From Rescue To Ruin: The Supreme Court’s Judgment In Jet Airways And The Future Of Airline Insolvencies

INTRODUCTION

On November 07, 2024, the Supreme Court of India (“Court”) in its judgment in State Bank of India & Ors. vs. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr.,¹ directed the liquidation of Jet Airways (India) Limited (“Jet”), bringing an end to the five-year long saga of efforts to revive the beleaguered airline.

Jet was admitted to the corporate insolvency resolution process (“CIRP”) by an order of the National Company Law Tribunal-1, Mumbai (“NCLT”), on June 20, 2019. Over the next three years, several issues of first impression came to test the then nascent insolvency law framework, including a cross-border insolvency protocol between Jet’s resolution professional and the administrator of Jet’s liquidation proceedings in the Netherlands. Finally, on June 22, 2021, the NCLT approved the resolution plan submitted by the Jalan Fritsch Consortium, the successful resolution applicant (“SRA”), following approval of the SRA’s resolution plan by the committee of creditors (“CoC”).

However, this did not bring an end to Jet’s insolvency woes as various challenges arose with the plan’s implementation. The SRA approached the NCLT and the National Company Law Appellate Tribunal, New Delhi (“NCLAT”), seeking extensions of timelines and other directions on multiple occasions, which were granted by NCLT/NCLAT from time to time. In its recent judgment, the Court set aside one such judgment of the NCLAT² and invoked its inherent powers under Article 142 of the Constitution of India to order that Jet be liquidated.

The Court’s judgment is significant as it underscores the importance of implementing resolution plans within agreed upon timelines and identifies certain gaps and shortcomings of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as far as implementation of resolution plans are concerned. This note analyzes the Court’s judgment to discuss its implications for the implementation of resolution plans as well as specific challenges in the context of insolvencies in the airline industry.

FACTUAL BACKGROUND

Under the terms of the resolution plan, the SRA was required to fulfill certain conditions precedent (“CPs”) prior to making the first tranche payment of INR 3.5 billion under the plan. These CPs included obtaining various licenses and approvals required to operate an airline, such as validation of the air operation certificate by the Directorate General of Civil Aviation and obtaining slot allotment approval and air traffic clearances. The CPs were required to be fulfilled within 90 days of the NCLT’s approval of the plan, with the SRA being permitted to seek additional extensions of time up to a maximum of 180 additional days or a total of 270 days from the date of approval of the plan.

In accordance with the request for resolution plans (“RFRP”), the SRA had also furnished a performance bank guarantee (“PBG”) of INR 1.5 billion, which was to be returned to it within seven business days of complete implementation of the resolution plan. The RFRP also provided that the PBG could be invoked under certain conditions, including if the SRA failed to implement the resolution plan in accordance with its terms.

After obtaining several extensions for implementation of the plan, the SRA submitted to the NCLT that the CPs had been fulfilled on May 25, 2022, and sought exclusions of certain time periods in determining the date by which the first tranche payment needed to be made. The NCLT agreed with the SRA that the CPs had been completed and granted it additional time to infuse the first tranche payment. The lenders appealed the order of the NCLT before the NCLAT, claiming, inter alia, that certain CPs had not been satisfied and submitted an affidavit (“Lenders Affidavit”). The Lenders Affidavit provided that the lenders would withdraw their appeal and not press their claims regarding extensions of the timeline, if the SRA were to deposit the first tranche payment of INR 3.5 billion by August 31, 2023, and otherwise scrupulously comply with the terms of the resolution plan. In response to the Lenders Affidavit, the SRA filed an application with the NCLAT seeking directions to be able to adjust the PBG against the first tranche payment, which the NCLAT allowed.

These orders of the NCLT and the NCLAT were appealed to the Supreme Court, which, in its judgment dated January 18, 2024, held that the PBG could not be adjusted against the first tranche payment and directed the SRA to infuse the balance Rs. 150 crores of the first tranche payment by January 31, 2024.³ However, instead of making payment of the first tranche in full within the timelines stipulated by the Court, the SRA deposited INR 2 billion and sought to adjust the PBG against the remaining portion of the first tranche payment. When the lenders moved the NCLAT with respect to the inordinate delay in the execution of the resolution plan and the SRA’s attempt to adjust the PBG against the first tranche payment, the NCLAT allowed the adjustment and refused to accept the lenders’ contention that the resolution plan had failed.⁴ Aggrieved by the decision of the NCLAT, the lenders moved the Court, which ordered that Jet be taken into liquidation.

THE SUPREME COURT’S JUDGMENT

In its judgment, the Court made the following salient observations:

