NCLT is not a post office and 3 other findings of Supreme Court in Byju's case

The Supreme Court on Wednesday allowed the appeal filed by US-based financial creditor Glas Trust challenging the National Company Law Appellate Tribunal (NCLAT) decision to halt insolvency proceedings initiated against Think & Learn, the parent company of Byju’s. 

The judgment set aside the NCLAT order which accepted the settlement between Byju Raveendran and Board of Control For Cricket in India (BCCI), on whose plea the National Company Law Tribunal (NCLT) in Bengaluru admitted Byju's to the the insolvency process .

The apex court’s judgment has laid down the law on how the NCLT and NCLAT must deal with settlements between a creditor and corporate debtor, once a company is admitted to the Corporate Insolvency Resolution Process (CIRP).

The Bench headed by Chief Justice of India (CJI) DY Chandrachud delved into the right of other creditors to object to a settlement, the inherent powers of NCLAT to accept a settlement and close CIRP, and the limitations of the suspended management once the company is admitted to CIRP.

The case has now been sent back to NCLT, which is expected to hear all the creditors before adjudicating on whether or not to accept the settlement and remove Byju's from CIRP.

Locus of creditors to appeal against order setting aside CIRP

Byju Raveendran and BCCI, who had entered into a settlement, had contended before the Supreme Court that Glas Trust could not have filed an appeal against the order of NCLAT as it was not a party to the settlement. 

Refusing to accept this contention, the Court observed that Section 62 of the Insolvency and Bankruptcy Code (IBC), 2016 stipulates that “any person” who is aggrieved by the order of the NCLAT may file an appeal before the Supreme Court within the prescribed limitation period. It saidm

“The use of the phrase “any person aggrieved” indicates that there is no rigid locus requirement to institute an appeal challenging an order of the NCLT, before the NCLAT or an order of the NCLAT, before this Court. Any person who is aggrieved by the order may institute an appeal, and nothing in the provision restricts the phrase to only the applicant creditor and the corporate debtor.”

The Court noted that once the CIRP is initiated, the proceedings against the company are no longer restricted to an applicant or a petitioner, but become collective proceedings, where all creditors of a company become necessary stakeholders. 

NCLAT’s inherent powers

In the present case, the NCLAT used its inherent/discretionary powers under Rule 11 of the NCLAT Rules, 2016 to grant a seal of approval to the settlement between BCCI and Byju Raveendran and put an end to Think and Learn’s CIRP.  

The Court analysed the evolution of the legal framework for settlement between parties under the IBC and went into various scenarios where settlement could occur and an application for insolvency could be withdrawn.

"Not only is there an exhaustive framework to deal with withdrawal and settlement, but the evolution of the law and the creation of an comprehensive framework indicates an attempt to reduce reliance on discretionary powers.”

The Court further found that inherent powers can be used only when there is a lacuna in law or rule or regulation, and not when there is a framework to deal with a situation.

“There is now a detailed procedure to deal with withdrawal or settlement at both stages post admission – before and after the CoC is constituted. In view of this detailed framework, the requirement to invoke discretionary power such as Rule 11 of the NCLT Rules, or Rule 11 of the NCLAT Rules or even the power of this Court under Article 142 no longer arises,” the judgment stated.

No forum can invoke its ‘inherent powers’ to deviate from what is provided in the law, the Court said. In case such a deviation is made, it must be justified as to why it was necessary to “prevent the abuse of the process of the Court".

Suspended management’s role in settlement

When a company is admitted to the CIRP, its management is suspended and the Resolution Professional (RP) appointed by the NCLT assumes charge of its affairs. In the present case, Byju Raveendran, the former Chief Executive Officer (CEO) of Think and Learn, entered into a settlement with BCCI. BCCI and Raveendran filed an application to put an end to the company’s CIRP.

The Court found this to be wrong, as the RP was now responsible for the affairs of the company and two people who were not a part of the company could not have done it without the RP’s involvement. It held,

“The parties (such as the former management of the corporate debtor) must submit their application for withdrawal through the IRP who is now the person in control of the insolvency proceedings. To subvert this requirement would run contrary to the scheme of the IBC and the underlying principles discussed in this judgment.”

NCLT must not act as a post office

The Court clarified that NCLT could not be treated as a post office that merely puts its stamp on every settlement agreement, especially after a company is admitted to CIRP. Since the insolvency proceedings become ‘in-rem’ proceedings after a company is admitted to CIRP, all the the creditors must be heard before an approval is granted to a settlement agreement. 

“The NCLT cannot be considered a post office that merely puts a stamp on the withdrawal application submitted by the parties through the IRP…this Court in Swiss Ribbons, in response to which Regulation 30A was amended, specifically observed that in cases where withdrawal is sought after initiation of CIRP, but before the CoC is constituted, the NCLT must decide on the application after “hearing all the parties concerned and considering all relevant factors on the facts of each case,” the judgment stated. 

[Read judgment]