Supreme Court Clarifies Procedure for CIRP Withdrawal: GLAS Trust Company LLC vs. BYJU Raveendran & Ors. (23 October 2024)

Date of the Judgment: 23 October 2024
Citation: 2024 INSC 811
Judges: Dr Dhananjaya Y Chandrachud, CJI, J B Pardiwala, J, Manoj Misra, J
Can a settlement between a corporate debtor and a creditor bypass the established procedures of the Insolvency and Bankruptcy Code (IBC)? The Supreme Court of India recently addressed this crucial question in a case involving Think and Learn Pvt Ltd (Byju’s) and the Board of Control for Cricket in India (BCCI). The core issue revolved around the legality of withdrawing a CIRP application after it had been admitted by the National Company Law Tribunal (NCLT), but before the formation of the Committee of Creditors (CoC). The Supreme Court bench, comprising Chief Justice Dr. Dhananjaya Y Chandrachud and Justices J B Pardiwala and Manoj Misra, delivered the judgment.

Case Background

Think and Learn Pvt Ltd (Byju’s), the Corporate Debtor, is an online educational services provider. The Board of Control for Cricket in India (BCCI) is an Operational Creditor, with whom Byju’s had a sponsorship agreement. GLAS Trust Company LLC, the Appellant, is the Administrative Agent for lenders who provided a loan to Byju’s Alpha Inc., a US-based subsidiary of Byju’s. Byju’s acted as a guarantor for this loan.

A financial dispute arose when Byju’s Alpha Inc. allegedly defaulted on its loan obligations, leading GLAS Trust to enforce security measures and remove existing directors. Further, Byju’s Alpha Inc. allegedly transferred approximately USD 533 million to a hedge fund, prompting legal action in the United States Bankruptcy Court, District of Delaware. The Delaware Court issued a preliminary injunction to protect these funds.

In India, BCCI initiated insolvency proceedings against Byju’s under Section 9 of the Insolvency and Bankruptcy Code (IBC) due to an unpaid operational debt of approximately Rs 158 crore. The NCLT admitted this petition on 16 July 2024, initiating the Corporate Insolvency Resolution Process (CIRP). Separately, GLAS Trust also filed a petition under Section 7 of the IBC, which was disposed of by the NCLT, granting GLAS Trust liberty to revive its petition depending on the developments at the appellate level.

Timeline:

Course of Proceedings

The NCLT admitted BCCI’s Section 9 petition, initiating CIRP against Byju’s. Subsequently, both Byju’s and GLAS Trust appealed the NCLT orders before the National Company Law Appellate Tribunal (NCLAT). During the NCLAT proceedings, Byju’s offered a settlement to BCCI, agreeing to pay Rs 158 crore in installments to clear the operational debt. Riju Raveendran, in his personal capacity, offered to pay the debt. The NCLAT approved this settlement, setting aside the NCLT’s order and staying the constitution of the CoC. GLAS Trust objected to the settlement, arguing it was a preferential payment and that the funds’ source was unclear. Despite these objections, the NCLAT approved the settlement, relying on an undertaking by Riju Raveendran that the funds were from his personal account and not linked to the disputed funds in the Delaware Court.

Legal Framework

The judgment discusses several key provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and related regulations:

• Section 7, IBC: Allows a financial creditor to initiate CIRP against a corporate debtor.
• Section 9, IBC: Allows an operational creditor to initiate CIRP against a corporate debtor.
• Section 12A, IBC: Provides for the withdrawal of an application admitted under Section 7, 9, or 10 with the approval of 90% of the CoC. The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.
• Section 14, IBC: Imposes a moratorium upon the initiation of CIRP.
• Rule 8, Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Allows withdrawal of an application before its admission. The Adjudicating Authority may permit withdrawal of the application made under rules 4, 6 or 7, as the case may be, on a request made by the applicant before its admission.
• Rule 11, National Company Law Appellate Tribunal Rules, 2016: Preserves the inherent powers of the NCLAT to make orders necessary for the ends of justice. Nothing 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.
• Regulation 30A, CIRP Regulations, 2016: Details the procedure for withdrawal of an application under Section 12A, both before and after the constitution of the CoC. (1) An application for withdrawal under section 12A may be made to the Adjudicating Authority – (a) before the constitution of the committee, by the applicant through the interim resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be: Provided that where the application is made under clause (b) after the issue of invitation for expression of interest under regulation 36A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.

