Mint Explainer: NCLT admits insolvency plea against Byju’s. Here’s what it means for the edtech platform

On 16 July, the National Company Law Tribunal (NCLT) admitted an insolvency petition filed by the Board of Control for Cricket in India (BCCI) against Think & Learn Pvt Ltd, the parent company of Byju’s, for allegedly defaulting on dues worth ₹158 crore. This is the latest in a series of setbacks for the online tutoring platform.

While Byju’s has previously navigated similar challenges, such as the out-of-court settlement with Surfer Technologies, this latest development could have a more severe impact.

Mint consulted legal experts to analyse the immediate ramifications for Byju’s, the potential effects on pending cases, the implications for stakeholders and subsidiaries, and the future course of action.

What will be the immediate impact on Byju's?

The NCLT ruling spells immediate consequences for Byju’s. 

Founder and chief executive Byju Raveendran, along with his management team, is set to lose operational control, which will be transferred to an NCLT-appointed insolvency resolution professional. 

Pankaj Srivastava has been appointed as the interim resolution professional to oversee the company’s day-to-day affairs until a Committee of Creditors (CoC) is formed. This is the first order in the matter.

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“The insolvency resolution professional (IRP) will also immediately issue an advertisement in the newspaper conveying about the commencement of the insolvency proceedings and invite all the creditors of the company to share information and proof of their claim," said Alok Dhir, founder and managing partner at Dhir & Dhir Associates, a law firm.

"As soon as the order is received, the very next day or latest a day after, the appointed IRP is supposed to begin the proceedings starting with visiting the company's office and taking over management control," added Dhir.

The RP’s major responsibility is to collate information on entire dues that the corporate debtor, in this case Byju’s, owes to all its stakeholders and create a committee of creditors (CoC). “In theory, the management is then passed on to the hands of the creditors," Dhir added.

How does this compare with previous cases?

Unlike a prior dispute with Surfer Technologies, which was settled out of court, the situation with BCCI appears more severe. Byju’s owes ₹158 crore to the cricketing body under a 2019 sponsorship agreement. 

More here | Mint Explainer: The mountain of legal cases that could bury Byju’s

The cricket board, which is one of the operational creditors to the ed-tech firm had filed a section 9 application under the Insolvency and Bankruptcy Code, 2016. Section 9 allows an operational creditor to initiate an insolvency case against the corporate debtor for default in payment of dues.

In November, Byju’s hinted at possible talks on a settlement, but since the company was facing a severe financial crisis, it could not repay the debts owed to its creditors.

Byju’s, in a statement, has said that it will continue negotiate for a settlement, but the initiation of the Corporate Insolvency Resolution Process (CIRP) complicates these efforts.

“In the BCCI matter, the debt amount is huge. There is considerable pressure on him (Byju Raveendran) to strike a deal but it is also much tougher considering he has lost control of assets, operations and management of Byju’s," said Saumya Brajmohan, partner, Solomon & Co.

In addition, the promoters of the company are also staring at a deadline. 

“In case, a settlement is reached before the formation of the CoC, the IRP can inform the NCLT and can get an order to stop insolvency proceedings. However, if the settlement is not reached after CoC has been formulated, Byju’s may need to get a majority approval for the settlement to be valid," said Brajmohan.

What does this mean for employees and operations?

During the insolvency proceedings, Byju’s will continue its operations under the supervision of the resolution professional, ensuring minimal disruption to daily activities. 

“It is unlikely that during this period, the company will enter any new contracts, let’s say for advertising and so on which might require unnecessary expenditure. Apart from that, employees will continue to function, classes will happen the way they were a day before the judgement," said Durgesh Khanapurkar, partner, Desai & Diwanji.

Will there be an impact on subsidiaries?

Byju’s subsidiaries, including Aakash, are expected to remain insulated from the financial turmoil affecting the parent company. 

“When insolvency proceedings are initiated against a parent entity, there is no direct impact on the operations of its subsidiary and the subsidiaries continue with their business ‘as-is’," said Yashojit Mitra, partner, Economic Laws Practice.

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"Since shares of the subsidiary are assets of the parent, those shares may be transferred as part of the insolvency proceedings, and eventually the shareholders of the subsidiary may change hands, but the subsidiary continues to operate as a separate entity on a going concern basis," Mitra added.

What about other pending legal cases?

Under the Corporate Insolvency Resolution Process (CIRP), all ongoing legal cases against Byju’s will enter a moratorium period, pausing these proceedings.

“The entire idea is to ensure that the insolvency proceedings go unhindered. Therefore, any active legal cases against the company will likely be put on hold," explained Khanapurkar of Desai & Diwanji.

This moratorium also means that Byju’s efforts to raise $200 million through a rights issue have become futile, impacting its ability to settle debts, including those to the BCCI.

What happens next?

The road ahead for Byju’s is fraught with uncertainty. Another lawyer noted that while BCCI may have secured a judgment in its favour, this situation may not benefit any stakeholders.

“During insolvency you will have to find a suitable buyer, who is ready to pay at least a part of the debts of the company. If that does not happen, the company will go for liquidation, and whatever comes out of the proceeds is then distributed in a certain order," said Sanket Jain, partner at Pioneer Legal. 

Byju's can appeal the order in the National Company Law Appellate Tribunal (NCLAT) and attempt an out-of-court settlement. "Since BCCI is an operational creditor, likely to be paid last if insolvency proceeds, they might accept a settlement after proving Byju's wrong," added Dhir of Dhir & Dhir Associates.

Also read | Byju's: Battle for control

However, if Byju’s cannot negotiate a settlement with the BCCI soon, its current management might permanently lose control, with new management potentially taking over through a buyout.

Byju’s must navigate these complex proceedings carefully, balancing creditor demands, operational stability, and stakeholder interests as it seeks a path forward amid its deepening financial woes.