The Supreme Court of India while jointly adjudicating two matters against besieged Ed-Tech mammoth Byju’s, emphasized the need to follow the legal framework laid down by statutory provisions for the withdrawal of petitions and settlement of claims in a Corporate Insolvency Resolution Process (CIRP).
The 3-Judge Bench of the Supreme Court of India, headed by Chief Justice of India, D Y Chandrachud and comprising J B Pardiwala and Manoj Misra was hearing a civil appeal and special leave petition filed by GLAS Trust Company LLC (GLC) against Byju Raveendran – founder and CEO of beleaguered Indian Study Platform Byju’s, among others. GLC is a US-based company serving as the administrative agent for a loan facility of USD 1,200,000,000 availed by an American subsidiary of Byju’s.
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The dispute arises from a “Team Sponsor Agreement” dated July 25, 2019, between Byju’s and the BCCI for the Indian National Cricket Team’s sponsorship.
BCCI alleged default by Byju’s in paying an operational debt of Rs.158 crore under the agreement and proceeded to file a petition under Section 9 of the Insolvency and Bankruptcy Code (IBC) with the National Company Law Tribunal (NCLT). Consequently, the NCLT admitted the petition, initiating a Corporate Insolvency Resolution Process (CIRP).
Subsequently it was claimed by Byju’s that they had cleared the Rs.158 crore debt, which the BCCI acknowledged and expressed their intention to withdraw the petition. The National Company Law Appellate Tribunal (NCLAT), in exercise of its inherent powers under Rule 11 of the NCLAT Rules, 2016 approved a settlement in relation to the dues payable to BCCI and proceeded to set aside the order of the NCLT.
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The Supreme Court, among other contentions was entrusted with gauging the legality of process followed by the NCLAT while approving settlement and dissolving the insolvency process in view of Byju’s settlement with a single creditor while many others stood unpaid.
The Apex Court discerned the Statement of Objects and Reasons of the IBC in light of its own decision in Swiss Ribbons (P) Ltd. v. Union of India (2019) and maintained that the IBC is a beneficial legislation attempting to put the Corporate Debtor back on its feet and shall not be used as a recovery legislation for individual creditors.
Reference was made to the decision of a two-judge Bench of the Supreme Court in Arun Kumar Jagatramka v Jindal Steel & Power Ltd (2021) which propounded the IBC’s consolidation of multiple fragmented insolvency statutes, wherein it was stated that the IBC should ensure that each creditor of the same class should receive a share that is proportionate to the debt owed to him during a CIRP.
Chapter II of the IBC provides that CIRP can be invoked in three ways: (i) by a financial creditor under Section 7; (ii) by an operational creditor under Section 9; and (iii) by a corporate debtor itself under Section 10. Section 5(11) of the IBC defines the “initiation date” as the date on which the financial creditor, operational creditor or corporate applicant makes an application to the NCLT for initiating insolvency proceedings, including CIRP.
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Upon admission of application, CIRP commences, moratorium is declared and an Insolvency Resolution Professional (IRP) is appointed who manages all further affairs of the corporate debtor.
Further, claims are received from all the creditors and they are collated to determine the financial position of the corporate debtor and a Committee of Creditors (CoC) is constituted.
The Bench observed that admission of the application and the due process following it brings forth significant changes which change the stakeholders from just the applicant creditor and corporate debtor, to all of the creditors of the injunct company.
The Bench devised 4 stages during which procedure for the withdrawal of CIRP or settlement of claims is contemplated in the existing legal framework:
The NCLAT’s exercise of its inherent powers under Rule 11 of the NCLAT Rules were rebuked by the Supreme Court stating that “When a procedure has been prescribed for a particular purpose exhaustively, no power shall be exercised otherwise than in the manner prescribed by the said provisions.”
While allowing the Appeal, the Bench contended that the ‘inherent powers’ cannot be used to subvert legal provisions that run contrary to the carefully crafted procedure for withdrawal. “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 Bench observed that CoC had only been constituted during the pendency of the instant case before the Supreme Court and reiterated the liberty of the parties to seek a withdrawal or settlement of claims in compliance with the legal framework governing the withdrawal of CIRP.
Concludingly, the Bench issued directions for the escrowed Rs 158 crore, along with accrued interest to be deposited with the CoC, who is to maintain the same in a separate escrow account until further developments in light of directions issuable by the NCLT.
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