STATE BANK OF INDIA VS CONSORTIUM OF MURARI LAL JALAN AND MR. FLORIAN FRITSCH : CASE SUMMARY
The Supreme Court in State Bank of India Vs. Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (Civil Appeal No. 5023 – 5024/2024) held that one of the key objectives of the IBC is to ensure the survival of the Corporate Debtor as a going concern, yet the same must not come at the cost of efficiency. “Timely liquidation” should be preferred over an “endless resolution process”
FACTS OF THE CASE
NCLT vide its order dated 26.06.2019 initiated insolvency proceedings in the matter of Jet Airways. The total admitted claim against the Corporate Debtor was 7800 Crores. Request for Resolution Plan was issued during CIRP, which has inter alia provision for furnishing of performance bank guarantee or demand draft of 150 Crore or 10% of upfront amount of Resolution Plan, whichever was higher.
Resolution Plan submitted by Consortium of Murari Lal Jalan and Mr. Florian Fritsch was approved by NCLT vide order dated 22.06.2021. “Effective date” was fixed on 90th day from plan approval order dated 26.06.2021. 90 days for fulfilling of conditions precedent expired on 22.09.2021. Extension of 90 days were granted by NCLT vide order dated 29.09.2021. First extension expired on 22.12.2021. Second extension expired on 22.03.2022. Maximum extension of 180 days prescribed under the Resolution plan thus expired on 22.03.2022. On 11.04.2022, NCLT granted exclusion of 65 days which extended effective dated to 25.05.2022.
The Successful Resolution Applicant had 180 days from 20.05.2022 to 16.11.2022 to infuse an amount of Rs. 350 Crore as per implementation schedule.
Appellants disputed fulfilments of conditions precedents on one ground or another. SRA filed two applications for declaration that conditions precedent had been fulfilled and exclusion of period for making payment of first tranche of Rs. 350 Crore, which were allowed vide common order dated 13.01.2023. Thus, deadline to make payment was extended to 15.05.2023.
On 30.01.2023, the Supreme Court upheld order passed by NCLAT whereunder SRA was made liable to pay gratuity and provident fund dues under 180 days of effective date.
NCLAT vide order dated 03.03.2023 declined to stay the order dated 13.01.2023 whereby NCLT had directed that implementation of Resolution Plan has to be monitored by monitoring committee.
NCLAT vide order dated 26.05.2023 excluded period between 16.11.2022 and 03.03.2023 for payment of first tranche under Resolution Plan. Thus, period was extended till 31.08.2023.
SRA filed Two IAs seeking adjustment of PBG against first tranche of payment of 350 Crore. NCLAT vide order dated 28.08.2023 allowed adjustment application and implementation of Resolution Plan was extended to 30.09.2023. Before expiry of 3rd implementation extension i.e. 30.09.2023 SRA deposited Rs. 200 Crore.
Three interim orders were challenged before the Supreme Court – (i) refusal of NCLT to stay the order of NCLT wherein it was held that conditions precedent has been fulfilled (ii) Order of NCLT whereby NCLAT restrained invocation of PBG and extended implementation to 31.08.2023. (iii) order of NCLAT permitting adjustment of PBG against first tranche of 350 Crore.
The Supreme Court vide order dated 18.01.2024 held that PBG of 150 Crore could not be adjusted against first tranche of payment under Resolution Plan failing which consequences under Resolution Plan will follow. The Supreme Court directed to make payment of Rs. 150 Crore till 31.01.2024.
The NCLAT on 12.03.2024 held that conditions precedent has been fulfilled and extended period for payment of Rs. 350 Crore till 11.04.2024. NCLAT also allowed adjustment of PBG of 150 Crore against first tranche of payment. Order of the NCLAT was challenged before the Supreme Court.
FINDINGS OF THE SUPREME COURT
The Supreme Court determined the following issues.
(i) Whether the Performance Bank Guarantee (PBG) could have been adjusted against the first tranche payment which was to be made under the Resolution Plan, within 180 days from the Effective Date in contravention of the order of this Court dated 18.01.2024, the terms of the Resolution Plan and the provisions of law ?
The Supreme Court observed that the contentions of SRA that its hands were tied since the conditions precedent were still being challenged before this Court is nothing but a reflection of its mala fide intention to not fulfil its obligations in accordance with Resolution Plan under the garb of pendency of litigation. Such an undue delay cannot be permitted especially in light of the intention of the IBC to ensure a successful and time-bound revival of the Corporate Debtor.
The Supreme Court noted that effective date has been frozen at 20.05.2022. Several extension were given for payment of first tranche including by the Supreme Court till 31.01.2024.
