Supreme Court overturns NCLAT judgment that closed insolvency process against Byju’s, following settlement with BCCI

Supreme Court: In a civil appeal filed by US-based financial creditor Glas Trust Company (‘appellant’) against the judgment of the National Company Law Appellate Tribunal, (‘NCLAT’), wherein the Tribunal approved a settlement in relation to the dues payable to Think and Learn Pvt Ltd (Corporate debtor) the parent company of Byju’s , by the Board of Control for Cricket in India (‘BCCI’) and set aside the order of the National Company Law Tribunal (‘NCLT’) that initiated the corporate insolvency resolution process (‘CIRP’) against Think and Learn, the three Judge Bench of Dr DY Chandrachud*, CJI, J B Pardiwala and Manoj Misra, JJ. set aside the impugned judgment, and said that it would not be appropriate for this Court to adjudicate on the objections of the appellant to the settlement agreement on merits, as the issues raised are the subject matter of several litigations in different fora, including the Delaware Court and investigation by various authorities, including the Enforcement Directorate, which are pending.

Further, the Court permitted the parties to invoke their remedies, to seek a withdrawal or settlement of claims, in compliance with the legal framework governing the withdrawal of CIRP.

Further, the Bench directed that the amount of Rs 158 crore, along with accrued interest, if any, which has been maintained in a separate escrow account pursuant to the Order of this Court dated 14 —08-2024, to be deposited with the Committee of Creditors (‘CoC’). The CoC was directed to maintain this amount in an escrow account until further developments and to abide by the further directions of the NCLT.

Background:

Byju Raveendran and his brother, Riju Raveendran are the former directors’ of the corporate debtor. BCCI was an Operational Creditor who executed a ‘Team Sponsor Agreement’ with corporate debtor, which relates to the sponsorship of the Indian National Cricket Team.

Corporate debtor has a 100% owned subsidiary, Byju’s Alpha Inc. (‘BYJU’) which availed a loan facility under a credit and guarantee agreement dated 24-11-2021.The Appellant is the ‘Administrative Agent’ of all the lenders under this agreement and the ‘Collateral Agent’ for the secured parties. Under the terms of the Credit Agreement, the corporate debtor acted as a guarantor and issued a guarantee deed dated 24 -11- 2021 in favour of the appellant. On account of an alleged default under the Credit Agreement, the appellant enforced the security in respect of the loan and took a series of steps that resulted in the removal of all pre-existing directors of BYJU, including Riju Raveendran and the appointment of a new sole director.

In 2023, BCCI moved a petition under Section 9 of the Insolvency and Bankruptcy Code (‘IBC’) in respect of an operational debt of approximately Rs 158 crore payable by the corporate debtor under the Team Sponsor Agreement. The NCLT admitted the petition and initiated CIRP. A moratorium under Section 14 of IBC was imposed and an Interim Resolution Professional was appointed.

However, the NCLAT held that in the absence of any evidence to the contrary, there was no reason to believe that the money that was being offered by Riju Raveendran was linked to the money disbursed to Byju’s Alpha Inc. under the Credit Agreement or from the coffers of the Corporate Debtor. Accordingly, the settlement between the parties was approved and the order of the NCLT admitting the Section 9 petition was set aside.

Thereafter, proceedings took place before the Supreme Court and the Delaware Court. On 26-09- 2024, Supreme Court reserved its judgment and directed that the IRP maintain the status quo and not hold any meeting of the CoC until the judgment is pronounced.

Issues, Analysis and Decision:

a. Whether the appellant, who is not a party to the settlement between BCCI and the Corporate Debtor, has locus in the proceedings before this Court?

The Court mentioned that the correct course of action by the NCLAT would have been to stay the constitution of the CoC and direct the parties to follow the course of action in Section 12A read with Regulation 30A of the CIRP Regulations 2016.

