top of page

Lessons From the Jet Airways Case

[Vrinda Rajoria is a third year law student at Jindal Global Law School, Sonipat]


Introduction


The Supreme Court of India has ordered the liquidation of Jet Airways, setting aside a March 12 decision by the NCLAT that had upheld the transfer of ownership to the Jalan Kalrock Consortium (JKC) as part of the airline's Corporate Insolvency Resolution Process (CIRP). The Court ruled that JKC's failure to comply with the resolution plan, including improper use of a performance bank guarantee and non-payment obligations, amounted to dereliction of duty. With the resolution plan deemed unimplementable, the Court directed the National Company Law Tribunal (NCLT) to appoint a liquidator immediately. This decision came after a prolonged legal battle between the airline's lenders, led by the State Bank of India (SBI), and JKC, which had won the bid for the airline's revival but failed to meet key conditions. The ruling emphasized the need for speedy resolution and liquidation to protect creditor interests.


Financial Viability of Resolution Applicant


The IBC’s current framework lacks mechanisms to enforce timely compliance. While Section 30 sets the foundation for what constitutes an acceptable resolution plan with the IBC framework. It mandates that the resolution must be feasible and viable, meaning it should be realistically capable of reviving the distressed company and ensure that the resolution applicant adheres to applicable laws like Section 29A. Also talks about approval of by the Committee of Creditors to ensure that creditors to weed out plans that may lack substance or could potentially lead to non-compliance.


In the Jet Airways case, the Jalan-Kalrock Consortium (JKC) presented a plan that seemed viable initially but later showed vulnerabilities due to delays in funding, failure to meet specific conditions, and challenges in acquiring regulatory approvals like the air operator’s certificate (AOC). While Section 30 outlines the criteria for selecting a resolution plan, it does not specify detailed methods to enforce these criteria once the plan is approved. This gap became evident when JKC failed to meet its financial commitments despite its plan being initially deemed viable. The inability to enforce milestones after approval created a situation where creditors had limited recourse when JKC delayed implementation. The case also highlighted a shortcoming in how the CoC evaluates a resolution applicant’s financial strength. Although Section 30 requires the CoC to assess the viability of the resolution plan, there is no mandated vetting process for ensuring that resolution applicants have liquid funds or guaranteed financing.


Section 31 of the IBC code, on the other hand renders an approved resolution plan binding on all stakeholders, including creditors, employees, and the corporate debtor (the distressed company). Once the CoC approves a plan and the NCLT sanctions it under Section 31, it is legally enforceable on all parties involved. By making the plan binding, Section 31 ensures that companies are given a genuine chance at revival, with all parties legally obligated to support the restructuring efforts.


While Section 31 enforces the plan but lacks the ability to enforce compliance with post-approval milestones or penalize non-compliance effectively. In Jet Airways, once the NCLT approved JKC’s plan, it was supposed to be binding. However, JKC’s delay in fulfilling the plan’s conditions led to litigation. Because Section 31 doesn’t specify penalties for missing conditions precedent or delaying payments, creditors had no immediate recourse to ensure compliance, prolonging the insolvency process. This has also been a point of contention in other cases, like Essar Steel and Bhushan Power & Steel, where delays by resolution applicants resulted in mounting dues for creditors and operational challenges.


Discretionary Extensions Undermine Resolution Finality


The IBC’s strict timeline requirements for the CIRP—originally set at 180 days and extendable up to 330 days—are based on the principle that prolonged delays in insolvency proceedings erode asset value and reduce creditors' potential recovery. Under Rule 15 of the NCLT and NCLAT Rules, both bodies can extend timelines as they see fit, which often leads to delays detrimental to resolution certainty.


The NCLAT granted multiple extensions to JKC for the ₹350 crore payment and allowed adjustments of the performance bank guarantee (PBG) of ₹150 crore, a decision the Supreme Court later struck down. This judicial latitude prolonged the CIRP and undermined the binding terms of the original resolution plan. This reliance on judicial discretion rather than clear IBC mandates created uncertainties and inconsistencies.


