The Competition Act, 2002 mandates the Competition Commission of India (“CCI”) to regulate large sized mergers and acquisitions beyond high value thresholds (in terms of assets or turnovers) prescribed for “combinations” under the Competition Act, 2002 (“the Act”) to assess whether such transactions could adversely affect competition in the relevant markets, It is an exante process which requires a deep and forward-looking economic analysis of the competition scenario likely to emerge post such proposed combination. In most cases, the CCI accords “conditional approvals”, requiring modifications such as disinvestment of overlapping assets to protect competition in the markets. On the other hand, the acquisition of strategic assets of distressed companies by resolution applicants under the corporate insolvency resolution process (“CIRP”) as envisaged under the Insolvency and Bankruptcy Code, 2016 (“IBC or Code”), may require prior approval from the CCI, if the Resolution plan contains and qualifies as a “combination” under the Act, before such Resolution plan is placed before the Committee of Creditors (“CoC”) for its approval.
This regulatory overlap between IBC and the Act, that is, the moot issue whether obtaining prior CCI approval for such Resolution Plans, which qualify as “combinations” under the Act, is mandatory or discretionary under the Proviso to Section 31(4) of the IBC has now been settled by the Supreme Court in Independent Sugar Corporation Ltd. v. Girish Sriram Juneja & Ors. decided on 29.01.2025.
The Court, by a 2:1 majority in a split verdict, ruled that a resolution plan constituting a “combination” under Section 5 of the Act is unstable and liable to be set aside if it has not undergone prior CCI scrutiny, as mandated by the Proviso to Section 31(4) of the IBC.
Through this ruling, the Apex Court has reaffirmed the importance of prior competition scrutiny by the CCI of such large sized corporate acquisitions of sick targets under the IBC, which fall under the definition of “combination” under Section 5 of the Act, thereby resolving this crucial overlap between the IBC and the Act.
The Supreme Court chastised not only the Resolution Professional appointed by the NCLT (for arbitrarily waiving the requirement of prior CCI scrutiny) but also the judicial tribunals below (NCLT and NCLAT) in ignoring this mandatory requirement.
Noticeably, the Supreme Court reiterated the “literal rule” of interpretation of statutes to clarify the ambiguity surrounding Proviso to Section 31(4) of the IBC laying down that the tribunals cannot ignore the statutory mandate of prior CCI clearance under any circumstances.
Additionally, in cases of ambiguity between the Memorandum explaining a particular proviso in the Bill and Notes on Clauses of the said proviso, the Court held that Notes on Clauses must be given preference in all circumstances to determine legislative intent.
More importantly, the Supreme Court also highlighted a serious procedural lapse committed by CCI in not issuing a Show Cause Notice (“SCN”) to all relevant parties including the target company, while scrutinizing the combination forming part of the resolution plan. In the present case the CCI, in violation of Section 29(1) of the Act and Regulation 2(f) of the erstwhile CCI (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (“Combination Regulations”), issued the SCN only to the acquirer (the successful resolution applicant company) and not to the other resolution applicants and the target company which was undergoing CIRP.
Additionally, the Court highlighted that the challenges associated with “conditional approvals” granted by CCI under the Act (with remedies such as divestitures etc. of overlapping assets) reveal a fundamental regulatory lacuna, the absence of a robust and comprehensive monitoring mechanism, which creates a significant risk of non-compliance or deliberate circumvention, ultimately frustrating the purpose of imposing conditions in the first place. Further, the Hon'ble Court noted that conditional approvals by CCI are inherently incapable of mitigating risks during the interim period preceding the full implementation of remedial measures to be prescribed by the CCI while granting the conditional approvals. The assumption by CCI that post-approval remedies will correct existing market distortions fails to account for the practical enforcement challenges involved in applying such remedies retrospectively, as this enforcement lag, creates a regulatory vacuum, delaying corrective action and exposing the market to significant and potentially irreparable harm during the transitional phase. The Court observed that failing to address immediate risks undermines the efficacy of conditional approvals and their intended regulatory objectives under the Act.
Consequently, the Supreme Court recommended that the CCI should implement mandatory oversight mechanisms, such as third-party audits or independent verifications, to prevent regulatory circumvention and ensure that the objectives of the Act are effectively enforced and maintained.
Conclusion
The Supreme Court judgment is an important landmark, which will ensure that in future insolvency proceedings do not undermine competition principles and will also hopefully guide the CCI to set right its procedures while scrutinizing the resolution plans submitted during CIRP from competition angle. This decision also underscores the importance of a structured regulatory approach where insolvency resolutions do not lead to anti-competitive outcomes. Moving forward, it will be interesting to see how the CCI refines its approach to “conditional approvals” and whether additional legislative or regulatory clarifications will follow.
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