SBI v. Jalan & Fritsch (2024): Supreme Court Sets Precedent on Performance Bank Guarantee Adjustment and Mandates Liquidation under IBC

Introduction

The case of State Bank of India v. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (2024 INSC 852) represents a landmark judgment by the Supreme Court of India concerning the application of the Insolvency and Bankruptcy Code (IBC), 2016, particularly focusing on the adjustment of Performance Bank Guarantee (PBG) against tranche payments in the context of corporate insolvency. This case involves the insolvency resolution process of Jet Airways (India) Limited, a prominent Indian airline that faced financial distress leading to the initiation of Corporate Insolvency Resolution Process (CIRP).

Summary of the Judgment

The Supreme Court of India, in its judgment delivered on November 7, 2024, addressed critical issues raised by the State Bank of India (Appellant) against the consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (Respondents) involved in the CIRP of Jet Airways. The crux of the dispute revolved around whether the PBG of Rs. 150 Crore could be adjusted against the first tranche payment of Rs. 350 Crore as proposed by the Respondents.

The National Company Law Appellate Tribunal (NCLAT) had previously allowed the adjustment of the PBG, which was contested by the SBI. The Supreme Court found that this adjustment was impermissible under the Resolution Plan and the IBC, leading to the conclusion that the Respondents had failed to implement the Resolution Plan as mandated. Consequently, the Supreme Court invoked its plenary powers under Article 142 of the Constitution, directing the liquidation of Jet Airways, thereby reinforcing the mandatory nature of compliance with Resolution Plan terms under the IBC.

Analysis

Precedents Cited

The judgment extensively referenced prior cases that shaped the interpretation of the IBC and the roles of various stakeholders within the insolvency resolution framework. Notably:

IFCI Ltd. v. Sutanu Sinha and Others (2023 SCC OnLine SC 1529): Clarified that appeals under Section 62 of the IBC must raise substantial questions of law.
Chandrabhan (Deceased) Through Lawyers v. Saraswati and Others (2022 SCC OnLine SC 1273): Emphasized that commercial wisdom of the Committee of Creditors (CoC) is non-justiciable.
Glas Trust Company LLC v. Byju Raveendran and Others (2024 SCC OnLine SC 3032): Highlighted the necessity of adhering to the statutory procedures before invoking inherent powers of the Court.

Legal Reasoning

The core legal argument hinged on the interpretation of the PBG provisions within the IBC framework. The Supreme Court concluded that:

Impermissibility of PBG Adjustment: Clauses 3.13.1, 3.13.2, 3.13.7, and 3.13.9 of the Request for Resolution Plan (RFRP) explicitly prohibit the set-off or adjustment of the PBG against any tranche payments. These clauses were incorporated into the Resolution Plan through Clauses 7.3 and 9.4, making them binding.
Non-Compliance Leading to Liquidation: The Respondents failed to infuse Rs. 350 Crore in cash within the stipulated 180 days from the Effective Date (20.05.2022), despite multiple extensions granted by the NCLT and NCLAT. This non-compliance, coupled with the failure to pay additional obligations like airport dues and workmen's dues, constituted a breach of the Resolution Plan.
Invocation of Article 142: Given the Respondents' repeated failures and the resultant erosion of asset value, the Supreme Court deemed it necessary to exercise its inherent powers to order liquidation, ensuring the objectives of the IBC—swift and efficient insolvency resolution—are upheld.

Impact

This judgment has profound implications for future insolvency cases in India:

Reinforcement of IBC Objectives: Emphasizes the necessity of strict adherence to Resolution Plan terms, discouraging any attempts to circumvent stipulated obligations.
Limits on PBG Utilization: Clearly delineates the non-adjustable nature of PBG, ensuring it remains a safeguard rather than a negotiable financial tool.
Strengthening of Judicial Oversight: Demonstrates the judiciary's willingness to enforce compliance through its inherent powers, thereby reinforcing the authority of the IBC framework.
Liquidation as a Last Resort: Sets a precedent that timely liquidation can be mandated when resolution plans fail, ensuring minimal asset depreciation and protecting creditor interests.

Complex Concepts Simplified

Performance Bank Guarantee (PBG)

A PBG is a financial instrument provided by the resolution applicant to assure creditors of their commitments to pay certain amounts. Under the IBC, the PBG is meant to serve as a performance guarantee, ensuring that the resolution applicant adheres strictly to the terms of the Resolution Plan. Importantly, it cannot be adjusted against tranche payments, serving as a non-negotiable security.

Insolvency and Bankruptcy Code (IBC), 2016

The IBC provides a comprehensive legal framework for the insolvency resolution process in India. Its primary objectives include the maximization of the value of the debtor’s assets, the promotion of entrepreneurship, and the assured return of creditors' dues in a time-bound manner. Key sections relevant to this case include:

Section 31: Pertains to the approval of resolution plans by the Adjudicating Authority (NCLT).
Section 33(3): Deals with the liquidation of the corporate debtor if the Resolution Plan is not implemented.
Section 62: Governs the appeal mechanism under the IBC.

Effective Date

The Effective Date marks the commencement of implementing the Resolution Plan, contingent upon the fulfillment of all Conditions Precedent. In this case, it was fixed on 20.05.2022, with multiple extensions granted for compliance by the Successful Resolution Applicant (SRA).

Conclusion

The Supreme Court’s judgment in SBI v. Jalan & Fritsch underscores the rigidity of the IBC framework in ensuring that Resolution Plans, once approved, are implemented without deviations. By disallowing the adjustment of the PBG and mandating liquidation due to non-compliance, the Court reinforced the sanctity of the Resolution Plan and the IBC’s objective of swift insolvency resolution.

This decision serves as a pivotal reference for future insolvency cases, highlighting the judiciary’s role in upholding statutory mandates and ensuring equitable treatment of all stakeholders within the insolvency resolution process. It also acts as a deterrent against any attempts to undermine the IBC’s provisions, thereby strengthening the overall insolvency regime in India.

"The resolution applicant shall furnish or cause to be furnished, an unconditional and irrevocable performance bank guarantee... provided that it is acceptable to the Resolution Professional... The Performance Security can be invoked and appropriated at any time, upon occurrence of any of the following conditions... The Performance Security shall not be set-off against or used as part of the consideration...”

This excerpt from the judgment encapsulates the non-negotiable nature of the PBG, emphasizing its role as a safeguard rather than a flexible financial tool.

Key Takeaways

Strict Compliance: Resolution Plans must be adhered to in full, with no room for unilateral adjustments.
PBG Non-Adjustability: PBG remains an immutable security, only triggerable under specified breach conditions.
Judicial Enforcement: Courts will actively enforce compliance, resorting to inherent powers when necessary.
Timely Liquidation: Liquidation is a viable and enforceable outcome when Resolution Plans fail, ensuring asset protection and creditor interests.
Strengthening IBC Framework: The judgment reinforces the IBC’s role in facilitating efficient and fair insolvency resolutions.

Implications for Future Cases

Legal practitioners and stakeholders must be acutely aware of the Supreme Court’s stance on PBG and Resolution Plan compliance. Future insolvency resolutions must ensure:

Clear delineation of financial securities and adherence to their stipulated terms.
Timely and full compliance with tranche payments as per the Resolution Plan.
Proactive measures to avoid litigation through thorough and feasible resolution plans.

Additionally, this judgment may influence the drafting of RFRPs and Resolution Plans to ensure airtight compliance mechanisms, thereby minimizing ambiguities and potential legal disputes.