Even in the landmark case of Ebix Singapore Pte Ltd. v. Committee of Creditors of Educomp, Ebix, a successful resolution applicant, sought to withdraw its resolution plan after approval due to changes in Educomp’s financial status. The NCLAT permitted this withdrawal, citing unforeseen circumstances as justification. However, upon appeal, the Supreme Court overturned the NCLAT’s ruling, holding that an approved resolution plan, once sanctioned, becomes binding on all stakeholders, including the resolution applicant. It clarified that, except under extraordinary circumstances, once a resolution plan is approved, judicial bodies must refrain from permitting alterations that could compromise the predictability of the process. This is especially relevant in light of Jet Airways, where discretionary extensions resulted in repeated delays, underscoring the need for strict adherence to CIRP timelines without deviation.


Enforcing Compliance with Conditions Precedent


Regulation 38 of the CIRP Regulations outlines what a resolution plan must include, such as an implementation schedule, compliance mechanisms, and payment timelines to creditors. However, Regulation 38 is limited in scope; it does not require active monitoring of these commitments post-approval. This absence of a structured compliance mechanism means that once the NCLT approves a resolution plan, there is no system in place to ensure that the applicant is meeting its conditions precedent promptly and as agreed. This loophole affects not only creditors but also other stakeholders—employees, operational creditors, and smaller vendors—who depend on the revival of the company for their financial stability.


JKC’s failure to secure an AOC on time and the failure of upfront initial payment of ₹350 Crore and to meet other key conditions precedent went unchecked for extended periods, resulting in delayed outcomes and escalating costs. The absence of interim checks or penalties created a loophole that allowed JKC to delay implementation without immediate repercussions. Even in the case of Bhushan Power & Steel, fraud investigations on the part of the resolution applicant led to protracted delays. A robust monitoring system would have identified and addressed these compliance issues sooner, minimizing impact on creditors.


Suggested Recommendations and Way Ahead


Firstly, resolution plans may include detailed milestone-based schedules with penalties for unmet targets. This framework will encourage applicants to adhere strictly to financial and operational commitments and will allow for quicker action if applicants fail to meet their obligations. The Jet Airways case demonstrates that missed milestones lead to increased costs and delayed outcomes for creditors.


Secondly, the courts can propanoate escrow accounts where applicants must deposit a portion of their upfront payments to secure creditor interests. This would minimize reliance on performance bank guarantees, which, as seen in Jet Airways, are insufficient when adjustments are permitted. Escrow funds would ensure that initial creditor payments are made, reducing the risk of plan failure due to insufficient funding.


Thirdly, Independent body to oversee compliance with the terms of the resolution plan, specifically focusing on high-risk sectors. Monitoring compliance at regular intervals would prevent protracted non-compliance, allowing earlier interventions when applicants fail to meet obligations. This would be especially relevant in cases like Jet Airways, where unresolved obligations disrupted the resolution’s effectiveness.


Fourthly, Fast-Tracking the Liquidation Protocols in Case of Repeated Non-Compliance. It would Empower creditors with the option to initiate fast-track liquidation proceedings if resolution applicants repeatedly fail to comply with conditions, timelines, or payments as stipulated in the approved resolution plan. This approach aligns with the intent of Section 33 of the IBC, which already provides for liquidation if a resolution plan cannot be implemented. Fast-tracking liquidation in cases of non-compliance would minimize discretionary judicial intervention, helping to preserve the time-bound structure of the CIRP.


Conclusion


The Jet Airways case underscores critical shortcomings in the current insolvency framework under the IBC, highlighting the need for systemic reforms to ensure resolution effectiveness and creditor protection. The delays in implementing JKC’s resolution plan revealed vulnerabilities in assessing the financial viability of applicants, enforcing compliance with approved plans, and curbing judicial discretion that undermines resolution finality. Strengthening the framework through milestone-based schedules, escrow accounts, independent compliance monitoring, and fast-track liquidation protocols can address these gaps and enhance the efficiency of the CIRP. By instituting these measures, the insolvency process can be better aligned with its objective of reviving distressed companies while safeguarding creditor interests, ensuring timely and predictable outcomes for all stakeholders involved.




27 views0 comments

댓글


Thanks for submitting!

  • LinkedIn
  • Instagram
  • Twitter

©2020 by The Competition and Commercial Law Review.

bottom of page