In the case of GLAS Trust Company LLC vs. BYJU Raveendran & Ors.1, the Hon'ble Supreme Court (SC/Court) delivered a significant judgment clarifying key aspects of the Insolvency and Bankruptcy Code, 2016 (IBC/Code). The Court analysed the balance between the statutory procedures for the withdrawal of a Corporate Insolvency Resolution Process (CIRP) under Section 12A of the Code and the inherent powers vested in the Hon'ble National Company Law Appellate Tribunal (NCLAT) under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules).2
Byju's Alpha Inc., a U.S.-based subsidiary of Think and Learn Pvt. Ltd. (the Corporate Debtor), secured a loan facility amounting to $1.2 billion under a credit and guarantee agreement dated November 24, 2021 (the Agreement) from its lenders. Under the said Agreement, the Corporate Debtor acted as a guarantor and issued a guarantee in favor of the GLAS Trust Company LLC (Appellant), who serves as the administrative agent for all the lenders and collateral agent for all the secured lenders under the Agreement. Following the alleged payment defaults by Byju's Alpha Inc. under the aforesaid Agreement, the Appellant took steps to enforce the security interest and invoked the guarantee provided by the Corporate Debtor. However, the Corporate Debtor also defaulted on its obligations as a guarantor under the terms of the Agreement. Additionally, it is alleged that in April and July of 2022, Byju's Alpha Inc. made a series of wire transfers, totalling approximately $533 million, at the behest of the Corporate Debtor to hedge fund based in United States, leading to the Appellant moving a motion before the United States Bankruptcy Court, District of Delaware (Delaware Court) for seeking preliminary injunctive relief to protect the said amount.
Accordingly, on March 18, 2024, the Delaware Court issued a preliminary injunction restraining Mr. Riju Raveendran, another wholly owned subsidiary of the Corporate Debtor, the hedge fund, and other associated parties from taking any actions that would involve spending, transferring, exchanging, converting, dissipating, liquidating, or otherwise modifying the rights related to the $533 million transferred from Byju's Alpha Inc. to the said hedge fund. Subsequently, on May 28, 2024, the Delaware Court found Mr. Riju Raveendran in contempt of the preliminary injunction order issued on March 18, 2024 and ordered the immediate commencement of full discovery of Mr. Riju Raveendran's financial situation, including but not limited to, determining the extent and location of his assets, the amounts in his personal bank accounts, and the identification of any other assets he holds and posted the case to a later date to determine the financial penalties to be imposed on Mr. Riju Raveendran. On July 31, 2024, the Delaware Court imposed a daily penalty of $10,000 on Mr. Riju Raveendran for his contempt of the court's order.
Simultaneously, in India, Board of Control for Cricket in India (BCCI) filed a petition under Section 9 of the Code against the Corporate Debtor for an operational debt of INR 158 Crores payable under the Team Sponsor Agreement. Accordingly, the National Company Law Tribunal (NCLT) admitted the petition on July 16, 2024 and initiated CIRP proceedings against the Corporate Debtor. On the other hand, the Appellant filed a petition under Section 7 of the Code against the Corporate Debtor. However, NCLT disposed off the said Section 7 petition in light of admission order passed under Section 9 petition filed by the BCCI. NCLT, although granted liberty to the Appellant to file its claims before the IRP appointed as per the said order under Section 9 of the Code and to seek a restoration /revival of its Section 7 petition depending on subsequent developments at the appellate level, if any.
The Corporate Debtor subsequently challenged the admission order before the NCLAT. The Appellant also approached the NCLAT to challenge the disposal of its Section 7 petition and also sought impleadment in the appeal filed by the Corporate Debtor. However, during the course of the hearing, Mr. Riju Raveendran, the former director of the Corporate Debtor, negotiated a settlement with the operational creditor, BCCI, agreeing to clear the outstanding dues in instalments. The said settlement was duly challenged by the Appellant on various grounds, including, but not limited to, the source of funds used for the settlement; the claim that the settlement amounted to preferential treatment of the operational creditor, thereby undermining the collective rights of all creditors involved in the CIRP; and that the funds being offered by Mr. Riju Raveendran to settle the debt of BCCI amounted to an act of round-tripping. However, despite these objections, the NCLAT, vide its order dated August 2, 2024, permitted the withdrawal of the CIRP proceedings initiated against the Corporate Debtor, by invoking Rule 11 of the NCLAT Rules (Impugned Order).
The Impugned Order was later appealed before the SC by the Appellant, challenging the NCLAT's reliance on inherent powers under Rule 11 of NCLAT Rules to approve the settlement and withdrawal the CIRP proceedings. Accordingly, the Court framed the following issues: (i) Whether GLAS Trust Company LLC, as a financial creditor, had the right to challenge a settlement agreement between the operational creditor and the debtor; (ii) Whether the NCLAT was justified in invoking Rule 11 of the NCLAT Rules, to approve a settlement without adhering to the procedural safeguards under Section 12A of the IBC and Regulation 30A of the CIRP Regulations; and (iii) Whether the settlement agreement was valid, given allegations of irregularities in the source of funds and potential violations of international court orders.
