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5 December, 2017
Background
Recognizing that the bankruptcy and insolvency procedures in India take some of the longest times and highest costs by world standards, the committee on bankruptcy law reforms (‘BLRC’) set up by the Government of India (‘GOI’) recommended implementation of a time bound insolvency resolution process.1 Based on the recommendations of the BLRC, the GOI enacted the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with a view to promote entrepreneurship, availability of credit, and to ensure expeditious insolvency resolution in a time-bound manner, in order to balance the interests of all the stakeholders. The corporate insolvency resolution process (‘CIRP’), introduced under the IBC, is required to be completed within 180 days from the initiation of CIRP.2 In very limited situations, a one-time extension of up to 90 days is envisaged under the IBC.3 Upon the expiry of 180 days, extendable by 90 days (‘CIRP Period’), the ‘resolution plan’ is required to be submitted to the National Company Law Tribunal (‘NCLT’) for its approval. The CIRP begins with admission of application filed by financial/operational creditor or corporate debtor (‘IBC Commencement Date’), followed by inter alia, appointment of interim insolvency resolution professional (‘IRP’), constitution of committee of creditors (‘COC’)4, preparation of detailed information memorandum (within 51 days from IBC Commencement Date) and submission of resolution plan to NCLT at the end of CIRP Period. If a resolution plan compliant with the requirements under all the applicable Indian laws is not submitted within the CIRP Period, then the relevant entity under CIRP would face mandatory liquidation.
Such an outcome may not be best suited and is certainly not intended for all cases of loan defaults, covered within the ambit of the IBC.
In this regard, one of the key areas of legal compliance may be the prior notification and approval requirements under Section 6 of Competition Act, 2002 (‘ Act’). Section 6 of the Act requires all combinations (mergers, acquisitions or amalgamations) that satisfy certain financial thresholds and are not otherwise exempt, to be notified to and approved by the Competition Commission of India (‘CCI’) before coming into effect. This article examines the potential conflict between the simultaneous timelines under the Act and the IBC process and possible ways to address this.
Timelines under the Act and IBC
The process of notification to and approval by CCI is also time bound, but the notification process is triggered and the process can be commenced only upon: (i) the execution of a binding agreement or document, in case of an acquisition; or (ii) issuance of board resolutions approving a merger, in case a transaction is structured as a merger; (each trigger even being an ‘CCI Trigger Event’).5 In total, from the date of notification of a transaction, CCI can take up to 210 days6 and in limited situations, where remedies7 may be warranted, 270 days8 to approve, disapprove or approve the transaction subject to remedies.
Under the CIRP, from a practical standpoint, the selection of a purchaser of the shares/assets of the relevant entity by the COC at the earliest can take place on the 100th day of the CIRP Period. Moreover, it is quite likely that the time period for this selection may extend all the way upto expiration of the CIRP Period. In such an eventuality, the purchaser would have no opportunity to secure CCI’s approval for the resolution plan. Under the IBC, such a failure would result in the mandatory liquidation of the entity going under CIRP. Needless to say, liquidation may not be the first best option to secure the interest of creditors and uphold the mandate under the IBC.
Therefore, in order to balance the process set out under the IBC with the timelines stipulated under the Act, there may be a need to calibrate the two processes. Some of the possible solutions have been considered below.
A. Exemption from Seeking CCI Approval to Purchasers identified under the CIRP
The economic rationale behind subjecting a firm to CIRP reflects the inability of the firm to operate as an effective competitor in the market. The redressal of bad debts by selecting an economically viable purchaser is essential for the larger health of the Indian economy. Thus, such an extraordinary situation warrants a cohesive implementation of all laws and regulations that may have the potential to affect the timelines
prescribed under the IBC.
Recognizing the above, the Securities and Exchange Board of India (‘SEBI ’) has already exempted acquisitions pursuant to resolution plans approved by NCLT under the IBC from open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.9 The GOI also has, recently in November 2017, granted an exemption to combinations involving Central Public Sector Enterprises in the oil and gas sectors operating under the Petroleum Act, 1934 or under the Oilfield (Regulation and Development) Act, 1948, for a period of five years. Similarly, in August 2017, the GOI exempted the reconstitution, transfer of the whole or any part thereof and amalgamation of nationalized banks, under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, from a notification required under the merger control provisions of the Act for a period of 10 years.
A similar step may also be adopted by the GOI to exempt the mandatory prior notification and approval requirement under Section 6 of the Act for the purchasers under the CIRP .
B. Aligning the Timelines under the IBC and Act
The approval process under the Act involves four key steps: (i) notification of the transaction upon CCI Trigger Event; (ii) formation of a prima facie opinion on whether the notified transaction is likely to cause an appreciable adverse impact on competition (‘AAEC ’) in India within 30 working days from the date of occurrence of the CCI Trigger Event (excluding the number of days lost due to submitting any additional information sought from the parties by CCI or consultations between CCI and industry experts and other stake holders); (iii) in case CCI considers that the transaction may cause an AAEC in India, a detailed review possibly extending all the way up to 210 days; and (iv) in case CCI considers that remedies are warranted to address any competition concerns, determination of appropriate remedies extending upto a further period of
60 days. In sum, it is quite possible that CCI may take all the way upto 270 days to approve a transaction emanating from the CIRP process.
