Introduction
The saga of the insolvency resolution of Jet Airways India Limited (“Jet”), once India’s leading airline, has disappointingly culminated, after several twists and turns, in a liquidation order by the Hon’ble Supreme Court of India, in its judgment dated November 7, 2024[1] (“SC Judgment”). The SC came to this conclusion upon having found that the Jalan-Kalrock Consortium[2], the successful resolution applicant (“SRA”), had failed to implement the resolution plan as was approved by the Adjudicating Authority in 2021 (“Plan”).
The SC termed this case as an eye opener and highlighted certain shortcomings in the Insolvency and Bankruptcy Code, 2016 (the “Code”), and the functioning of the NCLTs[3] and has made many important, noteworthy suggestions.
Factual Background
Jet was admitted into CIRP on June 20, 2019. Subsequently, the Plan submitted by the SRA was duly approved by the CoC, and thereafter the NCLT on June 22, 2021. The SRA submitted a performance bank guarantee of INR 150 crore (“PBG”) as required under Regulation 36B(4A) of the CIRP Regulations[4]. The Plan contained several conditions precedent (“CPs”) for its implementation to revive Jet’s business[5], which were to be fulfilled by the ‘Effective Date’ (i.e., date falling on the 90th day from the Plan approval date (extendable by another 180 days)). Further, as per the terms of the Plan, the first tranche payment of Rs 350 crore was to be made within 180 days, post the Effective Date. Only part of the CPs were achieved by the SRA, and it argued that the rest could only be done in a phase-wise manner. However, the Plan contained no provision for the SRA to declare satisfaction or waiver of the CPs. Despite this, the NCLT agreed with the SRA’s submissions and held that the relevant CPs were achieved.
During the appeal proceedings before the NCLAT[6], the lenders had offered, by way of an affidavit (“Lenders’ Affidavit”) that if the SRA inter alia infused the first tranche payment by August 31, 2023, then they would withdraw their appeals. However, despite multiple extensions of this date granted by the NCLT, the NCLAT[7] and the Supreme Court, the SRA failed to deposit the entire amount in cash by the prescribed deadline (it deposited Rs 200 crore in cash) and sought to adjust the PBG against part of its payment obligations. The NCLAT allowed such adjustment. This was assailed by the lenders before the Supreme Court, which culminated in the SC Judgment.
Supreme Court Judgment
The Supreme Court allowed the lenders’ appeal and inter alia held as follows:
- Adjustment of the PBG – The SC held that the NCLAT had committed an error in allowing the PBG adjustment, as the same was contrary to its directions given on January 18, 2024[8], and also it didn’t align with the provisions of the Plan, read with the terms of the RFRP as well as Regulation 36B(4A) of the CIRP Regulations. As per Regulation 36B(4A) (which was introduced[9] to ensure security in case of failure of plan implementation), a performance security submitted by a resolution applicant (of such nature, value, duration and source, as may be specified in the RFRP) shall stand forfeited if the resolution applicant fails to implement the plan or contributes to its failure. The SC held that the PBG had to be kept alive until the complete implementation of the Plan, as per Regulation 36B(4A).
- No modification to the Plan vide the Lenders’ Affidavit – The SC Judgment rejected SRA’s contention that the condition in the Lenders’ Affidavit (which stipulated that the first tranche payment of Rs 350 crore had to be made in cash) was different from the Plan, as the terms/ conditions in the Lenders’ Affidavit could not have modified the Plan. It referred to the principles laid down in its judgment in the Ebix case[10], as per which there is no scope for any modifications to a resolution plan (either by the NCLT, CoC or the SRA) in both cases, i.e., (A) post submission of such plan to the NCLT, after approval by the CoC, and (B) once it is approved by the NCLT under Section 31(1) of the Code.
- Timely implementation of resolution plan is also an objective of the Code – The Supreme Court held that, considering that time bound resolution is an objective of the Code, obligations of an SRA under an approved resolution plan cannot be endlessly postponed/ extended, including under the garb of ongoing litigation. It was noted that in the instant case, the SRA cannot use pending litigation as an excuse to shy away from its obligations under the Plan, which are absolute in nature, and it shows a mala fide intention on its part to not fulfill its obligations.[11] Implementation of the Plan in a time bound manner is imperative to avoid value erosion.[12] The court also held that the CoC is duty-bound to act in good faith and co-operate in the implementation of an approved resolution plan. In this context, the Court has also held that while the NCLT and NCLAT has powers to grant extension of time limits[13], such powers cannot be exercised mechanically, without application of mind and without weighing the consequences of such extension.
