On August 14, 2024, the Hon’ble Supreme Court of India stayed the order of the National Company Law Appellate Tribunal (“NCLAT”), Chennai, which halted the insolvency proceedings against BYJU’S, initiated by the Board of Controllers of Cricket in India (“BCCI”). This case, involving BYJU’S parent company, Think & Learn Private Limited (“Corporate Debtor”), raises several key issues regarding the insolvency mechanism under the Insolvency and Bankruptcy Code, 2016 (“Code”).

The BCCI had moved the plea to initiate Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor for a default on the payment of around INR 158 Crores (Indian National Rupees One Hundred and Fifty-Eight Crores) connected to Indian cricket team jersey sponsorship deals. The plea for the initiation of CIRP was admitted by the National Company Law Tribunal (“NCLT”), Bengaluru, in June 2024. Through an order dated July 16, 2024, the NCLT admitted the petition under Section 9 of the Code (by virtue of BCCI being an operational creditor) and appointed Mr. Pankaj Srivastava as the Interim Resolution Professional (“IRP”), triggering a moratorium under Section 14 of the Code.

However, Mr. Byju Raveendran, the suspended director, promoter and shareholder of the Corporate Debtor challenged the NCLT order and contended in the NCLAT that a settlement with BCCI was in progress. The settlement claim, however, was challenged by Glas Trust Company LLC (“Glas Trust”), a financial creditor representing US-based lenders. Glas Trust argued that the funds offered by the Corporate Debtor to settle the BCCI’s claim could potentially be an act of round-tripping, using money owed to US lenders.  The NCLAT dismissed Glas Trust’s concerns and accepted the settlement, thereby halting the insolvency process of the Corporate Debtor.

Following the decision of the NCLAT, Glas Trust moved the Supreme Court, which stayed the NCLAT’s ruling vide an order dated August 14, 2024. The Supreme Court also ordered that the amount of INR 158 Crores (Indian National Rupees One Hundred and Fifty-Eight Crores) paid to the BCCI shall be held in a separate escrow account pending further directives from the apex court.

Contentions raised by Mr. Byju Raveendran (“appellant”)

Aggrieved by the order of NCLT of admitting CIRP, the appointment of the IRP and triggering of moratorium, the appellant contended in the NCLAT that pursuant to the settlement which is in progress with the BCCI a sum of INR 50 Crores (Indian National Rupees Fifty Crores) had been already paid to the BCCI as part of the settlement, which has been duly accepted by the BCCI. It was further submitted by the appellant that the balance amount would follow and shall be paid by August, 2024. It was claimed by the appellant that the said payments have been undertaken by Mr. Riju Raveendran, who is the ex-promoter, director and largest shareholder of the Corporate Debtor and the younger brother of the appellant.

Contentions raised by Glas Trust

Glas Trust argued that the alleged payment being made by Mr. Riju Raveendran to the BCCI constituted a preferential payment to an operational creditor, which prioritized them over the financial creditors. They also raised concerns about the source of funds and potential violations of a US court's orders and round tripping of the funds.

Contentions by Mr. Riju Raveendran

Mr. Riju Raveendran stated that the money being offered by him, for the purpose of settlement between the Corporate Debtor and the BCCI is being paid from his own sources, generated by sale of shares held by him in the Corporate Debtor, on which income tax has been paid and thus, this money has been generated in India and that the funds did not arise from Byju’s Alpha Inc., the US-based subsidiary of the Corporate Debtor involved in a separate insolvency case. To support his submission, Mr. Riju Raveendran filed an affidavit and undertaking, confirming the source of funds and claimed that the payment will not lead to violation of the Delaware court’s order.

The Hon’ble NCLAT observed that they have perused the affidavit and undertaking submitted by Mr. Riju Raveendran and found that the money has been generated by Mr. Riju Raveendran from his own sources by sale of his shares held in the Corporate Debtor and that income tax has been paid on sale of such shares. Based on their observations, the NCLAT ultimately ruled in favour of the appellant, and invoked Rule 11 of the NCLAT Rules, 2016, to allow the settlement with the BCCI, before a Committee of Creditors (“CoC”) was constituted. However, the NCLAT also stipulated that if the undertaking submitted by Mr. Riju Raveendran was breached, the NCLT order dated July 16, 2024, would automatically revive.

