Grounded Resolutions: Lessons from Jet Airways and SBI vs. Jalan-Fritsch on the IBC’s Turbulent Path
Varun Chikhale
4th Year, B.B.A. LL.B., Symbiosis Law School, Nagpur
Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced to streamline corporate insolvency in India, promising timely resolutions, creditor protection, and economic revitalization. However, as demonstrated in State Bank of India & Ors. vs. Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr (2024) ibclaw.in 290 SC, implementing the Code often presents substantial challenges. The Jet Airways insolvency saga exemplifies these hurdles, spotlighting issues such as delays in implementation, unclear plan conditions, and limitations in enforcement. Here, we explore the IBC’s key shortcomings through the Jet Airways case and the SBI vs. Jalan-Fritsch judgment, emphasizing the need for reforms in India’s insolvency framework.
Jet Airways and SBI vs. Jalan-Fritsch: An Overview
The Jet Airways insolvency process began in 2019, with the State Bank of India (SBI) among the creditors owed around 7800 crore Rupees. In 2020, a consortium led by Murari Lal Jalan and Florian Fritsch was approved by the Committee of Creditors (CoC) to revive the airline. Yet, delays in the consortium’s payments, unmet obligations, and multiple legal disputes hampered the resolution’s progress. By 2024, SBI had sought liquidation, arguing that the consortium had failed to implement its Resolution Plan, In its ruling, the Supreme Court held that the & 150 crore Performance Bank Guarantee (PBG) could not offset the consortium’s payment obligations, thus requiring a fresh cash infusion. This case underscored several weaknesses within the IBC and highlighted the judiciary’s role in resolving ambiguities in the Code.
Weaknesses of the IBC
- Delays in Resolution and Implementation
The IBC aims to resolve insolvency cases within 270 days. However, the Jet Airways case illustrates how delays and extensions can undermine this objective. The consortium was granted multiple extensions, delaying creditor recoveries and further jeopardizing Jet’s potential for revival. This need for stricter timelines and the prevention of indefinite extensions is crucial to fulfilling the IBC’s mandate of timely resolutions.
- Ambiguities in Performance Bank Guarantee (PBG) Adjustments
The SBI vs. Jalan-Fritsch ruling clarified that the PBG could not substitute for cash obligations under a Resolution Plan. Yet, the initial lack of clarity over this issue led to prolonged disputes. In high-stakes cases, PBGs are intended as a compliance guarantee, not a replacement for committed cash. Clearer guidelines on the PBG’s treatment within the IBC could prevent similar conflicts, ensuring that performance guarantees serve as an enforcement mechanism rather than a source of contention.
- Gaps in Monitoring and Implementation Oversight
The Jet Airways case highlights the limitations of the IBC’s Monitoring Committees, which oversee Resolution Plan implementation. Although the Monitoring Committee is responsible for compliance, it lacks the authority to penalize or enforce non-compliance effectively. The consortium’s delayed payments went largely unchecked, reflecting a need for enhanced powers to compel compliance and penalize defaults. Strengthening Monitoring Committees could improve accountability and adherence to timelines.
- Uncertainty Around Employee Dues
Employee dues often receive priority under the IBC, but payment delays and disputes in the Jet Airways case revealed ongoing ambiguities. In the SBI vs. Jalan-Fritsch judgment, the Supreme Court emphasized that employee claims, like provident fund dues, must be prioritized, but the implementation process saw repeated deferment. To address this, the IBC could incorporate specific timelines for employee dues, protecting workers’ financial security and ensuring fair treatment in insolvency resolutions.
- Undefined Terms in Resolution Plans: “Effective Date” and “Conditions Precedent”
The Jet Airways case exposed complications stemming from undefined terms such as “Effective Date” and “Conditions Precedent” within the Resolution Plan. The consortium argued that these terms allowed for extended timelines, while the creditors and courts interpreted them strictly. This inconsistency highlights a gap in the IBC, where clear definitions for such terms could reduce loopholes, creating a more standardized timeline for compliance.
- Liquidation as a Last Resort
While the IBC prioritizes resolution, the SBI vs Jalan-Fritsch case demonstrates that the path to liquidation can be complicated and drawn-out, Transitioning Jet Airways to liquidation was delayed by multiple appeals, resulting in financial losses for creditors and uncertain outcomes. A clearer process in the IBC for transitioning to liquidation upon resolution failure could provide creditors with faster alternatives to recover dues and improve the efficiency of insolvency proceedings.
- Over-Reliance on Judicial Interpretation
The IBC’s provisions often rely on judicial interpretation for clarification, which can introduce unpredictability. In SBI vs. Jalan-Fritsch, the Supreme Court played a significant role in defining terms and enforcing timelines, but frequent judicial intervention can also create inconsistency. Refining the IBC with more precise statutory language could reduce this dependency, promoting more consistent application and reducing delays in the resolution process.
Key Reforms Needed in the IBC
Based on the challenges highlighted in the Jet Airways case and the SBI vs. Jalan-Fritsch judgment, the following reforms could enhance the IBC:
- Stricter Enforcement Powers for Monitoring Committees: Granting the Monitoring Committee authority to penalize defaults could improve compliance.
- Clearer PBG Provisions: Guidelines on PBG adjustments would prevent future disputes, ensuring that performance guarantees meet their intended purpose.
- Defined Liquidation Transition Path: Specifying criteria for triggering liquidation upon resolution failure could provide creditors with quicker alternatives.
- Streamlined Timeline for Employee Dues: Mandating a set timeline for employee payments would ensure workers are prioritized and reduce legal disputes.
Conclusion
The State Bank of India & Ors. vs. Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch & Anr. (2024) ibclaw.in 290 SC decision reveals critical gaps in the IBC, especially in high-profile cases like Jet Airways. While the Code has transformed India’s insolvency landscape, evolving cases demonstrate that its objectives require refinements. With clearer guidelines, stronger enforcement mechanisms, and streamlined liquidation pathways, the IBC can better serve its purpose of fostering swift, fair, and effective insolvency resolutions in India’s corporate sector.
