Proviso to S. 31(4) IBC mandatory in nature; Breakdown of SC’s 2:1 verdict holding AGI Greenpac’s Resolution Plan for HNGIL unsustainable

Supreme Court: While considering the instant appeals revolving around Corporate Insolvency Resolution Process (CIRP) of the Hindustan National Glass and Industries Ltd. (HNGIL) and set of appeals arising out of the NCLAT order dated 28-07-2023, pertaining to the approval accorded to the combination between HNGIL and AGI Greenpac; the 3- Judge Bench of Hrishikesh Roy*, Sudhanshu Dhulia and S.V.N Bhatti**, JJ., with a ratio of 2:1 held that the statutory provision and legislative intent unequivocally affirm the mandatory nature of the proviso to Section 31(4) of the Insolvency and Bankruptcy Code (IBC). The majority opined that for a Resolution Plan containing a combination, the CCI’s approval to the Resolution Plan must be obtained before and consequently, the Committee of Creditors’ (CoC) examination and approval should be only after the CCI’s decision. This interpretation respects the original legislative intent, and deviation from the same would not only undermine the statute but would also erode the faith posed by the stakeholders in the integrity of the legal and regulatory framework.

The majority thus held that AGI Greenpac’s Resolution Plan is unsustainable as it failed to secure prior approval from the CCI, as mandated under the proviso to Section 31(4) of the IBC. Consequently, the approval granted by the CoC to the Resolution Plan dated 28-10-2022 without the requisite CCI approval, cannot be sustained.

Justice S.V.N Bhatti expressed his dissent in the matter.

Background:

Incorporated in 1946, HNGIL has been manufacturing plants located in several Indian cities, catering to a wide range of industries, including pharmaceutical and wellness, cosmetics, food & beverage, and alco-beverages, etc. AGI Greenpac is the leading manufacturer of container glass. The appellant (INSCO), which is a Bermuda registered company, also submitted their Resolution Plan for HNGIL.

Appellant objected to the approval accorded to AGI Greenpac’s Resolution Plan stating that they had not obtained the requisite CCI approval at the time, when their Resolution Plan had been put to vote, which had been the condition precedent. The Appellant also pointed out that Form I submitted by AGI Greenpac with the CCI had been rejected on 22-10-2022 and that a fresh Form II had been submitted which had not yet been approved till the date of the COC approval. Further, serious contradictions between the process undertaken and the process envisaged to be undertaken by the RP in an e-mail clarification dated 25-08-2022, were also highlighted to point out that preferential treatment had been granted to AGI Greenpac despite the rejection of their Form I, by the CCI. However, on 28-10-2022, the CoC approved the AGI Greenpac’s Resolution Plan with 98% votes, while Appellant’s Resolution Plan received 88% votes.

Subsequently, AGI Greenpac submitted a divestment plan to CCI in respect of one of the seven HNGIL plants, as part of a voluntary modification, to comply with the requirements of Competition laws and CCI granted an approval to AGI Greenpac’s combination proposal with HNGIL, subject to the compliance of certain modifications.

Challenging the approval to HNGIL and AGI Greenpac’s Resolution Plan and seeking reconsideration of INSCO’s Resolution Plan, INSCO filed an application before NCLT Kolkata; however, the application was rejected. Thereafter, INSCO filed an appeal to NCLAT, whereby the Appellate Tribunal upheld the approval accorded to AGI Greenpac’s Resolution Plan, stating that although the requirement of approval by the CCI was mandatory in nature, its prior approval by the CoC, was only directory. This is because the timeline for CCI to decide upon a combination proposal is much longer and should not lead to a situation where the CIRP is frozen or halted because of a pending application before the CCI.

The combination between AGI Greenpac and HNGIL, with potential market share of 80-85% in F&B segment and 45-50% in alco-beverage segment, is generating a key issue for adjudication since the combination of the two major players in this sector is likely to result in an Appreciable Adverse Effect on Competition (AAEC) in the glass packaging industry generally and in particular, within the subsegments of F&B and alco-beverages.

Court’s Assessment:

Perusing the matter, the Court firstly held that INSCO (appellant) as an unsuccessful resolution applicant whose Resolution Plan could have otherwise been approved by the CoC, satisfies the requirement of being aggrieved as per Sections 61/62 of the IBC and Sections 53-B/53-T of the Competition Act. This preliminary locus standi objection vis-à-vis the Appellant, therefore, does not merit acceptance.

Vis-a-vis proviso to Section 31(4) of the IBC, the majority noted that the principal issue is whether the approval of a proposed combination by the CCI must mandatorily precede the approval of the Resolution Plan, by the CoC, as stipulated under the proviso to Section 31(4) of the IBC. Perusing the proviso, the Court pointed out that the proviso was added to Section 31(4) by the Insolvency and Bankruptcy Code (Amendment) Act, 2018. The introduction of a proviso, specifically addressing those Resolution Plans with provisions for combination, and the use of the term ‘prior’ therein, makes it starkly clear that the intent of the legislature was to create an exception. This ensures that in cases containing combination proposals, the approval of the CCI i.e., the regulatory body designated to ensure fair competition in markets and preventing anti-competitive practices, should first be obtained before the same is approved by the CoC. No other provision of the IBC has been pointed out that might suggest otherwise or cause disharmony between the scheme and intent of the IBC or the said proviso to Section 31(4) of the IBC.

The proviso creates an exception for those Resolution Plans that contain provisions for combination. The Court explained that language used in the proviso appears to be clear, precise & straightforward. As such, to understand the legislative intent, the Rule of Plain Reading or literal interpretation should find favour rather than the rule of purposive interpretation.