The Court also emphasized that the IBC is intended to be a beneficial legislation aimed at the revival of the corporate debtor, not just a recovery mechanism for individual creditors. It also highlighted the principle of ‘collective distribution’, where all creditors of the same class should receive a share proportionate to the debt owed to them.

Arguments

Appellant’s Submissions (GLAS Trust Company LLC):

• The NCLAT should not have used its discretionary powers under Rule 11 of the NCLAT Rules when a specific procedure for withdrawal and settlement existed under Section 12A of the IBC and Regulation 30A of the CIRP Regulations.
• The NCLAT’s discretionary powers should not be used when it could prejudice other stakeholders and lead to multiple insolvency actions.
• The NCLAT failed to address the concerns about the source of funds for the settlement and the conduct of the first respondent and his brother, including the alleged fraudulent transfer of USD 533 million and the ongoing investigations.
• The Corporate Debtor’s financial condition is precarious, indicated by a 99% drop in valuation, defaults in employee salaries, and other issues, making insolvency inevitable.
• Setting aside the CIRP just because one creditor has been paid is against the principle that IBC is not a recovery mechanism.
• Riju Raveendran’s undertaking regarding the source of funds was ambiguous and not adequately substantiated.

Respondents’ Submissions (BYJU Raveendran & Ors. and BCCI):

• The NCLAT’s inherent powers under Rule 11 include the power to permit withdrawal of CIRP.
• The appellant lacks the locus to challenge the settlement between the corporate debtor and an individual creditor.
• The appellant did not revive its Section 7 petition because it was not maintainable.
• The appellant is engaging in forum shopping by challenging the settlement in the NCLAT and the Delaware Bankruptcy Court.
• The Corporate Debtor is a viable company with a running business that should not be admitted into CIRP.
• The IBC encourages settlements, and the NCLAT’s judgment was correct.
• Regulation 30A is directory, and the settlement was made using personal funds, not the corporate debtor’s funds.
• The payment to BCCI does not prejudice other creditors.

Intervenors’ Submissions:

• Other Operational Creditors and shareholders supported the appellant’s arguments, stating that insolvency proceedings against the Corporate Debtor are inevitable.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the appellant, who is not a party to the settlement, has locus in the proceedings before this Court.
2. Whether the NCLAT erred in invoking its inherent powers under Rule 11 of the NCLAT Rules in the presence of a prescribed procedure for withdrawal of CIRP and settlement of claims.
3. 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.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17: Discussed the objectives of the IBC and the nature of CIRP as a collective proceeding.
  Ratio: The primary focus of the IBC is to ensure revival and continuation of the corporate debtor, not being a mere recovery legislation for creditors.
• Arun Kumar Jagatramka v Jindal Steel & Power Ltd, (2021) 7 SCC 474: Highlighted the change in corporate governance brought by the IBC.
  Ratio: The IBC perceives good corporate governance and adherence to the rule of law as central to resolving corporate insolvencies.
• Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436: Determined that proceedings become in rem upon admission of the application.
  Ratio: The trigger point for proceedings to become in rem is the admission of the application, not the filing.
• Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP, (2018) 15 SCC 589: Invoked Article 142 to record settlement, but questioned the use of Rule 11 of NCLAT Rules.
  Ratio: The Supreme Court used its powers under Article 142 to allow a settlement after the admission of the insolvency petition.
• Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem, (2018) 15 SCC 587: Allowed settlement under Article 142 and suggested amending rules to include inherent powers.
  Ratio: The Supreme Court suggested amending the rules to include inherent powers to allow settlements after the admission of an insolvency petition, to avoid unnecessary appeals.
• Brilliant Alloy Private Limited vs S Rajagopal and Ors, (2022) 2 SCC 544: Held that the requirement in Regulation 30A for application before the issuance of an invitation for expression of interest was directory.
  Ratio: Regulation 30A has to be read along with Section 12A, which does not contain any bar on withdrawal after the issuance of an invitation for expression of interest.
• Ram Chand and Sons Sugar Mills (P) Ltd. v. Kanhayalal Bhargava, 1966 SCC OnLine SC 215: Explained the scope of inherent powers under Section 151 of the Code of Civil Procedure.
  Ratio: The inherent power of a court is in addition to and complementary to the powers expressly conferred under the Code, but it cannot be exercised if it conflicts with express provisions of the law.
• Ebix Singapore (P) Ltd. v s. Educomp Solutions Ltd. (CoC), (2022) 2 SCC 401: Emphasized the need for caution while exercising residuary powers under IBC.
  Ratio: The adjudicating mechanisms under IBC must be circumspect in granting reliefs that may run counter to the timeliness and predictability that is central to the IBC.
• Ashok G. Rajani v. Beacon Trusteeship Ltd., 2022 SCC OnLine SC 1275: Allowed withdrawal under Rule 11, but did not refer to Regulation 30A.
  Ratio: The court allowed withdrawal under Rule 11, but failed to acknowledge the existence of Regulation 30A, which is the prescribed procedure for withdrawal.
• Abhishek Singh vs Huhtamaki PPL Limited, 2023 SCC Online SC 349: Cited by the NCLAT to justify the invocation of Rule 11, but found to be distinguishable by the Supreme Court.
  Ratio: The Supreme Court found that in this case, the IRP had moved an application under Regulation 30A, and the NCLT had dismissed it, which was incorrect.
• Kamal K. Singh v. Dinesh Gupta, (2022) 8 SCC 330: Cited by the NCLAT to justify the invocation of Rule 11, but found to be per incuriam by the Supreme Court.
  Ratio: The Supreme Court found that this case did not refer to the prescribed procedure under Section 12A read with Regulation 30A, and therefore, it was per incuriam.