• The Court held that the NCLAT’s order allowing adjustment of the PBG towards the first tranche payment was contrary to the Court’s order of January 18, 2024, the terms of the RFRP, the resolution plan and settled law. In doing so, the Court rejected the SRA’s contention that the condition that the PBG could not be adjusted was only stated in the Lenders Affidavit and not in the resolution plan. The Court also cited Regulation 36B(4A) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016, which provides that a successful resolution applicant would be required to provide a performance security which would be forfeited if the successful resolution applicant “fails to implement or contributes to the failure to implement the resolution plan in accordance with the terms of the plan and its implementation schedule.” This language made it abundantly clear that the performance security would have to be kept alive until complete implementation of the resolution plan and, therefore, could not be adjusted or encashed prior to this.
• It is settled law that there is no scope for modification or withdrawal of a resolution plan following its approval by the adjudicating authority and the SRA was required to implement the plan strictly in accordance with its terms. The SRA’s failure to deposit the first tranche payment in full amounted to non-implementation of the resolution plan. The Court pointed out that this failure also resulted in contravention of various other terms of the resolution plan, such as non-payment of CIRP costs and workmen and employee dues.
• The SRA had already been granted several extensions for implementing the resolution plan and had indisputably failed to implement the plan. While one of the key objectives of the IBC is revival of the corporate debtor, this objective had to be balanced with efficiency and protecting the interests of all stakeholders in the process. The Court observed that “in scenarios such as the present, timely liquidation is indeed preferred over endless resolution.”
• While invoking its inherent powers under Article 142 of the Constitution to direct Jet’s liquidation, the Court noted that it was being mindful of its recent judgment in the matter of Glas Trust Company⁵ where it had held that courts must exercise caution while interfering with the procedures prescribed under the IBC and any deviation must be justified. However, in this case, the Court held that extraordinary circumstances warranted the Court to use its inherent powers to ensure that the core objective of the IBC was not frustrated and at least liquidation remained a viable option for the creditors.

Terming the case an “eye opener”, the Court also made several suggestions for improving deficiencies in the functioning of the IBC. These suggestions included having effective guidelines for the functioning of the CoC and requiring the CoC to record its reasons for approving a resolution plan. In this regard, the Court recommended that the Central Government or the Insolvency and Bankruptcy Board of India (“IBBI”) consider having an enforceable code of conduct for the CoC, rather than the existing self-regulatory framework. The Court also emphasized the critical responsibility of the successful resolution applicant in reviving the corporate debtor and the need for cooperation among all stakeholders to ensure timely and efficient implementation of the resolution plan. Noting that the IBC did not have sufficient provisions regarding implementation of resolution plans, the Court suggested that formation of a monitoring committee be statutorily mandated and that the NCLT record the steps for implementation of the resolution plan once it was approved.

Finally, the Court observed several deficiencies in the infrastructure and functioning of the NCLTs and NCLATs, including lack of capacity of benches and domain knowledge of the members, inordinate delays in disposing of cases and failure in certain cases to follow the orders of the Court

IMPLEMENTATION OF RESOLUTION PLANS

Jet’s insolvency is not the first instance of delays in implementation of an approved resolution plan. In most cases, keeping in mind the objective of reviving the corporate debtor as a going concern, courts have granted a few extensions, but ultimately ordered the corporate debtor to be liquidated when delays extended to more than 270 days or a year. The Court cited the example of its judgment in Kridhan Infrastructure⁶ where the corporate debtor was ordered to be liquidated owing to non-implementation of the resolution plan. In fact, the NCLAT’s own 2019 ruling in Amtek Auto Limited⁷ similarly ordered liquidation of the corporate debtor owing to failure of the resolution plan. In the case of Jet, however, the NCLAT appears to have got the balance wrong and granted repeated concessions and extensions to the SRA for over two years, despite its obvious failure to implement the resolution plan. The Court’s intervention was, thus, timely and serves as an important reminder that the IBC does not require the corporate debtor to be preserved as a going concern at all costs while the value of its assets continues to deteriorate.

The Court’s judgment is likely to have implications for the process of implementation of a resolution plan going forward. The IBC contains limited provisions on plan implementation as the details of implementation are to be provided for in the plan itself. The Court’s suggestions include proposed changes to the law to mandate close monitoring of implementation by a monitoring committee as well as practical suggestions for smoother implementation. Interestingly, the Court remarked that cooperation amongst all the stakeholders is the way forward for dealing with issues such as the one posed in Jet’s insolvency. While emphasizing the responsibility of the SRA to pursue the long-term goal of reviving the corporate debtor and not being driven purely by its transactional or commercial interests, the judgment also discusses the importance of the CoC’s cooperation in working closely with the SRA to enable implementation of the plan.

It is also worth noting that some of the challenges with the implementation of Jet’s resolution plan are a consequence of features of the airline industry. In the Indian aviation industry, an airline’s most valuable assets, the aircrafts, are most often leased, making it next to impossible to operate the business as a going concern during the CIRP. The value of idle aircrafts deteriorates very rapidly when funds are not available for regular maintenance, which occurred in the case of Jet as well. While the facts do appear to suggest that the SRA failed on several counts to implement the plan, there were some CPs, which by their nature, could not be fulfilled unless the airline was in operation. For example, air traffic clearances can be obtained only if a minimum fleet of 20 aircraft are deployed. In light of these constraints, successful resolution of an airline would require careful planning by all the stakeholders involved, taking into account both the IBC and other regulations affecting the airline industry.

CONCLUSION

While Jet’s impending liquidation may be a disappointing end to a flagship airline, the Court’s judgment presented the only viable solution and serves to underscore the importance of timely implementation of resolution plans. Going forward, the NCLTs and NCLATs are likely to pay more attention to the steps for implementation of a resolution plan and be more cautious when granting extensions of time. It also remains to be seen if the Central Government and the IBBI take on board the Court’s suggestion of developing an enforceable code of conduct for the CoC. For resolution applicants, one of the key takeaways is the need to ensure that the resolution plan includes realistic timelines and steps for implementation and does not contain ambiguous language that is open to interpretation.

The Court’s judgment in Jet as well as the decision of the CoC to liquidate GoFirst also raise broader questions about whether the IBC is well equipped to deal with airline insolvencies. While the IBC was designed to facilitate timely resolutions and prevent value deterioration, its current provisions may require some sector-specific adaptations to address the unique needs of the aviation industry.