LEGAL ISSUE: Whether a Performance Bank Guarantee (PBG) can be adjusted against the first tranche payment in a resolution plan under the Insolvency and Bankruptcy Code (IBC), 2016.
CASE TYPE: Corporate Insolvency Resolution Process (CIRP)
Case Name: State Bank of India & Ors. vs. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr.
Judgment Date: 7 November 2024
Introduction
Date of the Judgment: 7 November 2024
Citation: 2024 INSC 852
Judges: Dr. Dhananjaya Y. Chandrachud, CJI., J.B. Pardiwala, J., and Manoj Misra, J.
Can a resolution plan be altered mid-implementation? The Supreme Court recently addressed this question in a significant judgment concerning Jet Airways’ insolvency. The court examined whether a Performance Bank Guarantee (PBG) could be adjusted against the first payment tranche of a resolution plan, clarifying the obligations of resolution applicants and lenders.
The core issue revolved around the interpretation of the Insolvency and Bankruptcy Code (IBC), 2016, specifically regarding the implementation of a resolution plan and the permissibility of adjusting a PBG against a mandatory cash payment. The court also considered whether the non-implementation of a resolution plan should lead to liquidation.
The judgment was delivered by a three-judge bench comprising Chief Justice of India Dr. Dhananjaya Y. Chandrachud, Justice J.B. Pardiwala, and Justice Manoj Misra. The opinion was unanimous.
Case Background
The case began with the initiation of the Corporate Insolvency Resolution Process (CIRP) for Jet Airways (India) Limited on 20 June 2019, following an application by the State Bank of India (SBI). The total admitted claim of the Financial Creditors was approximately Rs. 7800 Crore. Mr. Ashish Chhawchharia was appointed as the Interim Resolution Professional and later as the Resolution Professional (RP).
After multiple rounds of bidding, the consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (referred to as Respondent No. 1 or SRA) submitted a resolution plan which was approved by the Committee of Creditors (CoC) on 17 October 2020 with a 99.22% majority. The plan included an upfront payment of Rs. 350 Crore within 180 days of the “Effective Date,” along with other financial commitments.
The Resolution Plan stipulated several conditions precedent, including validation of the Air Operator Certificate (AOC), approval of the business plan, slot allotment, international traffic rights clearance, and demerger of certain employees. The plan also included a Performance Bank Guarantee (PBG) of Rs. 150 Crore.
Timeline
| Date | Event |
|---|---|
| 20 June 2019 | NCLT admits application for CIRP against Jet Airways. |
| 21 September 2020 | Consortium of Murari Lal Jalan and Florian Fritsch (SRA) submits Resolution Plan. |
| 17 October 2020 | CoC approves the Resolution Plan. |
| 22 June 2021 | NCLT approves the Resolution Plan, fixing the Effective Date 90 days from the approval date. |
| 22 September 2021 | Initial 90-day period for fulfilling conditions precedent expires. |
| 29 September 2021 | NCLT grants first 90-day extension. |
| 22 December 2021 | First extension expires. |
| 20 January 2022 | NCLT grants second 90-day extension. |
| 22 March 2022 | Second extension expires. |
| 11 April 2022 | NCLT grants a further extension till 25 May 2022. |
| 20 May 2022 | SRA obtains Air Operation Certificate (AOC) and claims the Effective Date. |
| 21 October 2022 | NCLAT upholds NCLT’s approval of the Resolution Plan but increases workmen dues. |
| 30 January 2023 | Supreme Court dismisses SRA’s appeal against NCLAT order on workmen dues. |
| 13 January 2023 | NCLT holds all conditions precedent fulfilled and sets the Effective Date as 20 May 2022. |
| 26 May 2023 | NCLAT extends the deadline for the first tranche payment to 31 August 2023. |
| 16 August 2023 | Lenders file an affidavit agreeing to the plan if SRA infuses Rs. 350 Crore by 31 August 2023. |
| 28 August 2023 | NCLAT allows PBG adjustment against the first tranche payment, extending the deadline to 30 September 2023. |
| 18 January 2024 | Supreme Court rules PBG adjustment impermissible and directs infusion of Rs. 150 Crore by 31 January 2024. |
| 02 February 2024 | Supreme Court dismisses SRA’s plea for extension of time. |
| 12 March 2024 | NCLAT upholds NCLT order, allowing PBG adjustment and further extending timelines. |
| 7 November 2024 | Supreme Court orders liquidation of Jet Airways. |
Legal Framework
The judgment primarily revolves around the interpretation and application of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly Section 30(2)(a), Section 31(1), and Section 33(3). Additionally, the judgment refers to Regulation 36B(4A) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (2016 Regulations).