Legal Provisions:

• Section 5(11), IBC: Defines the “initiation date”.
• Section 5(12), IBC: Defines the “insolvency commencement date”.
• Section 6, IBC: Specifies persons who may initiate CIRP.
• Section 13, IBC: Provides for declaration of moratorium.
• Section 15, IBC: Provides for public pronouncement of initiation of CIRP.
• Section 16, IBC: Provides for appointment of IRP.
• Section 17, IBC: Provides for management of affairs of corporate debtor by IRP.
• Section 18(b), IBC: Provides for the IRP to receive and collate claims.
• Section 21, IBC: Provides for the constitution of the CoC.
• Section 30(4), IBC: Provides for the approval of Resolution Plan by the CoC.
• Section 60, IBC: Provides for appeals against decisions of the CoC.
• Section 61, IBC: Provides for appeals to NCLAT from orders of NCLT.
• Section 62, IBC: Provides for appeals to the Supreme Court from orders of NCLAT.
• Section 151, Code of Civil Procedure: Saves the inherent powers of the Court.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17:* The Court relied on this case to emphasize that CIRP is a collective proceeding and that the CoC must be consulted before allowing a settlement.
• Arun Kumar Jagatramka v Jindal Steel & Power Ltd, (2021) 7 SCC 474:* The Court referred to this case to highlight the change in corporate governance brought by the IBC.
• Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436:* The Court used this to reiterate that the proceedings become in rem upon admission of the application.
• Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP, (2018) 15 SCC 589:* The Court referred to this case to show that it had earlier invoked Article 142 to allow settlement but questioned the use of Rule 11 of NCLAT Rules.
• Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem, (2018) 15 SCC 587:* The Court referred to this case to show that it had earlier allowed settlement under Article 142 and suggested amending rules to include inherent powers.
• Brilliant Alloy Private Limited vs S Rajagopal and Ors, (2022) 2 SCC 544:* The Court referred to this case to show that the requirement in Regulation 30A for application before the issuance of an invitation for expression of interest was directory.
• Ram Chand and Sons Sugar Mills (P) Ltd. v. Kanhayalal Bhargava, 1966 SCC OnLine SC 215:* The Court used this case to explain the scope of inherent powers under Section 151 of the Code of Civil Procedure, stating that such powers cannot be used to subvert legal provisions.
• Ebix Singapore (P) Ltd. v s. Educomp Solutions Ltd. (CoC), (2022) 2 SCC 401:* The Court relied on this case to emphasize the need for caution while exercising residuary powers under IBC.
• Ashok G. Rajani v. Beacon Trusteeship Ltd., 2022 SCC OnLine SC 1275:* The Court held that this case was per incuriam as it did not refer to Regulation 30A.
• Abhishek Singh vs Huhtamaki PPL Limited, 2023 SCC Online SC 349:* The Court distinguished this case and held that it did not support the respondents’ case.
• Kamal K. Singh v. Dinesh Gupta, (2022) 8 SCC 330:* The Court held that this case was per incuriam as it did not refer to the prescribed procedure under Section 12A read with Regulation 30A.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily driven by the need to adhere to the established procedures under the Insolvency and Bankruptcy Code (IBC). The Court emphasized that the IBC is a comprehensive code designed to ensure a fair and transparent process for resolving corporate insolvencies. The Court was concerned that the NCLAT had bypassed the mandatory provisions of Section 12A and Regulation 30A, which prescribe a specific procedure for withdrawal of CIRP applications after admission. This concern was further heightened by the fact that the NCLAT did not adequately address the objections raised by the appellant regarding the source of funds used for the settlement and the potential prejudice to other creditors. The Court was of the view that the NCLAT should not have used its inherent powers under Rule 11 of the NCLAT Rules, as this provision is not meant to circumvent the specific provisions of the IBC.