In light of the above, even in the best case scenario, the possibility that the transaction is approved by CCI within the CIRP Period could fail by as many as by 41 days10.
In the worst case scenario, the CIRP Period could be exceeded by as many as 179 days11 . One of the possible ways to ensure that the objectives of both IBC and the Act are met is that the GOI may consider amending Section 12 of the IBC to facilitate the exclusion of the time taken by CCI for approving the transaction, from the CIRP Period. Correspondingly, to uphold the mandate of expeditious resolution of insolvency under the IBC , the GOI may also consider instituting a separate timeline for review by CCI of the transactions emanating under the IBC.
C. Expediting the Review Process under the Act
The antitrust authorities in the United States have addressed the time-sensitivity of transactions involving financially distressed assets by introducing necessary exemptions in the merger control provisions. Thus, in case of transactions with respect to a transfer under bankruptcy covered by 11 USC Section 363(b), the merger control rules reduce the statutory initial waiting period to 15 days, from the usual 30 days.12 Similarly, the GOI may consider: (i) engaging with CCI to reduce the 30 working days review period to 10 working days; and (ii) reduce the 210 calendar days timeline provided under Act to 90 calendar days.
Additionally, the process could be further expedited if CCI permits a potential purchaser of shares/assets of an entity under CIRP, to notify the transaction to CCI upon submission of bids to the IRP under CIRP. D. Permit Post-Closing Notification to CCI of Transactions arising under the IBC Under the EU law, the transacting parties have the option of submitting a request seeking derogation (i.e. exemption) from the stand-still obligations imposed by the EC’s Merger Regulations.13 In practice, this provision is invoked in transactions involving financially distressed companies or insolvency proceedings.14
The Act itself exempts a financing, acquisition or subscription of shares undertaken by foreign institutional investors, or venture capital funds registered with SEBI, public financial institutions and banks pursuant to a covenant of an investment agreement or a loan agreement, from the mandatory prior notification and approval requirement under Section 6(2) of the Act. Such transactions are instead required to be notified within seven days of the acquisition being made. Given the need for maintaining the sanctity of timelines specified under the IBC and the possibility of the timelines being derailed because of the requirements under the Act, the GOI may consider providing flexibility for such transactions to be notified to CCI upon the completion of the CIRP and receipt of approval from the NCLT.
Conclusion
As highlighted above, the requirement to mandatorily notify a transaction satisfying the relevant thresholds, and securing an approval from CCI, poses significant risk of derailing the process envisaged under the IBC. Such a conflict would defeat the GOI’s endeavor to address the dire needs of the Indian banking sector and economy. Accordingly, it remains to be seen how the potential conflict is resolved such that the IBC mandate is not affected by the timelines under the Act.
1 The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, November 2015.
2 Section 12 (1) of the IBC states that the corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such process.
3 Sub-sections (2) and (3) of Section 12 of the IBC states that the NCLT may extend the CIRP beyond 180 days by a further period, not exceeding 90 days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of 75% of the voting shares. NCLT is empowered to grant only one extension under the IBC.
4 Section 21 of the IBC requires the IRP to constitute COC. The COC consists of all the financial creditors of the corporate debtor (excluding related parties). The CoC may endeavour to restructure the capital and operations of the corporate debtor as a going concern by approving a resolution plan.
5 In case of transactions arising from a CIRP, the precise trigger subsequent to which a filing may be made to CCI is unclear. CCI’s decisional practice suggests that where the acquisition is being made without the consent of the target enterprise, even a unilateral communication may be considered as a trigger for making a notification.
6 Section 6(2A) of the Act requires CCI to approve a transaction within 210 days from the date of notification.
7 Section 31(3) of the Act empowers CCI to direct modifications to the parties by way of imposing structural remedies (i.e. divestments) or behavioral remedies (requiring the parties to undertake certain commitments in relation to the manner in which business would be operated post consummation of the transaction).
8 Explanation to Section 31(11) of the Act excludes an additional period of 60 days, required for acceptance/re-modification of remedies directed by CCI under Section 31(3), from the total period of 210 days provided under Section 6(2A) of the Act.
9 Exemption has been provided by SEBI pursuant to the amendment dated August 14, 2017 to the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
10 Assuming that the potential bidder submits a bid or an agreement with a potential purchaser is reached immediately after issuance of information memorandum by IRP (i.e. 51 days from the IBC Commencement Date) and CCI takes 270 days to approve the transaction, 41 days beyond the CIRP Period would have elapsed.
11 Assuming that the potential bidder submits a bid or an agreement with a potential purchaser is reached immediately before the end of CIRP Period (i.e. assuming 179 days) and CCI takes 270 days to approve the transaction, 179 days beyond the CIRP Period would have elapsed.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
