Introduction
This article offers an in-depth analysis of a recent judicial pronouncement concerning the implementation and ultimate failure of a resolution plan under the insolvency framework. The judgment provides critical insights into the enforcement of resolution plans, the implications of non-compliance by Resolution Applicants (SRAs), and the circumstances warranting the liquidation of a corporate debtor.
1. Factual Background and Procedural History
The case originates from the Corporate Insolvency Resolution Process (CIRP) initiated against Jet Airways (India) Limited (the “Corporate Debtor”) by the State Bank of India (SBI) in accordance with Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016). The National Company Law Tribunal (NCLT) admitted the application on June 20, 2019, with the total admitted claim of financial creditors amounting to approximately Rs. 7800 Crore. A Resolution Professional (RP) was appointed to manage the CIRP.
Subsequently, the RP issued the 4th Round of the Request for Resolution Plan (RFRP). The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (the “Respondent No. 1 / SRA”) submitted its Resolution Plan on September 21, 2020, which was later amended and approved by the Committee of Creditors (CoC) with a majority of 99.22% votes on October 3, 2020. The Resolution Plan included a provision for the SRA to furnish an unconditional and irrevocable Performance Bank Guarantee (PBG) of Rs. 150 Crores, which could be invoked upon breach of conditions, failure to re-issue/extend the PBG, or failure to implement the plan. Crucially, the RFRP explicitly stated that the Performance Security shall not be set-off against or used as part of the consideration offered in the Resolution Plan. The Resolution Plan also stipulated upfront payments, including a first tranche of Rs. 350 Crore within 180 days from the Effective Date for CIRP costs, contingency funds, and payments to various creditors.
The NCLT, through its order dated January 13, 2023, affirmed that Respondent No. 1 had met all Conditions Precedent. The NCLAT, in its judgment dated March 12, 2024, upheld the NCLT’s order and directed that the PBG of Rs. 150 Crore could be adjusted towards the first tranche payment of Rs. 350 Crore. This decision became the subject of the present civil appeals before the Supreme Court of India.
Throughout the process, multiple extensions were granted by the NCLT, NCLAT, and even the Supreme Court for the SRA to fulfill its obligations, particularly the infusion of the first tranche payment and compliance with other conditions. Despite these extensions, the SRA allegedly failed to make significant payments, including the first tranche, airport dues, and workmen/employees’ dues.
2. Identification of Legal Issues
The Supreme Court addressed several key legal questions:
- Adjustment of Performance Bank Guarantee (PBG): Whether the PBG could be adjusted against the first tranche payment, particularly in contravention of earlier court orders, the Resolution Plan’s terms, and statutory provisions. This issue further delved into whether the Conditions Precedent were fulfilled and if the NCLAT was correct in allowing such an adjustment.
- Consequence of Non-Implementation: Whether the SRA’s non-implementation of the Resolution Plan necessarily leads to the liquidation of the Corporate Debtor under Section 33(3) of the IBC, 2016. This included examining the non-payment of Airport Dues and workmen and employees’ dues.
- Timely Implementation as an Objective of IBC: Whether the timely implementation of a Resolution Plan is a core objective of the IBC, 2016.
3. Arguments of the Parties
Arguments on Behalf of the Appellants (State Bank of India & Ors.): The Appellants argued that the NCLAT’s direction allowing the SRA to adjust the PBG against the first tranche payment was erroneous. They contended that the Resolution Plan, specifically Clause 3.13.9 of the RFRP, expressly prohibited the set-off of the Performance Security against any consideration offered in the plan. They further highlighted that a previous Clause 6.4.12, which might have allowed such flexibility, was explicitly deleted through an addendum.
The Appellants asserted that the SRA failed to implement the Resolution Plan due to non-payment of significant amounts, including the first tranche payment (Rs. 350 Crore), airport dues (approximately Rs. 475 Crore), and workmen’s/employees’ dues (Rs. 226 Crore), despite numerous extensions granted. They emphasized that Clause 6.3.1(d) of the Resolution Plan mandated the upfront and full settlement of airport dues within 180 days of the Effective Date, without staggered payments, to facilitate the immediate resumption of flying operations. They also pointed out the non-creation of security over Dubai properties as required. The Appellants relied on Clause 9.4 of the Resolution Plan and Clause 3.13.7(iii) of the RFRP, which allowed for the automatic invocation of the PBG in case of non-implementation. Furthermore, concerns were raised regarding the non-receipt of security clearance for Mr. Florian Fritsch, a key partner in the SRA consortium, which was a fundamental threshold requirement.
Arguments on Behalf of the Respondents (Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch): The Respondents countered that the Conditions Precedent were fulfilled on May 20, 2022, marking it as the Effective Date. They argued that the lapse of the Air Operation Certificate (AOC) during the pendency of the appeals did not mean the condition was not met, as it was valid when the implementation application was filed. Regarding the airport dues, the Respondents submitted that these were part of the CIRP costs, which could be met as the Resolution Plan operationalized , and that the Resolution Plan allowed the use of the Corporate Debtor’s positive cash balance for such payments. They referred to Clause 6.4.1(h) and (m) of the Resolution Plan, asserting that airport charges were indeed part of the CIRP costs.
The SRA also attempted to rely on a previous version of Clause 6.4.12 of the Resolution Plan, which suggested financial flexibility for advancing committed payments, to justify the PBG adjustment. However, this was shown to be an amended and deleted clause. They maintained that the slots allotment condition was met, having secured the requested slots, and the non-reinstatement of old slots was due to the NCLT’s earlier order. The SRA contended that the International Traffic Right Clearance could only be obtained after the re-commencement of operations with a minimum number of aircraft, implying it was a post-commencement condition.
