In a landmark decision passed by the Supreme Court of India in the Hindustan National Glass (HNGIL) case on the 29th of January 2025, has reinforced the legislative intent behind Section 31(4) of the Insolvency and Bankruptcy Code (IBC), clarifying that prior approval of the Competition Commission of India (CCI) is mandatory before a resolution plan involving a combination can be approved by the Committee of Creditors (CoC).
This ruling, delivered by a Bench led by Justice Hrishikesh Roy and Justice Sudhanshu Dhulia, overturns the National Company Law Appellate Tribunal (NCLAT)’s interpretation, which had treated prior CCI approval as a mere procedural requirement rather than a binding precondition.
Clarification on the legislative intent of Section 31(4) proviso
The Supreme Court unequivocally upheld the mandatory nature of the proviso to Section 31(4), rejecting arguments favouring a purposive interpretation that would have allowed CCI approval to be obtained post-CoC approval. The judgment emphasized that the use of the word ‘prior’ in the statutory language reflects the legislature’s intent to prevent anti-competitive outcomes before they materialize. This interpretation aligns with the Insolvency Law Committee’s 2018 recommendations, which stressed the need for competitive market conditions even in insolvency resolutions.
Justice A.K. Sikri, in his legal opinion, concurred with this interpretation, noting that a literal reading of the proviso to Section 31(4) is necessary to prevent combinations that may lead to market distortions. He highlighted that the amendment introducing this proviso was deliberate, aiming to ensure that no anti-competitive structures emerge under the guise of insolvency resolutions.
Errors in NCLAT’s judgment
The Supreme Court identified significant flaws in the NCLAT’s reasoning, particularly its reliance on the ArcelorMittalcase, which was factually and legally distinct. The NCLAT had erroneously concluded that obtaining prior approval was merely a directory, overlooking the express statutory mandate and the potential for market distortions caused by conditional approvals. Additionally, the NCLAT failed to recognize that CCI’s evaluation of the Appreciable Adverse Effect on Competition (AAEC) must precede any binding decision on the resolution plan.
Justice Sikri also noted that the NCLAT overlooked the importance of ensuring that modifications proposed by resolution applicants are subjected to rigorous scrutiny. He observed that voluntary modifications, such as AGI Greenpac’s proposed divestment of one plant, should not be treated as an automatic remedy for anti-competitive concerns without a full-fledged investigation.
Conditional CCI approvals under scrutiny
The judgment also scrutinized the shortcomings of conditional CCI approvals. The Supreme Court observed that such approvals, which permit transactions to proceed while compliance with remedial measures is pending, create enforcement gaps and regulatory uncertainties. The absence of robust monitoring mechanisms increases the risk of non-compliance, undermining the effectiveness of competition law safeguards. The ruling emphasized that allowing transactions to proceed without first ensuring full regulatory compliance could jeopardize fair market competition and investor confidence.
Justice Sikri, in his legal opinion, had raised concerns over the lack of transparency in conditional approvals. He noted that in cases where AAEC has been identified, the CCI must not only impose modifications but also ensure independent oversight to prevent abuse of dominant positions post-transaction.
Section 29 and due process violations
The ruling also addressed procedural lapses in the CCI’s handling of approvals under Section 29 of the Competition Act. The Supreme Court noted that CCI failed to issue mandatory show cause notices to all parties to the combination, particularly the target company, Hindustan National Glass & Industries Ltd. (HNGIL). The omission of key stakeholders from the approval process resulted in an incomplete assessment of the transaction’s impact, violating statutory due process. The Court reiterated that the procedures outlined in Section 29 must be followed in their entirety before an order under Section 31 can be issued.
Justice Sikri further emphasized that issuing a show cause notice to HNGIL was not just a procedural requirement but a substantive safeguard to ensure that market conditions are properly evaluated. He noted that unilateral submissions by acquiring entities should not be the sole basis for CCI’s decisions, especially when insolvency proceedings are involved.
Implications for future insolvency resolutions
This verdict sets a crucial precedent for corporate insolvency cases involving potential market combinations. It reinforces that regulatory approvals cannot be circumvented under the guise of procedural flexibility. By mandating strict adherence to competition law provisions, the judgment ensures that insolvency resolutions do not come at the cost of fair competition.
Legal experts, including Justice A.K. Sikri, have welcomed the decision, noting that it restores regulatory discipline and upholds the objectives of both the IBC and the Competition Act. Justice Sikri had previously highlighted the dangers of treating prior CCI approval as a formality, warning that doing so could lead to monopolistic market structures detrimental to consumers and industry stakeholders alike.
With this ruling, the Supreme Court has reaffirmed its commitment to maintaining a balance between speedy insolvency resolutions and competition law compliance. The decision is expected to bring greater transparency and accountability to the insolvency resolution process, ensuring that market forces remain competitive even amid financial distress.
