Jet Airways entered insolvency proceedings in June 2019. Since then, the process had been beset with continuous litigation on account of failures by the resolution applicant to adhere to the terms of the approved resolution plan. On 7 November, however, the Supreme Court used its extraordinary powers under Article 142 of the Constitution and ordered the liquidation of Jet Airways, ending a prolonged saga of litigation.
Even so, the behaviour of all the parties concerned – the lenders to Jet, the tribunals under the Insolvency and Bankruptcy Code and even the Supreme Court – raises significant concerns regarding our approach to handling contractual and commercial disputes.
Case background
Circa 2019 — Jet Airways was finding it difficult to meet its financial obligations. In April 2019, it requested its main banker, the State Bank of India, for emergency funds of Rs 400 crore. The bank denied this request, and instead filed for insolvency under IBC. In June 2019, the National Company Law Tribunal (NCLT) admitted the matter and commenced the resolution process. A resolution plan by the consortium of Murari Lal Jalan and Florian Fritsch was accepted by the lenders (also known as the committee of creditors). The plan had proposed significant financial restructuring, including an initial infusion of Rs 350 crore into the airline for its turnaround. The NCLT accepted this plan in June 2021.
Under the IBC, the resolution process is supposed to follow certain timelines. The winner has to fulfil conditions under specified timelines. The resolution applicant has to take certain actions through the process, and if this fails, the lenders can ask for liquidation.
However, the consortium was unable to meet any of the deadlines. It sought and was granted a 90-day extension by the NCLT. Second, even with this delay, it could not infuse the first tranche payment of Rs 350 crore within six months. Further, it appealed to the National Company Law Appellate Tribunal (NCLAT) to allow for adjustments in the payment schedule, and to use the performance guarantee of Rs 150 crore that it had given as part of the Rs 350 crore payment it had to make.
The NCLAT allowed for this in May 2023. SBI and other creditors objected, and appealed to the Supreme Court. The court agreed with the bankers, and asked the consortium to pay the required amount by 18 January 2024. The consortium missed this deadline too. In March 2024, the NCLAT, in direct contravention of the Supreme Court order, held that the consortium had met all conditions, and it only needed to infuse the additional funds of Rs 200 crore. These developments led the Supreme Court to pass the liquidation order in November.
Also read: ‘This litigation is an eyeopener’: Why SC invoked Article 142 to order liquidation of Jet Airways
Issue 1: The lender’s actions
Why did the lenders not seek liquidation of the company under the IBC? Failure of a resolution plan is a valid cause for initiating liquidation. Despite observing the repeated failure of the resolution applicant to meet the plan’s terms, lenders chose to pursue the litigation option instead of seeking liquidation.
Could this be because litigating was also in the interest of the lenders? It is hard to imagine how, after five years and repeated failures by the consortium, the Net Present Value (NPV) of recoveries from a delayed resolution was higher than liquidation. This would only be possible if lenders still assumed that there was some possibility of making recoveries from the resolution plan, however delayed.
Or perhaps the incentives of the lenders made it a safer bet to continue with litigation rather than take a complete haircut and close the matter. The fact that incentives of lenders are not aligned with speedy actions, whether in resolution or in liquidation, may be compatible with the careers of bankers but detrimental to any notion of preserving the time-value of money.
Issue 2: The tribunal’s actions
Ideally the resolution plan submitted by the consortium should have been followed through with contract documents that detail the transaction design and the obligations of parties. The fact that a relatively simple matter such as the adjustment of the Performance Bank Guarantee against the value payable by the applicant came up continuously for adjudication suggests that:
(i) either these contracts were not being put in place, or (ii) parties were routinely litigating these contract terms and seeking the intervention of the NCLT/NCLAT on these terms, and (iii) the NCLT/NCLATs were entertaining such litigation. Each of these is problematic.
For instance, the consortium used the litigation around performance guarantee adjustment to delay making their payments under the resolution plan. This matter had been adjudicated by the Supreme Court, and yet the NCLAT gave a subsequent judgment that contradicted the Supreme Court’s ruling. This generated another round of litigation, which once again went right up to the Supreme Court.
Issue 3: The Supreme Court’s action
Article 142 gives the Supreme Court the power to take up matters to ensure “complete justice”. Its use in commercial matters, ideally, should meet a high bar. The idea of complete justice in commercial matters is not straightforward. As long as there are valid contracts, contractual terms are adhered to or the provisions of the governing law are followed, there doesn’t appear to be a case for exercising it.
The court could have just reversed the NCLAT judgment and sent the parties back to the relevant process under the IBC to seek liquidation. In using Article 142, the court has opened a new channel for litigation for IBC-related matters. The use of Article 142 in commercial matters has also been done in other instances. It was used in the dispute between Delhi Metro Rail Corporation and Delhi Airport Metro Express Private Limited (DMRC vs. DAMEPL), to reverse an arbitration award that had previously been confirmed by the Supreme Court itself, raising uncertainty about future contractual disputes.
A market economy has two key features:
(i) the ability of firms and persons to enter into and enforce contracts, and (ii) incentive alignment with commercial decision-making. The Jet Airways saga highlights the difficulties with both these ideas.
Renuka Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering. Anjali Sharma is an independent researcher. Views are personal.
(Edited by Zoya Bhatti)