Competition Act and Insolvency & Bankruptcy Code: Applying the Failing Firm Defence for Green Channel Approval of cases

Originally Posted on BarandBench

Section 31 of Insolvency and Bankruptcy Code, 2016 (IBC) provides for approval of a resolution plan. Sub-section (4) says that resolution applicants shall obtain necessary approval as required under any law within one year from the date of the plan being approved.

The proviso to this subsection (added via the 2018 amendment) reads:

“where the resolution plan contains a provision for combination (under section 5 of the Competition Act, 2002) the resolution applicant shall obtain the approval of the Competition Commission of India (CCI) prior to the approval of such resolution plan by the committee of creditors.”

When this subsection is read together with the proviso, it means that the successful resolution applicant shall be responsible for obtaining all the required approvals from the CCI within one year from the date of approval of the resolution plan, and only in the case of combinations is prior approval is needed.

Since the onus to seek clearance from the CCI is on the resolution applicant; s/he can be armed with obtaining ‘green-channel’ approval with CCI too. This green channel approval has been recommended for combinations arising out of IBC for the first time in the Report of Competition Law Committee.

As per the report, Green Channel approval is when parties to the combination may self-asses, based on ‘specified criteria’ and pre-filing consultations with CCI, to determine their eligibility, and thereafter have automatic approval to consummate their combination. As of now, no Green Channel approval for combinations under the IBC have been notified, for want of “specified criteria”.

Under the Failing Firm Defence (FFD), there is a firm that has been consistently earning negative profits and losing market share to such an extent that it is likely to go out of business. In this case, the acquiring firm argues that the acquisition of such a firm does not result in substantial lessening of competition since it is likely to exit the market anyway. In fact, in the absence of the merger, the exit of the failing firm may lead to strengthening of a dominant position of the acquiring firm.

In order to rely on this defence, the failing firm must face the grave probability of a business failure and recovery to the normal condition must be in doubt. Also, the firm must reach the point where it can no longer pay its debts as they became due and has also exhausted all its alternatives for corporate rescue.

The Failing Firm Defence gets substantiated as a specified criterion on the following grounds:

1. Competitors are likely to pay the highest prices for assets and so a merger with a competitor could be an appropriate solution to save a deteriorating business. This is in line with the very preamble of IBC, which talks about “value maximisation of assets” in a “time-bound manner”, Further, an acquirer who is a competitor to the failing firm under IBC is most likely motivated by the desire to enhance efficiency as opposed to the mere acquisition of the market share without productive use of assets of failing firms.

2. It will further reduce the compliance burden on resolution applicants and ease the creation of market for distressed assets by creating fast-paced regulatory approval. The aim must be to move towards a disclosure-based regime with strict consequences for not providing accurate or complete information.

3. From 2011 to 2018, 97.4% of the cases have been approved by CCI without any modifications, and no rejection orders for any combination(s) have been made till date. It can be inferred that that the CCI comes with a mandate of facilitation rather than obstruction to ease of doing business.

4. Pursuant to recommendations of the Insolvency Committee Report, it has been agreed that the CCI will have a period of 30 working days for approval of combinations arising out of the Code, from the date of filing of the combination notice to the CCI. Further, this timeline of 30 days may be extended by another 30 days, only in exceptional cases. In the event that no approval or rejection is provided by the CCI within the aforementioned timelines, the said combination would be deemed to have been approved. The deemed approval from the CCI in case of no decision is suggestive of the intention of the government to circumvent procedural hassles for the resolution applicant.

5. If the Committee of Creditors feels that there are are two parties and selecting the highest bidder may lead to competition issues, they can always send the details of the second highest bidder (to the CCI) to avoid any delays. Therefore, it can take an informed opinion of the CCI at its own convenience.

6. Obtaining approval from the CCI under the Competition Act, 2002 prior to the approval of the resolution plan by the Committee of Creditors is directory and not mandatory. This means, rather than strict compliance, substantial compliance of the proviso to section 31(4) of IBC 2016 is sufficient to achieve the objective behind which this rule is enacted.