Deliberating over the basic rules of interpretation of statutes, the Court stated it is almost necessary for the courts to interpret the provision in its natural sense, as it is through the words used in a provision that legislature expresses its intention.

“When the language is unambiguous, as in the present matter, the courts must respect its ordinary and natural meaning instead of wandering into the realm of speculation and unintended overreach invoking the so-called ‘spirit of the law’”.

The Court explained that legislative intent behind inserting the proviso to Section 31(4) of the IBC would suggest that prior approval of the CCI was specifically mandated and it should not be seen as a flexible provision to be ignored in certain exigencies. In fact, a contrary interpretation of the said proviso, i.e., that the prior approval is directory, would distort the objective for which the legislature inserted the proviso, thereby rendering the proviso totally inconsequential. The language of the proviso to Section 31(4) of the IBC appears to be clear with no ambiguity and in those situations, all words finding place in the provision must be given their due meaning.

The Court further said that the use of the word ‘prior’ in the proviso, must be given some meaning as by virtue of the same, the statute requires that the act of obtaining CoC approval for the Resolution Plan must be done in a particular manner i.e., the necessary CCI approval for Resolution Plans containing combination proposals must be obtained prior to such Plan, being granted the CoC’s approval.

The proviso to Section 31(4) of the IBC mentions that the approval to the Resolution Plan from CCI shall be obtained ‘prior’ to its approval by the CoC. Therefore, to interpret the specific word to mean that such an approval can be obtained even ‘after’ and not necessarily ‘prior’ to the approval by the CoC would amount to reconstructing a statutory provision, which is not permissible.

The Court stated that when a Resolution Plan containing a provision for a combination that leads to an AAEC is placed before the CoC for approval before securing prior approval from the CCI, the Plan is incapable of being enforced or implemented. Specific consequences in law are provided under the IBC and the Competition Act for the same. Such a major omission cannot be cured at a later stage. Therefore, approval by CoC to such a deficient Resolution Plan can have no legal implications. In the present case, the CCI-unapproved Resolution Plan does not pass the muster. The same cannot be approved by the Court as it is in violation of Sections 30(2)(e), 30(3), 30(4) and 34(4)(a) of the IBC. It, therefore, does ‘contravene provisions of the law for the time being in force’.

The Court explained that even if the proviso to Section 31(4) of the IBC is kept aside, by virtue of the provisions incorporated under Sections 30(2)(e), 30(3) and 31(1) of the IBC, the Resolution Professional has the legal obligation to examine each Resolution Plan and determine whether it contravenes any provisions of law for the time being in force. On a combined reading of relevant provisions of IBC and Competition Act, the Court noted that it is clear that any combination that leads to an Appreciable Adverse Effect on Competition in the relevant market, is void. Any Resolution Plan containing provisions for a combination that results in an AAEC would therefore be not compliant with the provisions of the Competition Act. In that light, the Competition Act mandates that a notice of combination be given to the CCI and approval obtained at the earliest.

Prior approval of the CCI should advisedly be secured for the Resolution Plans which are to be scrutinised and approved by the CoC i.e., the body with expertise and resources to appropriately analyse the possible effects of an Appreciable Adverse Effect on Competition (AAEC), in the relevant market due to a proposed combination as well as the viability of the concerned Resolution Plan.

The Court further pointed out that several procedural deficiencies have occurred in the approval process of the combination of HNGIL and AGI Greenpac. the CCI, while exercising its powers under Section 29(1), failed to issue the mandatory SCN to all relevant parties, most notably, the target company itself and was issued only to the acquirer company. This omission constitutes a major procedural lapse. Sections 29 and 30 of the Competition Act, 2002 when read holistically, delineate a structured procedural roadmap that the CCI must traverse when it scrutinises combinations that may exert an AAEC in the relevant market.

In the present matter, the procedural sanctity prescribed under the scheme has been regrettably disregarded, with the CCI failing to solicit inputs from public, affected stakeholders and those likely to be affected by such combination. The legislative scheme unambiguously envisions an investigation that encompasses a wide array of stakeholders, as combinations inherently possess the potential to reshape market dynamics in ways that ripple across the competitive landscape.

“As India aspires to establish itself as a global manufacturing powerhouse and investment hub, it is imperative that it is able to provide a reliable, robust and competitive business environment for both domestic and international stakeholders”.

While the IBC’s primary objective is the timely resolution of stressed assets with maximised value realisation for the stakeholders, the significant delay seen in the present case is both unfortunate and regrettable. Nevertheless, expeditious resolution cannot come at the cost of disregarding statutory provisions. A balance between the need for expeditious relief and adherence to the statutory framework must necessarily be maintained, in order to ensure that the objectives of both, the IBC and the Competition Act are met in a manner that supports India’s long-term economic aspirations.

Where the provisions allow for dilution or departure from the intended scheme of the IBC or the Competition Act, it is the responsibility of the legislature to rectify such inconsistencies through appropriate legislative measures and the judiciary should not normally venture into the legislative domain.

Decision:

Therefore, the Court set aside AGI Greenpac’s Resolution Plan for lack of prior approval from the CCI. Any action taken pursuant to the Resolution Plan shall stand nullified, and the rights of all stakeholders shall be restored as per status quo ante, prior to the approval of the Resolution Plan by the CoC on 28-10-2022.

The Court held that the CoC shall reconsider the Appellant’s Resolution Plan and any other Resolution Plans which possessed the requisite CCI approval as on 28-10-2022 i.e., the date on which the CoC voted upon the submitted Resolution Plans.