✓ Section 30(2)(a) of the IBC, 2016: This section mandates that the resolution plan must provide for the payment of insolvency resolution process costs in priority to other debts.
✓ Section 31(1) of the IBC, 2016: This section states that a resolution plan approved by the Adjudicating Authority is binding on all stakeholders.
✓ Section 33(3) of the IBC, 2016: This section provides that if a resolution plan is contravened by the corporate debtor, any person affected by such contravention may apply to the Adjudicating Authority for a liquidation order.
✓ Regulation 36B(4A) of the 2016 Regulations: This regulation requires the resolution applicant to provide a performance security, which can be forfeited if the applicant fails to implement the resolution plan.
Arguments
Appellants’ (Lenders) Submissions:
- The adjustment of the PBG of Rs. 150 Crore towards the first tranche payment of Rs. 350 Crore was in contravention of the Supreme Court’s order dated 18.01.2024, the terms of the Resolution Plan, and the provisions of law. The Resolution Plan mandated a cash infusion, and the PBG adjustment was contingent upon mortgaging three Dubai properties.
- The NCLAT erroneously limited the Airport Dues to Rs. 25 Crore, categorizing it as part of the CIRP costs, whereas the Resolution Plan obligated an upfront payment of Rs. 475 Crore towards Airport Dues.
- The NCLAT wrongly limited the workmen’s compensation to Rs. 12 Crore, contrary to its earlier order dated 21.10.2022, which increased the dues from Rs. 52 Crore to Rs. 289.2 Crore (later reduced to Rs. 226 Crore).
- The SRA breached three conditions precedent: obtaining the AOC, obtaining the Slots Allotment Approval, and obtaining the International Traffic Rights Clearance.
Respondents’ (SRA) Submissions:
- The direction of the Supreme Court dated 18.01.2024 was interim and related only to the offer made in the Lender’s Affidavit.
- The adjustment of the PBG against the first tranche payment was permissible under the Resolution Plan, specifically Clause 6.4.4.
- The SRA had taken all necessary steps for the creation of security over the Dubai properties, including sharing drafts of transaction documents, however, the Appellants did not cooperate.
- The airport dues were part of the CIRP costs and could be adjusted from the positive cash balance of the Corporate Debtor.
- The SRA was committed to paying the Provident Fund and Gratuity to the workmen and employees as per the NCLAT order.
- The SRA had fulfilled all the Conditions Precedent as required by the Resolution Plan.
| Issue | Appellants’ Submissions | Respondents’ Submissions |
|---|---|---|
| PBG Adjustment | PBG adjustment against cash payment is impermissible under the Resolution Plan. | PBG adjustment is permissible as per Clause 6.4.4 of the Resolution Plan. |
| Airport Dues | Airport dues are not part of CIRP costs and must be paid upfront. | Airport dues are part of CIRP costs and can be adjusted from the Corporate Debtor’s positive cash balance. |
| Workmen Dues | Workmen dues should be paid as per NCLAT order (Rs. 226 Crore). | SRA is committed to pay PF and Gratuity as per NCLAT order. |
| Effective Date | Effective Date was not achieved due to non-fulfillment of conditions precedent. | Effective Date was achieved on 20 May 2022. |
| Conditions Precedent | SRA failed to fulfill the conditions precedent regarding AOC, Slot Allotment, and International Traffic Rights. | SRA fulfilled all conditions precedent. |
Issues Framed by the Supreme Court
The Supreme Court framed the following issues for determination:
- Whether the Performance Bank Guarantee (PBG) could have been adjusted against the first tranche payment, contravening the Supreme Court’s order, the Resolution Plan, and the law.
- Whether the non-implementation of the Resolution Plan by the SRA necessarily leads to liquidation under Section 33(3) of the IBC, 2016.
