the Committee of creditors Importantly, Vedanta’s resolution plan was subsequently approved by the NCLT during the CCI’s review process. Such a situation i.e. approval by the NCLT pending the CCI approval could possibly lead to two issues which are illustrated below


● (1) disqualification of Vedanta and ultimately liquidation of Electrosteel assuming that CCI’s approval took more than 270 days (mandated under the IBC)

● (2) potential gun-jumping concerns under the Competition Act because of the conflict between the IBC and the Competition Act resulting from the implementation of “control” provisions under a resolution plan (pursuant to the approval of NCLT).


The CCI has up until now expeditiously assessed a number of IBC transactions and approved such transactions, with an average of 25 days per transaction. As mentioned above, this Amendment is a welcome step given that it clarifies the exact timelines for notifying the CCI in the Insolvency resolution plan framework.


But there are certain colossal problems stated below that steel sector and other few industries are facing :


The IBC mandates a 180 day period which is extendable to 270 days for the completion of the resolution process. However, it has been found hard to stick to the prescribed time-frame owing to the litigation initiated by ousted promoters or losing bidders, and courts still settling certain substantive issues.


Predominant examples of this are the insolvency proceedings in the case of Bhushan Power and Steel and Essar Steel India Limited. Although insolvency proceedings were initiated for both companies more than 650 days there is no resolution in sight and neither has any final liquidation been made.


Further anticipated problems not taken into consideration by Competition Commission of India (CCI) :

As is evident from the above, the Commission has most generously been passing its orders of approval, finding no appreciable adverse effect in the steel sector. It is important to consider that certain transactions, despite receiving the Commission’s approval may have not been effectuated, since the acquiring entities may yet to be declared the highest bidder/ yet to receive the approval of the committee of creditors for their respective acquisitions of the insolvent target companies. In such a situation, while one company awaits to be declared the winner, they, in the interim are not prevented from swooping for another insolvent steel company.


In simpler words, acquirer company ‘ATTA’, having received the Commission’s approval, (but not yet declared the highest bidder) for insolvent company ‘BATA’, may approach the Commission and file its notice for the acquisition of yet another insolvent company ‘CATA’ in the same sector. Thus, what this entails is that in a separate race, company ATTA is free to swoop for another insolvent company like CATA and will have to approach the Commission for its prior approval, as made mandatory subsequent to the amendment in the IBC.


What the Competition Commission will now be facing with is a intricate situation. It will be borne with the task of assessing company ATTA’s acquisition of insolvent company CATA while it is still unclear whether ATTA would finally acquire BATA or not. It is thus unclear how the Commission will perceive such a situation.



CERTAIN POSSIBLE SOLUTIONS:

Whether, CCI will consider the transaction to be company ATTA’s acquisition of insolvent company CATA (without including the market shares of company BATA), as despite getting the approval for company BATA from the Commission, in effect, company ATTA is yet to acquire BATA for want of approval of the committee of creditors (CoC)/ being declared the highest bidder under the IBC proceedings; or


ALTERNATIVE POSSIBLE SOLUTION:


Whether, CCI Will it consider company ATTA to include company BATA (as company A has previously received approval from the Commission for acquisition of insolvent company BATA and assume that it will be the final winner) while assessing the transaction for acquisition of insolvent company CATA.



Conclusion:


● If CCI grants permission for combinations within prescribed time on expeditious basis compliance to see Competition Act will not be hindrance in the process of insolvency bankruptcy code. The harmonized construction of provisions of CCI and IBC will give an effect of synergy on economic reconstruction and proliferation of the economy. They will also facilitate proceeding of NCLT.

● Steel sectors and other prolonged proceedings have certainly hindered the object of IBC defeating the soul of law and true intent of our legislators

● Also the adjudicating authorities NCLT does not differentiate between financial creditors and operational creditors which has caused an havoc in preference of payment to the financial creditors

● SEBI moving to Supreme Court on the ruling of Securities appellate Tribunal(SAT) to overide IBC provisions is impediment in proceedings of IBC, thus drubbing the object of the Insolvency bankruptcy Code

Whether,

CCI Will it consider company ATTA to include company BATA (as company A has previously received approval from the Commission for acquisition of insolvent company BATA and assume that it will be the final winner) while assessing the transaction for acquisition of insolvent company CATA.

Conclusion:

● If CCI grants permission for combinations within prescribed time on expeditious basis compliance to see Competition Act will not be hindrance in the process of insolvency bankruptcy code. The harmonized construction of provisions of CCI and IBC will give an effect of synergy on economic reconstruction and proliferation of the economy. They will also facilitate proceeding of NCLT.

● Steel sectors and other prolonged proceedings have certainly hindered the object of IBC defeating the soul of law and true intent of our legislators

● Also the adjudicating authorities NCLT does not differentiate between financial creditors and operational creditors which has caused an havoc in preference of payment to the financial creditors

● SEBI moving to Supreme Court on the ruling of Securities appellate Tribunal(SAT) to overide IBC provisions is impediment in proceedings of IBC, thus drubbing the object of the Insolvency bankruptcy Code


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Author Details: Ashutosh Shinde (2nd year student at Dayanand Law College, Solapur)

The views of the author are personal only.


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