India: Paradox Of Regulatory Approvals In CIRP

Last Updated: 18 May 2018
Article by Riya Agicha

The corporate insolvency resolution process has been facing several hiccups and the law has been evolving. One of the tricky issues has been the regulatory approvals required, the stage at which these need to be obtained and the consequences of the same not being granted. The Insolvency and Bankruptcy Code, 2016 (Code) clarifies that the resolution applicants are required to comply with all other applicable laws in addition to the Code. A resolution applicant may propose any structure as it may deem fit keeping in mind not only the interest of corporate debtor but also the resolution applicant's long-term strategy of reviving the corporate debtor. That said, the resolution plan may be subject to regulatory approvals from Reserve Bank of India, Competition Commission of India (CCI) or other sectoral central or state government authorities, thus triggering different laws. However, the Code does not contemplate the timing of applying and obtaining such regulatory approvals.

To understand the consequences of the issue revolving around regulatory approvals, let us consider the broad stages in the resolution process of the corporate debtor for the purpose of applying and thereafter obtaining the necessary regulatory approvals:

  1. Before submission of resolution plan to the resolution professional;
  2. After submission of resolution plan to the resolution professional and before obtaining approval of the committee of creditors;
  3. After obtaining approval of the committee of creditors and before submitting the resolution plan to the Adjudicating Authority being the National Company Law Tribunal (NCLT);
  4. After submitting the resolution plan to the NCLT and before approval of the NCLT; and
  5. After approval of NCLT.

No uniform practice

Since the law does not lay down the stage at which the regulatory approvals are required to be applied for and obtained, the resolution applicants act as per their discretion. In case of Binani Cement Limited, few resolution applicants made applications with CCI after submitting the resolution plan and before obtaining approval of the committee of creditors.The CCI accorded its approval to Rajputana Properties Private Limited before the resolution plan was submitted to NCLT while UltraTech Cement Limited received CCI approval after the resolution plan of Rajputana Properties Private Limited was submitted to NCLT but before final adjudication by NCLT. On the other hand, in case of Electrosteel Steels Limited, the CCI approval is currently awaited by Vedanta Limited while the resolution plan has been approved by NCLT.In the case of Central and State Government authorities, it may be counterproductive to make applications for approvals before the approval of the resolution plan by the committee of creditors. Such lack of clarity in law may lead to needless delays and uncertainty in the whole process. It may be a good idea to provide for a mechanism whereby the regulatory authorities are bound to dispose of the applications under the Code within strict timelines.

Denial of regulatory approval

The Code lays down that the resolution process shall be completed with 180 days or in case of extension, 270 days from the date of admission of the application1 and further states that the resolution professional shall submit the resolution plan approved by the committee of creditors to the Adjudicating Authority at least 15 days before the expiry of the aforesaid period2.

If the regulatory authority rejects the application for approval after the expiry of the resolution process period, the Code does not provide for a way out. In such circumstances, the corporate debtor will undergo liquidation, even though other eligible bidders could have revived the corporate debtor. In the interest of the resolution process and to uphold the spirit of law, the Code may contemplate that in such circumstances, the second highest bidder can be given an opportunity to revive the corporate debtor.

Mandatory payment prior to receipt of all requisite approvals

While certain legislations contemplate prior approval as a prerequisite to acquisition of control, the Code provides for mandatory timelines for making payments to certain classes of creditors. To elucidate, the Competition Act, 2002 provides that any acquisition, merger or amalgamation that is notifiable to CCI cannot be consummated without the approval of CCI or until 210 days of notifying CCI, whichever is earlier3.As against this,the Code requires the successful bidder to make the payments towards the insolvency resolution process costs and liquidation value due to operational creditors within 30 days of approval of the resolution plan by NCLT4. In such a scenario, if CCI approval is not received within 30 days of obtaining the approval of NCLT, the resolution applicant may still be required to make the mandatory payment under the Code resulting in gun-jumping. To worsen the situation for the resolution applicant, if CCI rejectsthe application after such mandatory payments have already been made by the resolution applicant, the resolution applicant steps in the shoes of a financial creditor/operational creditor while the corporate debtor goes into liquidation. The monies therefore paid by the resolution applicant takes the nature of a debt thereby running a major business risk for the resolution applicant. The solution could possibly be a clarification by CCI that such payments in accordance with the Code will not amount to gun jumping. The Code should also be amended to provide that such payments towards CIRP Costs and liquidation value to operational creditors will get priority of payment over all other dues should the application be rejected by the CCI.

Management and control of corporate debtor till receipt of all approvals

The Code does not provide for the management of the corporate debtor post the corporate insolvency resolution period i.e., the period from the date of NCLT approval till the resolution plan is given effect to. The intervening period may be substantial as the resolution applicant may have to obtain certain regulatory approvals during this period. The resolution applicant may want to play a role in all decisions taken during this period. However, any exercise of control by the resolution applicant at this stage, prior to receipt of CCI approval, may be perceived as gun jumping.The current practice in many cases is that a steering committee is set out to guide the resolution professional to manage the corporate debtor during this period; however, the resolution applicant is not a part of such steering committee till the CCI approval is received. The Code ought to clarify that participation by the resolution applicant in the management of the corporate debtor during the period between NCLT approval and the effective date of the resolution plan shall not be treated as gun jumping. The Code also ought to clarify that the resolution professional shall manage the corporate debtor in the interim under guidance of a committee comprising members of the committee of creditors and the resolution applicant.

While specifying timelines in the Code would be a simpler solution, the legislature should be mindful of the limitations faced by various governmental authorities in processing such applications in a timebound manner. Any amendment to the Code may also entail amendments to other legislations. A concept of deemed approval may also help in smoothening the insolvency process.

The corporate debtor already being a run-down company, any approvals in addition to NCLT's approval makes the process complex and increases the risks faced by resolution applicants who are ready and willing to revive the company, whose fate would otherwise be liquidation. The objective of the Code is to maximise the value of the assets, therefore, it is incomprehensible why would any government authority be entitled to deny a legally compliant resolution plan except in rare cases where it is against public interest to grant the approval. A mere formality of obtaining approvals without any directions given to the government authorities to speedily process such applications, exposes the resolution applicant and the creditors to unnecessary risks.

The above article is contributed by Riya Agicha, Associate at Vaish Associates Advocates, Mumbai. Views expressed in this article are personal and do not reflect the views of the firm and specialist professional advice be sought about your specific circumstances. Specific questions relating to this article should be addressed to the author at


1Section 12of the Insolvency and Bankruptcy Code, 2016

2 Regulation 39(4) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

3Section 6 of the Competition Act, 2002

4 Regulation 38(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

© 2018, Vaish Associates Advocates,
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Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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