IBC Reforms In Focus As Supreme Court Orders Jet Airways Liquidation

Introduction:

The Supreme Court decision dated November 7, 2024 in the insolvency case of State Bank of India & Ors. v. The Consortium of Murari Jalan and Florian Fritsch & Anr[1] (Jet Airways Case) stressed on the need to strengthen India’s Insolvency and Bankruptcy Code, 2016 (“IBC”). This decision also brings to light critical issues regarding the role and obligations of the Committee of Creditors (“CoC”), the resolution applicant, and the efficiency of insolvency tribunals in implementing approved plans.

Background:

The Supreme Court’s decision followed a long and complex journey through India’s insolvency tribunals. Once a leading airline in India, Jet Airways entered the corporate insolvency resolution process (“CIRP”) in 2019 after encountering severe financial difficulties. In June 2019, Jet Airways was admitted into CIRP under the IBC. The following year, a resolution plan was proposed by the Jalan-Kalrock Consortium (“JKC”), which the CoC, led by the State Bank of India (“SBI”), eventually approved. This plan aimed to revive Jet Airways through an equity infusion of Rs 350 crore, among other commitments.

The CoC, comprising Jet’s lenders, initially saw this as a viable pathway to recover dues while retaining Jet’s business as a going concern. However, despite CoC and tribunal support, the resolution faced significant implementation challenges. In 2021, the National Company Law Tribunal (“NCLT”) approved JKC’s plan, formally transferring the responsibility of executing the plan to the consortium. But by 2023, it was evident that the consortium struggled to meet its financial obligations, casting doubts on the feasibility of the plan.

In early 2024, the Supreme Court directed JKC to deposit Rs 150 crore in an escrow account held jointly by SBI and JKC, reinforcing the importance of a Performance Bank Guarantee (“PBG”) as assurance for meeting plan commitments. This direction came with a caution that failure to deposit the funds would have legal repercussions. The CoC, meanwhile, contested the feasibility of transferring ownership to JKC, especially given its missed financial deadlines. The National Company Law Appellate Tribunal (“NCLAT”) allowed a partial adjustment of Rs 150 crore from the PBG toward JKC’s equity commitment. However, the CoC, sceptical of JKC’s ability to revive the airline, escalated the issue to the Supreme Court.

Judgment:

The Supreme Court’s recent ruling reasserts the principle that a resolution plan, once approved, must be executed according to its specified terms and within established timelines. The Court criticized the practice of tribunals extending deadlines without scrutinizing the potential impact on the debtor’s financial stability, emphasizing that the IBC’s primary objective is to ensure timely and efficient resolutions to maximize the value of distressed assets. The Court also highlighted the sanctity of CoC’s decisions in approving or rejecting a resolution plan, reiterating that once a plan is approved, any deviations must be minimal and justified.

Under the court-approved resolution plan, JKC had initially agreed to infuse Rs 350 crore in equity to gain ownership of Jet Airways. However, by mid-2023, the consortium failed to make timely payments, even after the NCLAT extended payment deadlines. JKC committed to pay Rs 100 crore by August 31, 2023, and another Rs 100 crore by September 30, 2023, yet failed to meet these commitments. The Supreme Court ultimately found that the plan, approved nearly five years ago, had lost feasibility due to repeated delays and non-compliance by JKC. Consequently, the Court, using its extraordinary powers under Article 142 of the Indian Constitution, ordered Jet Airways’ liquidation to “do complete justice” between the parties involved.

The Court also ordered the forfeiture of Rs 200 crore already invested by JKC and directed lenders to invoke the Rs 150 crore PBG. This forfeiture illustrates the Court’s strict stance on ensuring that financial guarantees serve their intended purpose as safeguards for creditors. According to Regulation 36B(4A) of the CIRP, performance guarantees are crucial tools to secure creditor interests in cases where the resolution applicant cannot fulfil obligations under the approved plan. The Court’s decision reinforces that performance guarantees are to be maintained until full plan implementation and should not be used to cover missed payment commitments, thereby discouraging applicants from relying on these funds as fallback resources.

Implications of the Judgment:

Beyond the immediate impact on Jet Airways, this judgment has far-reaching implications for India’s insolvency ecosystem. The Supreme Court addressed the shortcomings of the current framework, urging improvements to expedite the insolvency resolution process. Specifically, the Court recommended that the CoC record detailed reasons when approving or rejecting resolution plans to increase transparency in its decision-making. Such records would allow tribunals to better understand the rationale behind CoC decisions and avoid unnecessary delays caused by interpretative challenges. Furthermore, the Court suggested the establishment of an oversight committee to enforce standards and best practices outlined by the Insolvency and Bankruptcy Board of India (“IBBI”). Currently, the CoC operates largely on self-regulated guidelines, which the Court found insufficient for ensuring consistent adherence to fair and efficient practices.

The Court also called for more efficient infrastructure and adequate staffing within the NCLTs to handle the increasing volume of insolvency cases. The Court’s observations about the CoC and tribunal responsibilities reflect its broader concerns about maintaining the Code’s integrity and preserving its primary goals, timely and efficient resolution of corporate debt. Additionally, the Supreme Court underscored the importance of adhering to the statutory timelines set out under the IBC, cautioning against tribunals extending deadlines without rigorous justification.

Significance:

The decision points out the need for all stakeholders, including resolution applicants, lenders, and tribunals, to prioritize timely execution of approved plans to prevent value erosion of distressed assets. For example, the Court criticized JKC’s attempts to use pending litigation as a reason to delay payments, stating that such practices not only undermine the objectives of the Code but also create uncertainty for creditors and other stakeholders. The Court clarified that an approved resolution plan cannot be modified post-approval and that tribunals must resist the temptation to grant indefinite extensions.

This judgment also signals the importance of clear and precise language in resolution plans. Ambiguous terms can lead to prolonged litigation and delays, hampering the timely implementation of plans and ultimately affecting the recovery prospects for creditors. For instance, the absence of explicit provisions in JKC’s plan regarding phased payments became a focal point of contention and contributed to the plan’s eventual collapse. Moving forward, resolution applicants must ensure that their proposals are devoid of vague or flexible terms that could jeopardize timely fulfilment.

Conclusion:

The Supreme Court deemed the case an “eye-opener,” highlighting flaws in the current IBC framework and recommending substantial reforms to ensure timely and effective resolutions in future insolvency cases.

The Supreme Court’s decision in Jet Airways not only orders liquidation but also reaffirms the necessity of retaining liquidation as a viable option when resolution plans become unviable. The Court’s judgment, in this case, emphasizes that while liquidation may be a last resort, it is preferable to an endless and ineffective resolution process. Prolonged resolution efforts only reduce the recoverable value of assets, diminishing the potential returns for creditors and negating the Code’s goal of efficient recovery.

[1] Civil Appeal 5023-5024 of 2024.

King Stubb & Kasiva,
Advocates & Attorneys

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