The Supreme Court observed that direction of adjustment of PBG is contrary to provision of RFRP which has been incorporated in the Resolution Plan and also Regulation 36 B (4A) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Once Resolution Plan is approved by Adjudicating Authority, the same is binding on every stakeholder and cannot be modified.
In view of its crystal-clear order of the Supreme Court dated 18.01.2024, the PBG of Rs. 150 Crore could not have been allowed to be adjusted with the first tranche payment of Rs. 350 Crore. Non-compliance of the SRA with the order of this Court has led to a dereliction of its obligations to implement the Resolution Plan.
(ii) Whether non-implementation of the Resolution Plan by the SRA necessarily leads to the consequence of liquidation as provided under Section 33 (3) of the IBC ?
The Supreme Court noted that the SRA has defaulted in implementation of Resolution Plan on several counts. The SRA failed to infuse first tranche of Rs. 350 Crore. The SRA also defaulted in payment of CIRP costs including Airport Dues. The Supreme Court observed that order dated 21.10.2022 of the NCLAT was unambiguous in its declaration that both Provident Fund and Gratuity dues have to be paid by the SRA in order to save the Resolution Plan from being hit by Section 30 (2)(e) of the IBC, 2016. Thus, SRA also defaulted in payment of provident fund and gratuity dues.
The Supreme Court held that although one of the key objectives of the IBC is to ensure the survival of the Corporate Debtor as a going concern, yet the same must not come at the cost of efficiency. In scenarios such as the present, “timely” liquidation is indeed preferred over an “endless resolution process”. Such a view will prevent the likelihood of adversely affecting the interests of all the creditors who have been suffering due to no fault of their own and securing the maximizing of value of remaining assets.
(iii) Whether the timely implementation of the Resolution Plan is also one of the objectives of the IBC, 2016 ?
The Supreme Court observed that several decisions of this Court have highlighted the importance of a speedy resolution process under the IBC, 2016 in the context of either completing the CIRP process in a time bound manner as per Section 12 of the IBC, 2016 or ensuring that the Liquidator does not cause unnecessary delay or inefficiency in the Liquidation Process. A primary and predominant consideration behind minimizing delay is to ensure that the assets of the Corporate Debtor do not get frittered away or depreciated due to the time lag caused either during CIRP or during the liquidation process overseen by the Liquidator. Such a time bound action is also equally important and imperative while the Resolution Plan is being implemented by the successful resolution applicant. Unnecessary delay caused in implementation of the Resolution Plan would also lead to similar consequences of the assets of the Corporate Debtor diminishing in value. Therefore, there is no doubt hat the timely implementation of the Resolution Pan is also one of the underlying objectives.
The Supreme Court observed that the discretion in extending the time limits fixed under the Resolution Plan must be exercised in a much more circumspect manner, especially in cases such as the present, which pertains to the aviation sector, wherein timely resolution and revival of the Corporate Debtor is all the more crucial since the sector operates in such a way that a continuous flow of cash is required to maintain the company in a position of status quo.
The Supreme Court invoked its power under Article 142 and liquidated the Corporate Debtor.
SHORTCOMING AND SUGGESTIONS
The Supreme court gave several suggestions in this case.
The Supreme Court noted that Commercial Wisdom of CoC can not be subjected to judicial review, but self-regulating guidelines have been issued by IBBI on 06.08.2024 which may go a long way in streamlining functions of CoC. The Supreme Court suggested that the Central Government or the IBBI explore the possibilities of better enforcement of the standards and practices enumerated in the guidelines through an independent mechanism under the auspices of an oversight committee instead of making them self-regulatory.
The Supreme Court observed that exercise of discretion as regards altering the binding terms of the Resolution Plan including the timelines imposed must be kept at a minimum at best. The authorities including the NCLT and NCLAT must not aid the successful resolution applicants in circumventing the strict mandates of the law by acceding to their requests to relax the terms of the plan itself.
The Supreme Court also suggested that the Adjudicating Authority while approving the Resolution Plan under Section 31 of the IBC, 2016 should record the next steps which are to be taken by the respective parties for commencement of the implementation of the approved Resolution Plan.
The Supreme Court also suggested that IBC statutorily provide for the constitution of a Monitoring Committee once the plan has been approved for a smooth handover of the Corporate Debtor to the successful Resolution Applicant.
The Supreme Court also observed that the integrity of the original timelines laid down by the code and the Resolution Plan must not be allowed to be violated since it would dilute the objective of the Code in its entirety, erode investor confidence and hinder all corporate restructuring efforts.
The Supreme Court also suggested that filing of vacancies with experts having domain knowledge in the field must be prioritized along with addressing the infrastructure needs of the Tribunals to prevent any adverse effect on the Resolution Process. There should not be any political appointment.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