The Court’s decision was also influenced by the principle that the CIRP is a collective process, and that all creditors of the same class should be treated equally. The Court noted that the settlement between the corporate debtor and one creditor (BCCI) was not in line with this principle, as it potentially prejudiced the interests of other creditors, including the appellant. The Court also highlighted the fact that the IBC is not merely a recovery mechanism for individual creditors, but rather a beneficial legislation aimed at the revival of the corporate debtor. The Court was not convinced that the settlement was in the best interests of the corporate debtor or its creditors as a whole.

Ratio of Fact to Law: The judgment is heavily focused on legal interpretation and procedural compliance. While the facts of the case, such as the financial dispute between Byju’s and its creditors, and the settlement between Byju’s and BCCI, were important in providing context, the Court’s decision was primarily based on a detailed analysis of the relevant provisions of the IBC and related regulations. The Court’s reasoning was driven by the need to ensure that the established legal framework is followed in all insolvency proceedings, and that the rights of all stakeholders are protected. Therefore, the ratio of law to fact is high in this judgment.

Decision

The Supreme Court allowed the appeal, setting aside the judgment of the NCLAT. The Court held that the NCLAT had erred in invoking its inherent powers under Rule 11 of the NCLAT Rules and in approving the settlement between the corporate debtor and BCCI without following the prescribed procedure under Section 12A of the IBC and Regulation 30A of the CIRP Regulations. The Court emphasized that the NCLAT should have considered the objections raised by the appellant and ensured that the settlement was not prejudicial to the interests of other creditors.

The Supreme Court’s decision has the following implications:

• Adherence to Procedure: The judgment emphasizes the importance of adhering to the prescribed procedures under the IBC and related regulations. The Court made it clear that the inherent powers of the NCLAT cannot be used to circumvent these procedures.
• Protection of Creditors’ Interests: The decision underscores the need to protect the interests of all creditors in insolvency proceedings, not just those who have reached a settlement with the corporate debtor. The Court emphasized that the IBC is a collective process and that all creditors of the same class should be treated equally.
• Clarity on Withdrawal of CIRP: The judgment clarifies the procedure for withdrawing CIRP applications after admission but before the constitution of the CoC. It confirms that such withdrawals must be done in accordance with Section 12A of the IBC and Regulation 30A of the CIRP Regulations.
• Judicial Scrutiny: The judgment highlights the importance of judicial scrutiny in insolvency proceedings and the need for the adjudicating authorities to consider the objections raised by all stakeholders before approving settlements.
• Impact on Future Cases: This judgment will serve as a precedent for future cases involving the withdrawal of CIRP applications and the use of inherent powers by the NCLAT. It will ensure that the adjudicating authorities follow the prescribed procedures and protect the interests of all creditors.

Flowchart for CIRP Withdrawal (Pre-CoC)