Analysis of the Supreme Court judgment in GLAS Trust Company LLC v. Byju Raveendran & Ors.

1. Background of the Case

Parties

• The appellant, GLAS Trust Company LLC, acted as the Administrative and Collateral Agent for lenders who extended a $1.2 billion loan to Byju’s Alpha Inc., a U.S.-based subsidiary of Think & Learn Pvt. Ltd. (the Corporate Debtor).
• The respondent Think & Learn Pvt. Ltd., a major ed-tech firm in India, is controlled by Byju Raveendran, the first respondent, and his brother Riju Raveendran.
• The Board of Control for Cricket in India (BCCI), the second respondent, was an operational creditor, holding sponsorship agreements with the Corporate Debtor.
  

Insolvency and Settlement Context

• After BCCI initiated a petition under Section 9 of the Insolvency and Bankruptcy Code (IBC) for unpaid debts of approximately Rs. 158 crore, the National Company Law Tribunal (NCLT) admitted the petition, beginning the CIRP against Think & Learn Pvt. Ltd.
• During appeals, Byju Raveendran arranged a settlement with BCCI to pay the outstanding amount, with objections raised by GLAS Trust regarding the legitimacy and sources of the funds for the settlement, potentially conflicting with Delaware Court’s prior injunctions.

2. Key Legal Issues Addressed

• Use of Rule 11: Whether the NCLAT correctly used its inherent powers under Rule 11 of the NCLAT Rules to approve the settlement without following the CIRP withdrawal procedure outlined in Section 12A of the IBC and related regulations?
• Locus of the Financial Creditor: Whether GLAS Trust, a financial creditor, had standing to object to the settlement between the Corporate Debtor and BCCI, an operational creditor?
• Transparency of Funding Source: Whether the NCLAT adequately investigated GLAS Trust’s claims regarding the settlement funds, which were alleged to be linked to funds restricted by a Delaware Court injunction?

3. Supreme Court’s Analysis

• Proceedings in Rem and Collective Interest:
  • The Court emphasized that insolvency proceedings, once admitted, are proceedings in rem (binding on all stakeholders) and involve all creditors, not just the initial applicant.
  • The CIRP mechanism of the IBC ensures that all creditors, including financial and operational ones, are part of a unified resolution process. This discourages private settlements between the debtor and one creditor post-admission, as it would undermine the collective rights and equal treatment principle established in the IBC.
• Application of Rule 11:
  • Rule 11 provides the NCLAT with inherent powers to issue orders necessary for justice, but the Supreme Court underscored that this rule is not meant to bypass specific statutory provisions.
  • Section 12A of the IBC, introduced after the IBC’s inception to allow CIRP withdrawal post-admission, requires a 90% CoC approval vote before any withdrawal can proceed. This reflects the importance of collective decision-making in insolvency processes. NCLAT’s approval of the settlement under Rule 11 was improper, as it bypassed the requisite CoC review under Section 12A.
• Transparency of Settlement Funding:
  • GLAS Trust raised concerns about the funding source used by Byju Raveendran to settle with BCCI, citing Delaware Court’s earlier injunction restricting certain fund movements due to suspected misuse of the $1.2 billion loan by Byju’s Alpha Inc.
  • The Court agreed that NCLAT did not sufficiently scrutinize the settlement funding’s origin, which could potentially conflict with international court orders, risking fund repatriation issues and reputational concerns for Indian corporate governance.

4. Principles Established by the Judgment

• Inherent Powers Limited by Statutory Framework:
  • The Supreme Court clarified that inherent powers like Rule 11 cannot be exercised to override express statutory requirements, especially in highly regulated processes like CIRP. The judgment reinforces that Section 12A and Regulation 30A provide a strict procedure for CIRP withdrawal post-admission, ensuring accountability to the entire creditor body.
• Transparency and Compliance in Cross-border Insolvency:
  • The Court underscored the need for transparency in fund origins for settlements within CIRP, especially when international transactions and injunctions are involved. Ensuring that funding complies with international court restrictions maintains corporate integrity and mitigates risks associated with fund misuse.
• Protection of Collective Creditor Rights:
  • The Court reiterated that insolvency proceedings should prioritize all creditors rather than allowing settlements that might prejudice one party over others. Any attempt to favor an individual creditor, especially by potentially compromising collective assets or circumventing established procedures, contravenes IBC’s core objectives.

5. Outcome and Directions

• The Supreme Court allowed the appeal, setting aside NCLAT’s decision to approve the settlement. The Court directed a strict adherence to Section 12A for any CIRP withdrawal, requiring CoC approval and establishing a clear audit of fund sources in line with both domestic and international legal obligations.

6. Conclusion

• This judgment lays emphasis on adherence to procedural integrity in insolvency proceedings and prioritizes the collective interests of all creditors over individual settlements.