Setback for Byju’s as Supreme Court restores insolvency case, raps NCLAT for overreach

In a blow to the once-high-flying edtech giant Byju's, the Supreme Court on Wednesday overturned a decision that had halted insolvency proceedings against the company. The ruling mandates that Byju's follow established protocols under the Insolvency and Bankruptcy Code (IBC) to resolve its ₹158 crore debt to the Board of Control for Cricket in India (BCCI).

The order marks a pivotal moment in Byju’s financial crisis, effectively shifting control of the company from founder Byju Raveendran to its creditors. The decision is welcome news for Glas Trust Co. LLC, a U.S.-based financial creditor, which had challenged the National Company Law Appellate Tribunal’s (NCLAT) earlier order halting the insolvency process.

For the BCCI, the decision pushes it further down the queue among operational creditors.

Read this | Mint Explainer: Why Byju's creditors took its insolvency professional to court

The Supreme Court mandated that Byju's deposit the ₹158 crore settlement amount, previously agreed upon with the BCCI, into an escrow account overseen by the Committee of Creditors (CoC). This directive aligns with the court's 26 September order, instructing the interim resolution professional (IRP) to maintain the status quo and refrain from convening CoC meetings until the judgment was delivered.

The court emphasized that while Byju's and the BCCI may continue to pursue their settlement, it must do so under the strict supervision of the IRP and CoC, adhering to the established procedures outlined in the IBC.

What’s next?

The case has been sent back to the NCLT for fresh adjudication, with clear instructions that any settlement application must be submitted through the IRP rather than the company’s management.

“Since the Supreme Court has clarified that inherent powers under Rule 11 cannot be used to circumvent the proper process, the settlement will now need to be presented formally by the Resolution Professional before the NCLT,” said Shiv Sapra, partner at Kochhar & Co.

SC rebukes NCLAT overreach

A three-judge bench led by Chief Justice D.Y. Chandrachud criticized the NCLAT for misusing its inherent powers under Rule 11 of the NCLAT Rules, 2016, to permit the withdrawal of an insolvency application. The top court emphasized that where specific procedures exist for withdrawal, the NCLAT cannot bypass them by invoking its inherent powers.

The court clarified that once an insolvency application is admitted, only the IRP has the authority to file withdrawal requests on behalf of the debtor, not the parties involved.

It further underscored that managing the debtor’s affairs becomes the IRP’s responsibility upon admission of the case, meaning any settlement or withdrawal requests must align with Section 12A of the IBC and follow the process outlined in Regulation 30-A of the IBBI (Insolvency and Bankruptcy Board of India) Rules.

The Supreme Court noted that the NCLAT’s error lay in approving the settlement directly, bypassing the National Company Law Tribunal (NCLT), which holds primary jurisdiction over such withdrawals.

This procedural misstep, the court said, was a significant legal oversight, especially as no formal withdrawal application was filed through the appropriate channels.

What experts say?

The Supreme Court’s ruling reinforces the importance of IBC procedures, requiring that settlements in insolvency cases be managed by the IRP/RP and approved by the CoC to ensure compliance with legal standards, said Tushar Kumar, advocate, Supreme Court.

Additionally, the decision underscores the importance of judicial review of lower tribunal rulings, promoting accountability within the insolvency system and setting a binding precedent for similar future cases, Kumar added.

"The judgment, in effect, instils confidence of the creditors having superior and/or prior charge over assets of a company including funds available with the company. It protects any creditors having subservient rights from stealing a march over other creditors with assistance of a court/tribunal," Alok Dhir, founder and managing partner of Dhir & Dhir Associates.

He added that the judgment reaffirms that the IBC is a complete code, and its procedures cannot be bypassed using inherent powers.

Earlier this month at a press conference, Byju Raveendran had expressed optimism that the Supreme Court would announce a judgment in their favour.

Glas Trust plea

The Supreme Court's order follows an appeal by Glas Trust Company LLC, which alleged that the settlement funds raised by Riju Raveendran, brother of Byju’s founder, were “tainted” and should have been allocated to financial creditors.

Glas Trust also cited ongoing Enforcement Directorate investigations into Byju’s financial dealings, noting that Byju currently resides in Dubai, while Riju is based in London.

Adding to the complexity, Glas Trust and Aditya Birla Finance (ABF) filed a lawsuit in September, alleging misconduct by Byju's resolution professional, Pankaj Srivastava, in the bankruptcy process. The Supreme Court’s decision on whether to include US lenders in the CoC and the reclassification of ABF is expected to have further implications for the insolvency proceedings.

On 14 August, the Supreme Court had directed BCCI to deposit the ₹158 crore settlement amount into a separate escrow account pending the outcome of Glas Trust’s appeal.

Previously, on 2 August, the NCLAT had dismissed insolvency proceedings against Byju’s and approved the settlement with BCCI. This ruling followed Riju Raveendran raising ₹158 crore to repay the cricket board, temporarily restoring Byju Raveendran’s control over the company’s operations.

Byju’s entered into a sponsorship agreement with the BCCI in 2019, featuring its branding on the Indian cricket team’s jerseys. The contract was extended until November 2023, with the BCCI later seeking to encash a ₹140 crore bank guarantee and demanding an additional ₹160 crore in instalments.

However, when Byju’s failed to meet these financial obligations, the BCCI filed an insolvency petition with the NCLT, which admitted the case on 16 June.

Deepening crisis

Founded by Byju Raveendran and Divya Gokulnath in 2011, Byju’s had quickly emerged as a leading player in India’s edtech sector. However, the company’s rapid growth has been marred by financial difficulties, regulatory scrutiny, and disputes with creditors.

Once India's most celebrated startup, Byju’s is facing multiple litigations from lenders and investors. Lenders have sought repayment of the $1.2-billion loan he took in November 2021. Investors have sought to preserve their rights in the company's parent entity Think & Learn, while some like Qatar Investment Authority have sought a court ruling asking details of Raveendran's personal assets.

Also read | Raveendran blames investors, eyes new edtech avatar, says $533 mn used up

At the peak of the business in 2021, the company claimed to be making ₹10,000 crore in revenues and had more than 85,000 employees, including teachers on its platform.