NCLAT Confirms Prior CCI Approval Requirement in Insolvency Resolution Plans Involving Combinations: Makalu Trading Ltd. v. Rajiv Chakraborty

Introduction

The case of Makalu Trading Ltd. And Others v. Rajiv Chakraborty And Others was adjudicated by the National Company Law Appellate Tribunal (NCLAT) in New Delhi on September 9, 2020. This appeal arose under Section 61 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) and challenged the orders passed by the National Company Law Tribunal (NCLT), Principal Bench, concerning the insolvency resolution process of Uttam Value Steels Limited. The appellants comprised several trading and enterprise entities seeking to overturn the approval of a resolution plan submitted by CarVal Investors, a consortium involved in the insolvency proceedings.

The central issue of the case revolved around whether the approval of the resolution plan by the Committee of Creditors (CoC) and the Adjudicating Authority could stand without obtaining prior mandatory approval from the Competition Commission of India (CCI). The appellants contended that the omission of this prerequisite rendered the resolution plan null and void, thereby challenging the legality of the entire approval process.

Summary of the Judgment

The NCLAT, upon thorough examination of the submissions from both appellants and respondents, upheld the orders passed by the NCLT. The Tribunal concluded that the resolution plan had indeed complied with the necessary provisions of the I&B Code and the relevant regulations, including obtaining the requisite approval from the CCI, albeit retrospectively. The Tribunal referenced prior precedents, notably the Arcelor Mittal India Pvt. Ltd. v. Abhijeet Guhathakurta & Ors., to affirm that the proviso to Section 31(4) of the I&B Code is a directory rather than a mandatory requirement. As such, the approval of the resolution plan by the CoC and the Adjudicating Authority was deemed valid, leading to the dismissal of the appeal by Makalu Trading Ltd. and others.

Analysis

Precedents Cited

The Tribunal extensively cited several landmark judgments to underpin its decision. The foremost among these was the Arcelor Mittal India Pvt. Ltd. v. Abhijeet Guhathakurta & Ors., 2019 SCC Online NCLAT 920. In this case, the NCLAT had earlier established that the proviso to Section 31(4) of the I&B Code, which mandates CCI approval prior to the approval of a resolution plan by the CoC, is directory rather than a binding obligation. This distinction means that while CCI approval is advisable and aligns with legislative intent, its absence does not automatically nullify the resolution plan provided other procedural aspects are duly followed.

Additionally, the Tribunal referenced the Mackinnon Mackenzie Ltd. v. Mackinnon Employees Union, (2015) 4 SCC 544, where the Supreme Court of India held that statutory provisions prescribing a specific procedure must be strictly adhered to, and any deviation renders the act null and void. However, in the context of the I&B Code, the directory nature of certain provisions allows for procedural flexibility, especially under exceptional circumstances such as unforeseen delays.

Other significant references included the judgments of HMT House Building Cooperative Society Vs. Syed Khader and Ors., 1995 SCC (2) 677 and Bangalore City Cooperative Housing Society Ltd. vs. State of Karnataka & Ors., 2012 3 SCC 727, which reiterated the importance of adhering to prescribed legal procedures and the implications of failing to secure mandatory approvals.

Legal Reasoning

The Tribunal's legal reasoning centered on the interpretation of the proviso to Section 31(4) of the I&B Code. While the appellants argued that the absence of prior CCI approval violated the statutory requirements, the Tribunal aligned with the precedent that such approval is directory. This interpretation implies that while obtaining CCI approval is favorable and aligns with good governance and regulatory compliance, its absence does not, in itself, compromise the validity of the resolution plan.

Furthermore, the Tribunal examined the timeline of events, noting that the CCI approval was secured on June 4, 2019, and the resolution plan was approved by the NCLT on April 30, 2020, and May 6, 2020. The Tribunal observed that the Adjudicating Authority was aware of the CCI approval status and had made provisions in its order to ensure compliance within the specified timelines. This recognition of retrospective compliance under exceptional circumstances, such as the COVID-19 pandemic, reinforced the Tribunal's stance on procedural flexibility.

The Tribunal also addressed the allegations of suppression of material facts by the resolution professional and the CoC. However, it found these claims unsubstantiated, noting that necessary disclosures were made and that the CoC acted within its contractual and regulatory rights to modify terms related to the Performance Bank Guarantee (PBG) amidst the pandemic-induced financial crisis.

Impact

This judgment has significant implications for future insolvency resolution processes, particularly those involving combinations as defined under the Competition Act, 2002. By affirming that the proviso to Section 31(4) is directory, the Tribunal provides clarity and flexibility to the insolvency resolution ecosystem. It underscores the judiciary's intent to balance strict regulatory compliance with practical considerations arising from unprecedented circumstances, such as global pandemics.

Additionally, this decision reinforces the binding nature of prior CCI approvals when available and clarifies the procedural expectations when such approvals are to be obtained retrospectively. It serves as a precedent for both resolution applicants and professionals to ensure meticulous adherence to procedural mandates, while also recognizing the need for adaptability in exceptional situations.

Moreover, the dismissal of claims regarding the suppression of material facts sets a benchmark for transparency and accountability among resolution professionals and CoC members, ensuring that all actions taken during the resolution process are within legal and ethical boundaries.

Complex Concepts Simplified

1. Proviso to Section 31(4) of the I&B Code: This legal provision requires parties involved in a corporate insolvency resolution that involves a combination (merger, acquisition, etc.) to seek approval from the Competition Commission of India (CCI) before their resolution plan is approved by the Committee of Creditors (CoC). The key debate in this case was whether this is a strict requirement (mandatory) or a recommendation (directory).

2. Directory vs. Mandatory Provisions: A directory provision offers guidance or recommendations without legal compulsion, allowing for flexibility in its application. In contrast, a mandatory provision is legally binding and must be strictly followed. The Tribunal classified the proviso to Section 31(4) as directory, meaning it is advisable but not absolutely compulsory.

3. Performance Bank Guarantee (PBG): This is a financial tool provided by the resolution applicant to assure creditors of their commitment to the resolution plan. In this case, modifications to the PBG were made due to the financial strain caused by the COVID-19 pandemic, illustrating the need for adaptability in financial assurances during unforeseen crises.

4. Committee of Creditors (CoC): This is a group comprising all financial creditors of the insolvent company. The CoC holds significant authority in approving or rejecting resolution plans, as it represents the creditors' collective interests.

5. Resolution Professional: An appointed individual responsible for managing the insolvency resolution process, ensuring compliance with the I&B Code, and presenting viable resolution plans to the CoC for approval.

Conclusion

The NCLAT's judgment in Makalu Trading Ltd. And Others v. Rajiv Chakraborty And Others reaffirms the balance between stringent regulatory compliance and procedural flexibility within the insolvency resolution framework. By classifying the proviso to Section 31(4) as directory, the Tribunal provides a nuanced interpretation that accommodates the dynamic and often unforeseen challenges faced during insolvency proceedings, such as global pandemics. This decision not only upholds the importance of obtaining CCI approval in cases involving combinations but also ensures that the insolvency process remains efficient and adaptable. The affirmation of prior CCI approval, along with the dismissal of allegations regarding the suppression of material facts, underscores the need for transparency, due diligence, and adherence to both letter and spirit of the law by all stakeholders involved in the insolvency resolution process. Consequently, this judgment serves as a pivotal reference for future cases, guiding resolution applicants, professionals, and tribunals in navigating the complexities of corporate insolvency with a balanced approach.