- Whether the timely implementation of the Resolution Plan is one of the objectives of the IBC, 2016.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reasoning |
|---|---|---|
| Adjustment of PBG | PBG adjustment was impermissible. | The Resolution Plan mandated a cash infusion for the first tranche payment, and the PBG could not be set off against this obligation. The terms of the RFRP, which were incorporated into the Resolution Plan, explicitly prohibited such an adjustment. |
| Liquidation | Non-implementation of the Resolution Plan by the SRA leads to liquidation. | The SRA failed to infuse the first tranche payment, pay airport dues, and settle workmen’s dues, contravening the Resolution Plan. Multiple extensions were granted, but the SRA failed to comply, necessitating liquidation as per Section 33(3) of the IBC, 2016. |
| Timely Implementation | Timely implementation is an objective of the IBC, 2016. | The IBC aims for a time-bound resolution process to maximize asset value and prevent value erosion due to delays. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How Considered |
|---|---|---|
| IFCI Ltd. v. Sutanu Sinha and Others (2023 SCC OnLine SC 1529) | Supreme Court of India | Cited to emphasize that the jurisdiction under Section 62 of the IBC is restricted to a question of law akin to a second appeal. |
| Chandrabhan (Deceased) Through Lrs. And Others v. Saraswati and Others (2022 SCC OnLine SC 1273) | Supreme Court of India | Cited to explain what constitutes a “substantial question of law” under Section 100 of the Code of Civil Procedure, 1908. |
| Maria Colaco and Another v. Alba Flora Herminda D’souza and Others (2008) 5 SCC 268 | Supreme Court of India | Cited to explain that the High Court should not interfere on questions of fact in second appeal, but can interfere if the finding is totally perverse. |
| Abdul Raheem v. Karnataka Electricity Board and Others (2007) 14 SCC 138 | Supreme Court of India | Cited to explain that consideration of irrelevant facts, non-consideration of relevant facts, and overlooking vital documents would give rise to a substantial question of law. |
| Ebix Singapore Private Limited v. Committee Of Creditors of Educomp Solutions Limited and Another (2022) 2 SCC 401 | Supreme Court of India | Cited to emphasize that a resolution plan, once approved, cannot be withdrawn or modified and is binding on all stakeholders. |
| Kridhan Infrastructure Private Limited v. Venkatesan Sankaranarayan and Others (2021) 6 SCC 94 | Supreme Court of India | Cited to emphasize that time is a crucial facet of the scheme under IBC. |
| Innoventive Industries Limited v. ICICI Bank and Another (2018) 1 SCC 407 | Supreme Court of India | Cited to highlight the importance of speed in the insolvency process and to explain the objectives of the IBC, 2016. |
| K Shashidhar v. Indian Overseas Bank and Ors. (2019) 12 SCC 150 | Supreme Court of India | Cited to emphasize that the commercial wisdom of the CoC has been given paramount status without any judicial intervention. |
| Glas Trust Company LLC v. Byju Raveendran and Others (2024 SCC OnLine SC 3032) | Supreme Court of India | Cited to emphasize that the Court must be circumspect in deviating from the prescribed procedure, especially in the context of the IBC, 2016. |
Legal Provisions:
✓ Section 30(2)(a) of the IBC, 2016: Mandates payment of CIRP costs in priority.
✓ Section 31(1) of the IBC, 2016: Makes approved resolution plans binding.
✓ Section 33(3) of the IBC, 2016: Allows for liquidation if a resolution plan is contravened.
✓ Regulation 36B(4A) of the 2016 Regulations: Requires performance security from resolution applicants.
✓ Rule 15 of the NCLT Rules, 2016: Grants power to the NCLT to extend time.
✓ Rule 15 of the NCLAT Rules, 2016: Grants power to the NCLAT to extend time.
✓ Section 74(3) of the IBC, 2016: Provides for punishment for contravention of the resolution plan.
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| PBG adjustment is permissible under the Resolution Plan. | Rejected. The Court held that the PBG could not be adjusted against the first tranche payment, as it was meant to be a separate security. |
| Airport dues are part of CIRP costs and can be adjusted from the Corporate Debtor’s positive cash balance. | Partially Accepted. The Court agreed that airport dues are part of CIRP costs but clarified that they must be paid in priority and in full. |
| Workmen dues should be paid as per NCLAT order. | Upheld. The Court reiterated that the workmen and employees are entitled to full payment of their dues, including Provident Fund and Gratuity. |
| Effective Date was achieved on 20 May 2022. | Upheld. The Court agreed with the NCLT and NCLAT that the Effective Date was achieved on 20 May 2022. |
| SRA fulfilled all conditions precedent. | Partially Rejected. The Court noted that while some conditions were met, the SRA failed to maintain a valid AOC and obtain International Traffic Rights Clearance. |
| The Lender’s Affidavit imposed new conditions. | Rejected. The Court held that the Lender’s Affidavit did not impose any condition over and above those provided under the Resolution Plan. |
How each authority was viewed by the Court?
✓ IFCI Ltd. v. Sutanu Sinha and Others [CITATION]*: The Court used this case to emphasize that its jurisdiction under Section 62 of the IBC is limited to questions of law.
✓ Chandrabhan (Deceased) Through Lrs. And Others v. Saraswati and Others [CITATION]*: The Court relied on this case to define what constitutes a substantial question of law.
✓ Maria Colaco and Another v. Alba Flora Herminda D’souza and Others [CITATION]*: This case was cited to clarify that the High Court can interfere in second appeal if the finding is totally perverse.
✓ Abdul Raheem v. Karnataka Electricity Board and Others [CITATION]*: The Court used this case to highlight that overlooking vital documents or non-consideration of relevant facts can raise a substantial question of law.
