Jet Airways saga shows challenges of contractual & commercial disputes in India

The Supreme Court could have just reversed the NCLAT judgment and sent the parties back to the relevant process under the IBC to seek liquidation.

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.

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.

The article appeared in the Print, 13 November 2024.

Nuclear power is cleaner, more reliable than solar energy. India must ease regulations

Besides engineering, there have been significant developments in the regulatory framework for nuclear energy, with countries building standards and safeguards to avert future disasters.

India has made progress in solar energy in the last few decades. The action on nuclear power remains modest. As of March 2022, the Nuclear Power Corporation of India Limited was operating 21 reactors with an installed capacity of 6,780 MW, which accounted for 1.7 per cent of the country’s total installed capacity.

The Ministry of Power’s Central Electricity Authority expects a capacity addition of 6,600 MW from nuclear energy between 2027 and 2032, compared to 1,79,000 MW from solar and 49,000 MW from wind during the same period. This article takes a dive into the trade-offs between nuclear and solar power on questions of safety, cost, and efficiency.

Is nuclear energy safe?

Many of us may remember the 9.0-magnitude earthquake that struck off Japan’s coast and the tsunami that followed. This proved to be a disaster for the Fukushima Daiichi nuclear plant that was powering 30 per cent of Japan’s electricity. The tsunami led to a failure of its power system that was important for cooling the nuclear reactor cores. This resulted in hydrogen explosions and partial meltdowns in three reactors. The radiation that was released from this incident prompted mass evacuations. This incident led to a rethink of nuclear power—Japan decommissioned 21 out of its 54 nuclear reactors. As of 2023, the share of nuclear power has come down to about 6 per cent. Countries such as Germany also withdrew from nuclear energy in the aftermath of the Fukushima disaster.

However, more than a decade has passed since the disaster. The pressure to decarbonise is upon us. The world has made significant progress in improving the safety of nuclear power plants. Earlier, reactors required active cooling systems, which meant that, in an emergency, both power and human intervention were required for cooling. Newer designs, including the Small Modular Reactors (SMR), are built to be “passively safe.” In other words, they are designed to shut down on their own in an emergency. There is also growing interest in floating nuclear power plants where the reactor is located at sea thus leveraging the cooling effect of water, making it safer. As of now, only one such floating nuclear plant exists in Russia, but interest in this technology continues to grow.

Besides engineering, there have been significant developments in the regulatory framework for nuclear energy, with countries building standards and safeguards to avert future disasters. Nuclear energy’s safety profile has improved with advancements in both technology and regulation. Yet, the question of safety remains, especially owing to the possibility of accidents after a natural disaster, and the ongoing challenges of dealing with radioactive waste. The consequences of human error are also more severe in nuclear power, making high technical skills a prerequisite for safe operation.

Is nuclear cost-competitive with solar?

The cost of nuclear power plants depends on the capital costs of setting up the facility, as well as fuel and other operating expenses. Estimates vary on how expensive nuclear electricity is. A report by Lazard suggests that the levelised cost of energy (LCOE), which includes construction, fuel, operation, and maintenance over the plant’s lifetime, for solar with storage ranges from $60-$210/MWh, while the LCOE for nuclear ranges from $140-$220/MWh, making nuclear a much more expensive option. These costs are approximations, as conditions in each country can be very different.

How would these play out in India? A 2020 joint report by the International Energy Agency and the OECD Nuclear Energy Agency shows that, in India, the LCOE for nuclear is $48/MWh and solar utility–scale costs $35/MWh. However, the upfront costs for nuclear are much higher than for solar. Setting up a nuclear plant also takes more time, making it a difficult investment. Similarly, the operational costs for nuclear are also higher than those for solar. Further, nuclear energy is dependent on raw material, which makes it vulnerable to geopolitical events. In contrast, solar energy is immune to international events and price volatility in global markets. While the costs, over the lifetime of the plant, may equalise, the high upfront costs make nuclear a more difficult proposition in India. Furthermore, unlike Europe, which has limited solar opportunities, India faces no such constraints. The human capital required to generate solar power is also cheaper than that required for nuclear power.

What are the advantages of nuclear power?

The advantage of nuclear power is that it is available 24/7 and has a capacity factor of almost 90 per cent. This means nuclear plants operate close to their maximum output over time, providing consistent and reliable electricity. This is not the case with solar, which is only available when the sun is shining, and therefore has a capacity factor of 15-30 per cent. Solar will, therefore, always require backup from coal or some other technology for baseline energy needs, as well as significant storage capacity. In contrast, nuclear plants can produce high-output power, making it ideal as an efficient source of electricity for large, densely populated cities. Further, nuclear energy produces zero carbon emissi ons, making it an important component of the strategy to achieve net-zero targets.

Private capital will assess these trade-offs before making investment decisions. Investors across the world are increasingly allocating resources toward both solar and nuclear energy. Regulators are addressing safety and liability concerns. However, the policy landscape for nuclear energy in India remains restrictive, which deters private sector involvement. While safety is paramount, easing regulatory constraints could unlock critical flows of private investment and foreign expertise.

The article was published in the Print, 6 November 2024.