- Timely liquidation preferred over endless resolution – The Supreme Court held that, per Section 33(3) of the Code,[14] consequences of non-implementation of the Plan by the SRA must necessarily be liquidation of the corporate debtor. It was noted that while liquidation under the Code is a matter of last resort, time being a crucial facet of the scheme under the Code[15], a delayed resolution must not come at the cost of efficiency. Further, any delay in arriving at the decision of putting the company in liquidation may cause further detriment to the company and hamper the realisations that can be made through liquidation[16]. Considering that in the instant case, more than five years have passed and implementation of the Plan still seems to be a dim light at the far end of a long tunnel and therefore, in such scenarios, “timely liquidation is indeed preferred over an endless resolution process”.[17]
Basis the above, the Supreme Court held that the SRA has failed to implement the Plan despite numerous opportunities. Accordingly, the Court used its plenary powers under Article 142 of the Constitution of India to order Jet into liquidation under the Code. The Court, while being cognizant of its judgment in the Glas Trust case[18] (where it emphasised the need for exercising caution while invoking its inherent powers to deviate from the statutorily prescribed timelines and procedures especially in the context of the Code), held that the existence of exceptional circumstances in this case warrants the exercise of the plenary powers to ensure that at least liquidation remains as a “viable” resort for the company and its creditors.[19]
While ordering liquidation, the SC also permitted lenders to encash the PBG, and stated that the rest of the funds infused by the SRA also stood forfeited.
Suggestions by the Court
The SC Judgment also cited this case as an eye opener towards various shortcomings in the Code and the functioning of the NCLT and NCLAT. Highlighting them, the Court went on to provide some important suggestions to strengthen the insolvency ecosystem, some of which are as follows:
- CoC should record reasons while approving/ rejecting a resolution plan. This will enable the NCLT/ NCLAT to understand the rationale behind the CoC’s decision-making and avoid unwarranted interpretation.
- An oversight committee should be constituted for better enforcement of standards and practices set out in the guidelines issued by the IBBI for functioning of the CoC, which are otherwise self-regulatory in nature.
- NCLTs, while approving a resolution plan, should record the next steps that are to be taken by the respective parties for implementation of the approved plan, to ensure that parties are more vigilantas regards their obligations and to prevent unnecessary delay in implementation.
- The NCLTs and NCLAT have also been directed to adjudicate applications under the Code in a time-bound manner, by adhering to the timelines prescribed under the Code and to not ignore requests for urgent listings and orders passed by the Supreme Court.
- The Court also highlighted the need to improve the existing infrastructure in the NCLTs and appoint adequate number of members to aid the insolvency reform initiative undertaken by the Government.
Conclusion
While the SC Judgment marks the end of Jet’s flight, there are a few critical takeaways for all stakeholders. These include: (i) ensuring that the RFRP or a resolution plan does not provide for adjustment of PBGs for payments to be made under a plan, (ii) to ensure timely implementation of an approved resolution plan (and to avoid unwarranted interpretation and litigation), avoid ambiguous and uncertain language in resolution plans, (iii) insolvency courts should cautiously exercise their discretion to extend timelines on SRA request and (v) CoCs (and NCLT/ NCLAT) should not shy away from taking the decision to put the corporate debtor into liquidation (as was recently done in the Go First case) if the situation so warrants, to avoid any further value erosion and keeping liquidation as a viable option for resolution/ recovery.
The SC Judgment re-emphasises the importance of speedy and timely resolution, which is one of the bedrocks of the Code. To achieve this objective, all stakeholders, including the RP, lenders, resolution applicants and the NCLTs/ NCLAT need to actively contribute towards achieving a successful and timely resolution, to ensure that the purpose of the Code is not defeated. While the IBBI’s powers to provide a justiciable code of conduct for banks and financial institution is debatable, the Supreme Court has introduced certain duties on creditors during an insolvency process under the IBC.
*Note : Cyril Amarchand Mangaldas acted for the Committee of Creditors in the CIRP of Jet. The views expressed here are personal and not of the firm. The authors also thank Mehul Kumar of this firm for his assistance on this blog.
For further information, please contact:
Dhananjay Kumar Partner, Cyril Amarchand Mangaldas
dhananjay.kumar@cyrilshroff.com
[1] State Bank of India & Ors. v. The Consortium of Murari Jalan and Florian Fritsch & Anr, Civil Appeal 5023-5024 of 2024
[2] Comprised of Mr. Murari Lal Jalan along with Kalrock Capital (Mr. Florian Fritsch)
[3] National Company Law Tribunal
[4] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
[5] Jet had stopped operations in April, 2019, prior to the CIRP.
[6] National Company Law Appellate Tribunal
[7] National Company Law Appellate Tribunal
[8] It was held by the SC that the PBG cannot be permitted to be adjusted against the first tranche payment, and therefore directed that INR 150 Crore be infused in cash on or before January 31, 2024
[9] Vide Notification No. IBBI/2019-20/GN/REG040 dt 24.01.2019
[10] Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited & Anr., (2022) 2 SCC 401
[11] Para 97
[12] Para 154
[13] Rule 15 of NCLT Rules, 2016 and Rule 15 of NCLAT Rules, 2016
[14] Section 33(3) states that where an approved resolution plan is contravened by a corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected, can make an application to the NCLT for a liquidation.
[15] Kridhan Infrastructure Pvt. Ltd. v. Venkatesan Sankaranarayan & Others, [2021 INSC 127]
[16] Para 152
[17] Paras 147 and 148
[18] Glas Trust Company LLC v. Byju Raveendran and Others, 2024 SCC OnLine SC 3032
[19] Para 165