The Court delineated some of the underlying aims and objectives which guide the IBC, and concluded that:

• A significant change brought about by the IBC was the consolidation of the pre-existing fragmented insolvency framework, The aim was to eliminate parallel proceedings by various creditors before different fora, given that all creditors would be a part of a single insolvency process under the IBC;

• The above consolidation also sought to implement the principle of ‘collective distribution’, where the interests of all stakeholders were considered. The CIRP envisaged by the IBC is premised on the principle that each creditor of the same class should receive a share that is proportionate to the debt owed to him;

• IBC must not be used as a tool for coercion and debt recovery by individual creditors. Improper use of the IBC mechanism by a creditor includes using insolvency as a substitute for debt enforcement or attempting to obtain preferential payments by coercing the debtor using insolvency proceedings. That the mechanism under the IBC must not be used as a money recovery mechanism has been reiterated in a consistent line of precedent by this Court;

• The interests of the corporate debtor must be detached from those of its promoters/those who are in management. A “recalcitrant management” must be prevented from taking advantage of undue delays and preventing an inevitable insolvency.

Nature of the proceedings after admission of the application

The Court highlighted that the scheme of IBC under Chapter II gives rise to two significant principles:

a. Once the petition is admitted, the proceedings are no longer the preserve of the applicant creditor and the debtor. They now become in rem and all creditors of the corporate debtor become stakeholders in the process; and

b. Once the petition is admitted, the management of the affairs of the corporate debtor is vested in the IRP and eventually, in the RP. Thus, the corporate debtor no longer exists in the form that it did, before the admission of the petition. Once CIRP is initiated, the interests of the erstwhile management of the corporate debtor must be distinguished from the interests of the corporate debtor.

The Court rejected the argument that in a case for settlement between the Corporate Debtor and BCCI , there is no scope for hearing any other creditors, such as the appellant.

The Court took note of Section 62 of IBC and observed that 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. As noted above, once the CIRP is initiated, the proceedings are no longer restricted to the individual applicant creditor and the corporate debtor but rather become collective proceedings (in rem), where all creditors, such as the appellant, are necessary stakeholders.

The Court stated that the appellant is not an unrelated party to the CIRP, but is in fact, an entity whose claims had been verified by the IRP vide letter 19-08-2024. The appellant who claims to be a Financial Creditor, has expressed reasonable apprehensions about the prejudice it would face if there were roundtripping of the funds, and the prioritization of the debts of BCCI an operational creditor.

Further, while noting that the appellant had moved an application before the NCLAT seeking impleadment as a respondent and the objections of the appellant were specifically recorded and addressed in the Impugned Judgment, the Court held that the appellant falls within the ambit of the phrase “any person aggrieved” and has the locus standi to institute the present Civil Appeal before this Court.

b. Whether the NCLAT erred in invoking its inherent powers under Rule 11 of the NCLAT Rules 2016 in the presence of a prescribed procedure for withdrawal of CIRP and settlement of claims between parties?

c. Without prejudice to the above, whether the NCLAT adequately addressed the objections raised by the appellant, while exercising its discretionary power under Rule 11 of the NCLAT Rules 2016?

The Court said that there are four stages at which a procedure for the withdrawal of CIRP or settlement of claims is contemplated in the existing legal framework. The situation before the NCLAT was that when the application of a creditor has been admitted and CIRP has been initiated, however, the CoC has not been formed. When settlement was sought by Byju Raveendran before the NCLAT, the Section 9 petition had been admitted and the Section 7 petition had also been disposed of on that basis. However, admittedly, on this date, i.e. 31-07- 2024, the CoC had not been constituted and the NCLAT subsequently stayed the formation of the CoC.

The Court explained that in such cases, the legal framework mandates that an (i) application for withdrawal be moved; (ii) the application has to be moved through the IRP; and (iii) it be placed before the NCLT for approval. The Court noted that none of these requirements were met in the present case.

The Court noted that there was no formal application instituted to seek the withdrawal of the CIRP. The settlement agreement was taken on record and approved by the NCLAT based on the submissions and assurances of the counsel before it and the affidavits/undertakings filed by the parties. Further, Byju Raveendran, who is a former director of the Corporate Debtor, did not move the application through the IRP and instead approached the NCLAT directly. Finally, the request to approve the settlement was moved before the NCLAT during appellate proceedings, instead of being placed before the NCLT. Despite these grave deviations, the NCLAT still proceeded with approving the settlement and setting aside the CIRP by invoking its inherent power under Rule 11 of the NCLAT Rules.

The Bench viewed that recourse to Rule 11 of the NCLAT Rules was not warranted in the present circumstances ‘inherent powers’ cannot be used to subvert legal provisions, which exhaustively provide for a procedure.

The Court noted that in the Impugned Judgement, the NCLAT does not provide any reasons for deviating from this procedure or the urgency to approve the settlement without following the procedure.

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