Following the Supreme Court's order to resume insolvency proceedings against the Corporate Debtor, the IRP appointed by the NCLT assumed office on August 14, 2024, and constituted the CoC on August 21, 2024. In surprising turn of events, the IRP has removed Glas Trust from the CoC on the grounds that it does not represent at least 51% (Fifty-One Percent) of the lenders in the consortium that extended a USD 1.2 billion (United States Dollar One Point Two Billion) term loan to Byju’s Alpha, Inc. The Corporate Debtor had disqualified most of the lenders represented by Glas Trust on the grounds of exercising their right under the credit agreement to exclude lenders deemed to be predatory or focused on distressed debt. In response, Glas Trust has filed a petition before the NCLT seeking the removal of the IRP and a stay on further CoC proceedings. However, the NCLT has deferred its decision on the matter.

The Supreme Court on September 11, 2024 decided to schedule the hearing of the appeal filed by Glas Trust against the NCLAT order, on September 17, 2024. The decision of the Apex Court to fast track the proceedings, follows a request from the counsel of the parties for an urgent hearing, citing recent developments in the case.

The Role of the IRP and the CoC

The IRP’s role, as defined under Section 16 of the Code, is to manage the assets and operations of the corporate debtor until the CoC is constituted. The IRP is responsible for overseeing the resolution process, maintaining the status quo, and preventing any actions that could affect the interests of creditors. Following the Supreme Court’s order, the IRP appointed by the NCLT, resumed office and, as per Section 21 of the Code, formed the CoC on August 21, 2024.

Controversy arose when the IRP excluded Glas Trust from the CoC. This decision, which is aligned with the provisions of Section 25 of the Code (which vests the IRP with the duty to protect the interests of creditors and manage the operations of the debtor), has been challenged by Glas Trust, which has sought the IRP's removal and a stay on the CoC’s proceedings. This ongoing dispute highlights the complexities involved in managing creditor claims and the importance of judicial scrutiny, particularly in cross-border insolvencies.

NCLAT’s role in accepting the settlement after initiation of CIRP

The order passed by the NCLAT for accepting the settlement between Corporate Debtor and the BCCI, after the initiation of CIRP has set the world on frenzy. It is pertinent to note that such order of NCLAT, though appears controversial, aligns with Rule 11 of the NCLAT Rules, 2016, which provides that, “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal."

The Hon’ble apex court in Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India, AIR 2019 SC 739, has clearly discussed the stage of application of Rule 11 of the NCLAT Rules, 2016, and has observed that that at any stage where CoC is not yet constituted, Rule 11 can be invoked.

Potential outcomes for BYJU’S

Once the CoC is formed under Section 21 of the Code, it can either approve a resolution plan or recommend liquidation, as per Section 33 of the Code. The CoC has 180 (One Hundred and Eighty) days to complete the CIRP of the corporate debtor. However, if required, an extension may be sought from the appropriate authority for completing the said process subject to a maximum period of 330 (Three Hundred and Thirty) days, including the time taken for pursuing the legal proceedings, if any.

In a liquidation scenario, Section 53 of the Code sets out the distribution hierarchy in a waterfall mechanism, with secured creditors taking priority over operational creditors, like the BCCI. This may mean that the U.S.- based lenders, represented by Glas Trust, could have their claims settled before the operational creditors.

Potential impact on BYJU’S customers

During the CIRP, BYJU’S operations may continue under the IRP’s supervision as a ‘going concern’ until a Resolution Professional (“RP”) is appointed by the CoC, thereafter the RP may continue the operations of the Corporate Debtor to ensure that the company’s services remain uninterrupted. However, if liquidation occurs, customers who have paid in advance might have to file claims as operational creditors, as defined under Section 5(20) of the Code, though their claims would be subordinate to those of financial creditors.

The BYJU’S insolvency case highlights the intricacies of India’s insolvency regime, particularly when cross-border financial obligations are involved. The Supreme Court’s stay has revived the CIRP, and its pending decision will significantly influence the fate of BYJU’S, and its various stakeholders, including but not limited to its creditors and its customers. The outcome will depend on the resolution process, the CoC’s decisions, and further judicial scrutiny, all of which will shape the future of this high-profile ed-tech company.

About the authors: Guneet Mayall is a Senior Associate and Ishita Goel is an Associate at Ahlawat & Associates.