The Appellant argued that once insolvency proceedings under the IBC are admitted, it becomes in rem process, involving the rights of all creditors, not just the petitioner. It was also contended that the reliance placed on Rule 11 of NCLAT Rules, by the NCLAT, undermined the safeguards under Section 12A of the Code, which mandates approval by 90% of the Committee of Creditors (CoC) for the withdrawal of CIRP proceeding. The Appellant also alleged that the funds used to settle the operational debt owed to BCCI were sourced in violation of the Delaware Court's injunction and also drew attention to various financial irregularities committed by the Corporate Debtor.
In response, the respondents argued that Rule 11 of NCLAT Rules provides sufficient discretion to the NCLAT to approve settlements in the absence of a CoC. They asserted that the settlement was consistent with the objective of the Code, which promotes resolution over liquidation. The respondents further contended that the funds used for the settlement were sourced from personal assets of Mr. Riju Raveendran, rather than from the Corporate Debtor's resources, and denied any violations, either directly or indirectly, of the Delaware Court's order dated March 18, 2024.
While placing reliance on the statement of object and reasons of the Code and various precedents, the Court observed that Section 12A of the Code was intentionally made more stringent than Section 30(4), as once the application of commencement of CIRP is admitted, it no longer remains a proceeding between the applicant creditor and the corporate debtor. Instead, it becomes a proceeding involving rights of all the creditors of the debtor and acquires in rem nature.
In view of the above, the Court acknowledged the procedural gap in situations where the CoC has not been constituted/formed post admission of the CIRP application. In such cases, the Court held that the party can approach the NCLT directly which may exercise its inherent powers under Rule 11 of NCLT Rules, to allow or disallow the application for settlement/withdrawal. However, given the in rem nature of the proceedings, the Court emphasized that such applications should only be decided after hearing all relevant parties and considering the relevant factors in the case and NCLT, being a quasi-judicial body, must not merely function as a "post office" that stamps and approves every settlement agreements without the application of judicial mind.
It is also reaffirmed that once an application has been admitted, it transitions from a bilateral dispute to a collective process involving all creditors and thus, any settlement cannot be privately negotiated to the exclusion of other stakeholders, especially when the CIRP process has commenced. In light of this principle, the Court held that the Appellant, GLAS Trust Company LLC, being a financial creditor, had the locus standi to challenge the settlement and the withdrawal of the CIRP, even when it was not directly a party to the settlement agreement.
The Court further emphasized that Section 12A of the Code and Regulation 30A of CIRP Regulation establishes a clear framework for CIRP withdrawal, requiring CoC approval with a 90% voting threshold. It observed that the NCLAT, by invoking Rule 11 of NCLAT Rules to approve the settlement, bypassed these statutory safeguards, undermining the collective rights of creditors.
While recognizing the discretionary powers of both the NCLT and NCLAT, to prevent abuse of process and ensure justice, the Court clarified that such powers must operate within the boundaries of statutory provisions. The Court also relied on precedents, including Swiss Ribbons (P) Ltd. v. Union of India3 and Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP4 and emphasised that Section 12A of the Code and Regulation 30A of CIRP Regulation were introduced to address gap identified in earlier decisions, statutory framework now provides a structured mechanism for withdrawals at various stages of the CIRP, from pre-admission requests under Rule 8 of the NCLT Rules to post-admission withdrawals requiring CoC approval.
Another critical aspect of the judgment is the Court's scrutiny of the settlement's validity, particularly with regard to the allegations concerning the source of the funds. The Appellant raised concerns that the settlement funds may have been sourced from Byju's Alpha Inc. in a manner that violated the Delaware Court's injunction, potentially amounting to fund diversion or round-tripping. The Court observed that the NCLAT had not adequately addressed these concerns and had relied solely on the undertaking filed by Mr. Riju Raveendran.
The entire issue brings to light the importance of ensuring transparency and strict adherence to international legal obligations in cross-border insolvency context. While NCLAT had relied on undertaking given by Mr. Riju Raveendran affirming the legality of the settlement funds, there is a need for rigorous due diligence, given the cross broader implications for creditor confidence and the integrity of the insolvency framework.
This judgment reinforces the collective nature of insolvency proceedings, ensuring that settlements align with the interests of all stakeholders. It prevents misuse of the insolvency process for private negotiations or selective recoveries. It clarifies the boundaries of inherent powers under Rule 11 of NCLAT Rules, emphasizing adherence to statutory frameworks to prevent arbitrary decision-making. It also highlights the need for transparency in settlement agreements, particularly concerning the source of funds, bolstering creditor confidence and maintaining procedural integrity in cross-border contexts.
This judgment strikes a delicate balance between procedural integrity, creditor rights, and the IBC's overarching goal of promoting insolvency resolution of corporate debtor. By clarifying the scope of inherent powers and emphasizing the collective nature of insolvency proceedings, the Court strengthens the framework for equitable and efficient resolutions. This decision also serves as a precedent for disciplined use of discretion by NCLAT/NCLT under the Code, ensuring settlements are transparent, fair, and aligned with statutory mandates.
Footnotes
1. Civil Appeal No. 9986 of 2024
2. Inherent powers.- Noting in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal
3. (2019) 4 SCC 17
4. (2018) 15 SCC 589
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