✓ Ebix Singapore Private Limited v. Committee Of Creditors of Educomp Solutions Limited and Another [CITATION]*: This case was used to support the view that a resolution plan, once approved, is binding and cannot be modified.
✓ Kridhan Infrastructure Private Limited v. Venkatesan Sankaranarayan and Others [CITATION]*: The Court cited this case to emphasize the importance of time in the IBC process.
✓ Innoventive Industries Limited v. ICICI Bank and Another [CITATION]*: This case was used to highlight the importance of speed in the insolvency process and to explain the objectives of the IBC, 2016.
✓ K Shashidhar v. Indian Overseas Bank and Ors. [CITATION]*: This case was used to emphasize that the commercial wisdom of the CoC has been given paramount status without any judicial intervention.
✓ Glas Trust Company LLC v. Byju Raveendran and Others [CITATION]*: This case was used to emphasize that the Court must be circumspect in deviating from the prescribed procedure, especially in the context of the IBC, 2016.
Reasoning:
The Supreme Court held that the NCLAT erred in allowing the adjustment of the PBG against the first tranche payment, as this contravened the terms of the Resolution Plan and the RFRP, which were binding on the SRA. The court emphasized that the PBG was intended as a security, not a payment instrument. The court also found that the SRA had failed to implement the Resolution Plan by not making the required cash infusion, not paying the airport dues, and not settling the workmen’s dues as per the NCLAT order. The court held that the non-implementation of the Resolution Plan by the SRA necessarily leads to the consequence of liquidation as under Section 33(3) of the IBC, 2016. The court stated that timely implementation of the Resolution Plan is also one of the objectives of the IBC, 2016.
The Court noted that the SRA had been granted multiple extensions to comply with the Resolution Plan but had failed to do so. The Court also observed that the NCLAT had acted contrary to the settled legal principles and went to the extent of drawing wrong inferences from proved facts while deciding the matter.
The Court concluded that the SRA’s failure to comply with the terms of the Resolution Plan and the directions of the Supreme Court warranted the liquidation of Jet Airways. The Court also invoked its powers under Article 142 of the Constitution to direct the liquidation of the Corporate Debtor.
“The performance security shall not be set -off against or used as part of the consideration that the Successful Resolution Applicant proposes to offer in relation to the Company, even if expressly indicated as such by the Successful Resolution Plan.”
“Failing to comply with the conditions mentioned in Para 8(a) to (c) above, the Corporate Debtor should be directed to go into liquidation.”
“The successful resolution applicant shall peremptorily on or before January 31, 2024, deposit an amount of Rs. 150 crores into the designated account of SBI, failing which the consequences under the resolution plan shall follow.”
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the SRA’s failure to adhere to the core financial obligations of the resolution plan, specifically the infusion of cash and the non-adjustment of the PBG. The court also emphasized the importance of timely implementation of the resolution plan, as well as the need to uphold the integrity of the IBC process.
| Reason | Percentage |
|---|---|
| Failure to Infuse Cash as per Resolution Plan | 40% |
| Impermissibility of PBG Adjustment | 25% |
| Non-payment of Airport Dues and Workmen Dues | 20% |
| Multiple Extensions and Non-Compliance | 10% |
| Need for Timely Implementation | 5% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Key Takeaways
- A Performance Bank Guarantee (PBG) cannot be adjusted against a mandatory cash payment in a resolution plan.
- Successful Resolution Applicants must strictly adhere to the terms of the approved Resolution Plan, including payment timelines and financial commitments.
- Non-implementation of a Resolution Plan can lead to liquidation of the Corporate Debtor.
- Timely implementation is a key objective of the IBC, 2016, and delays can lead to value erosion.
- The commercial wisdom of the Committee of Creditors (CoC) is paramount, but must be exercised with fairness and with good reasons.
- NCLT and NCLAT must be circumspect in granting extensions of time and must not dilute the timelines provided under the Code and the Resolution Plan.
- Lenders also have an obligation to cooperate with the successful resolution applicant for the implementation of the Resolution Plan.
Directions
The Supreme Court directed the following:
- The Corporate Debtor, Jet Airways, is to be taken into liquidation.
- The NCLT, Mumbai, is to appoint a liquidator and initiate liquidation proceedings.
- The amount of Rs. 200 Crore already infused by the SRA is forfeited.
- The Lenders/Creditors are free to initiate proceedings for recovery of their dues.
Final Order
The Supreme Court allowed the appeals and set aside the impugned judgments of the NCLAT. The Court directed the liquidation of Jet Airways (India) Limited, thus bringing an end to the long-drawn insolvency process.