4. Court’s Analysis and Reasoning
The Supreme Court undertook a meticulous analysis, focusing on the sanctity of the approved Resolution Plan and the objectives of the IBC.
- Adjustment of PBG: The Court emphasized that the RFRP, which formed the basis of the Resolution Plan, explicitly prohibited the PBG from being set off against or used as part of the consideration. It found that the NCLAT’s direction to adjust the PBG against the first tranche payment contravened the express terms of the Resolution Plan. The Court noted the deliberate deletion of the original Clause 6.4.12 from the Resolution Plan, which had previously allowed the PBG to provide financial flexibility for advancing payments. This deletion underscored the parties’ mutual agreement to remove any such provision, making the NCLAT’s direction inconsistent with the agreed terms.
- Non-Payment of Airport Dues: The Court critically examined the SRA’s obligation regarding airport dues. While the NCLAT held that airport charges were part of CIRP costs and could be met from the Corporate Debtor’s cash balance, the Supreme Court highlighted Clause 6.3.1(d) of the Resolution Plan. This clause unequivocally stated that airport dues were to be settled “upfront in full in first 180 days from the effective date and without any conditions (including not being staggered payments spread across a period of time) so that flying can start immediately”. The Court pointed out the significant increase in airport dues over time due to extensions, which impacted the feasibility of the plan.
- Non-Payment of Workmen and Employees’ Dues: The judgment noted the SRA’s failure to make the promised payments to workmen and employees, which was a critical component of the Resolution Plan and was to be made in priority. The repeated non-compliance with these financial commitments was a significant factor in the Court’s assessment.
- Fulfillment of Conditions Precedent and Effective Date: The Court acknowledged the NCLT’s finding that the Conditions Precedent were fulfilled on May 20, 2022, and that this date was accepted as the Effective Date. However, the continued non-compliance with financial obligations even after the Effective Date and subsequent extensions demonstrated a failure to implement the plan.
- Timely Implementation as a Goal of IBC: The Supreme Court reiterated that timely implementation of the Resolution Plan is a paramount objective of the IBC. It observed that incessant extensions granted by the NCLT and NCLAT, while aimed at revival, could undermine the feasibility and practicability of the Resolution Plan, especially in dynamic sectors like aviation. The Court suggested that discretion in granting extensions must be exercised with greater circumspection.
- Security Clearance of SRA Partner: The Court took note of the significant issue of security clearance not being obtained for Mr. Florian Fritsch, a key partner in the SRA consortium. This was deemed a fundamental threshold requirement that remained unfulfilled, further casting doubt on the SRA’s ability to implement the plan effectively.
5. Final Conclusion and Holding
The Supreme Court concluded that the SRA had consistently failed to implement the approved Resolution Plan, particularly regarding crucial financial obligations such as the first tranche payment, airport dues, and workmen/employees’ dues, despite multiple extensions. The direction by the NCLAT to adjust the PBG against the first tranche payment was found to be in direct contravention of the Resolution Plan’s explicit terms, which prohibited such set-off. The Court found the SRA’s arguments regarding the fulfillment of Conditions Precedent and the nature of airport dues unconvincing in light of the continuous non-compliance with financial commitments.
Given the prolonged non-implementation, the Court found itself with no alternative but to invoke its jurisdiction under Article 142 of the Constitution and direct the liquidation of the corporate debtor. This decision was based on the fact that almost five years had elapsed since the Resolution Plan’s approval by the NCLAT with no substantial progress. The Court also directed the forfeiture of the Rs. 200 Crore already infused by the SRA and permitted the lenders/creditors to encash the performance bank guarantee of Rs. 150 Crore.
The legal principle laid down is that while the IBC aims for corporate revival through resolution, the timely and faithful implementation of an approved Resolution Plan is critical. Persistent and substantial non-compliance by the Resolution Applicant, especially concerning financial commitments and fundamental conditions, can lead to the inevitable consequence of liquidation, even when multiple opportunities for compliance have been provided. The sanctity of the Resolution Plan, as approved by the CoC and the Adjudicating Authority, must be upheld, and its terms cannot be unilaterally altered or circumvented.
FAQs:
1. What happens when a corporate insolvency resolution plan fails?
When a corporate insolvency resolution plan fails due to non-implementation by the chosen applicant, the company may be directed towards liquidation, meaning its assets are sold off to pay its debts.
2. Can a performance bank guarantee be used to offset payments in an insolvency resolution?
Generally, a performance bank guarantee in an insolvency resolution is intended as a security for fulfilling the plan’s terms and may not be used to offset payments if the resolution plan explicitly prohibits such adjustments.
3. What are “Conditions Precedent” in a business resolution plan?
Conditions Precedent in a business resolution plan are specific requirements that must be met before certain obligations of the resolution applicant become effective or before the plan can be fully implemented, such as obtaining necessary licenses or approvals.
4. Why is timely execution important in corporate restructuring?
Timely execution is crucial in corporate restructuring to preserve the value of the distressed company, prevent further erosion of assets, and ensure the effective revival of the business, especially in time-sensitive industries.
5. What role do airport dues play in airline insolvency cases?
In airline insolvency cases, significant outstanding airport dues for parking and lease charges are often treated as critical operational costs, and their prompt payment is usually essential for the re-commencement of flying operations under a resolution plan.
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