Road to Settlements- Byju’s Ordeal
Mr. Nipun Gautam & Mr. Kumar Anurag Singh
Insolvency and Commercial lawyers based out of Delhi, Mumbai
Prologue:
A significant ruling passed by the Hon’ble Supreme Court in the matter of “GLAS Trust Company LLC v BYJU Raveendran & Ors.[1]” (in short ‘BYJU judgment’) drew the attention of all. The Supreme Court in the said case put a fetter on the power of NCLAT to facilitate settlements and directed that the settlements must only be through the prescribed procedural scope i.e. Section 12A of the Insolvency and Bankruptcy Code (IBC), 2016 and Regulation 30A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). In the said case, the suspended board attempted to settle with an Operational Creditor/Applicant in teeth of injunction passed by US Bankruptcy Court, District of Delaware. The Appellant before the Supreme Court opposed the said settlement inter alia on the ground of tainted money being used and withdrawal of the Petition by the Operational Creditor at this stage would be prejudicial to other creditors, among other reasons.
The Supreme Court ultimately somehow diluted the inherent powers of the NCLAT and directed that the settlements are allowed only by following the prescribed mechanisms under Section 12A read with Regulation 30A of CIRP Regulations. However, it is interesting to note that in Para 80 of BYJU judgment, the Supreme Court took an interesting stand by allowing NCLAT to grant stay on the constitution of Committee of Creditors (CoC) and directed that the parties may thereafter approach NCLT for settlements as per the law laid down inSection 12A read with Regulation 30A.
Background of Settlements at the Appellate Stage (NCLAT):
With insolvency laws developing rapidly and the judgments on different issues varying from bench to bench, the Corporate Debtor often attempts to fight the existence of debt to the hilt. Most of the times, first the judgment/order is reserved by the NCLT, and later, the judgment is pronounced. The promoters realize the strength of their arguments after the judgment is pronounced and have very little time to explore settlements.
Meanwhile, the Insolvency Resolution Professional (IRP) rushes to reach out to different creditors and tries their best that the CoC is constituted. The promoters are left with two options: a) to pay the entire debt amount to the Applicant (Operational/Financial Creditor); or b) to pay in part and seek time from Appellate Court. The author is not discussing the contingencies where the admission order is entirely perverse and ex-facie illegal, in that case a stay by Appellate Court is almost a writing on the wall.
In a case where the entire debt amount is paid before the constitution of CoC, the settlement remains only a formality. However, it is seen that the IRPs still make great efforts to obviate the closure of CIRP by hastily constituting CoC[2]. Those actions, including violation of stay orders, have forced the hands of Court and drew significant observations on such actions/omissions of the IRP and ensured that the promoters are not meted out unfair treatment[3].
Although, the decision of the Hon’ble SC to look at the CIRP as a proceeding in rem may not be incorrect but, to shut out any option for the promoters to settle before the Appellate Tribunal may also not be correct. The premise laid down by the Hon’ble SC has two loopholes which the Hon’ble SC failed to appreciate; a) Even though Overall Resolution is paramount, settlements are also equally important; b) the proceedings in rem invite legions of claims, the tenacity of which is never tested by Adjudicating Authority and the IRP on the other hand could only collate such claims, and not verify[4].
The IRP has all the reasons not to reject such claims and greater the number of claims received, the chances of reaching settlements by the promoters become lesser. In such cases, the suspended board is left with limited options and at times the insolvency is forced onto the company. It is also common for a handful of the financial creditors to take over the company and refuse to settle the debt or in collusion with the IRP, the claim is accepted with exponential interest rates, and the application of promoters seeking grievance against such claims are not received well by the Courts. In one such instance of financial creditors attempting to take over the assets of Corporate Debtor, the NCLAT held that the intent of the financial creditor is to take over the prime prized asset of Corporate Debtor and to handover the said prized asset to some prospective resolution asset[5].
The CIRP must be the last option:
The Courts in India have time and again allowed and facilitated settlements by promoters. Any company having even a semblance of survival was allowed to settle its dues, and time was granted to settle the debts. One notable ruling in that context is the case of Vidarbha Industries Power Limited wherein the Supreme Court factored in an arbitration receivable of INR 1730 Crores and directed that even in the case of established default, the NCLT may not admit the company into CIRP.
Further, Section 20 of the IBC, 2016 ordains the IRP to keep the Company Debtor as going concern. However, it is seen that the IRPs often fail to keep the company as going concern due to several extraneous factors such as complex workings, unreliable credit system with the vendors, no experience of running a company, etc. The corollary to the same is the loss of jobs of multitude of employees whose livelihood depends on the company. Even though the mandate of law prescribes that the Company must remain a going concern, there are no imminent repercussions if it is not complied with. The author does not subscribe to the idea of grant of endless time-period to the promoters to settle after the admission order is passed but, a supervisory stay by the Appellate Court ought not to have been knocked out. The same is argued on the strength of innumerable cases settled at the stage of Appellate Tribunal namely Jaypee Healthcare Ltd., Chandulal Chandrakar Memorial Hospital etc., to name a few. The Appellate Tribunal has been conscious of lifting the stay on constitution of CoC when the promoters failed to adhere to the directions passed by the Appellate Tribunal[6].
Epilogue:
Given the quantum of debts repaid through the efforts at Appellate stage, the BYJU judgment may be clarified and interpreted only in the cases wherein the settlements are achieved through illegal means, as a sweeping ban on the settlement at the Appellate stage may not be in the interests of the insolvency stakeholders. Moreso, when the NCLT is bereft of any powers to stay their own admission orders and the promoters have very limited time to settle the dues.
In the era of Reverse CIRPs, promoters driven real estate projects, and project wise insolvency, the Courts below ought not to make a pedantic interpretation of the statute and shunt out window of settlement for the promoters. Until the settlement cases reach the Supreme Court in the near future, it is difficult to predict how the Courts below facilitate the settlements (post admission orders) without violating the law laid down by the SC in the BYJU judgment. Lastly, it may be concluded that the sentiments of creditors waiting to realize their debts were addressed by the Supreme Court in BYJU, however, the Supreme Court failed to weigh in the grievances of suspended board who genuinely face difficulty in retaining their ownership in the company despite having sufficient means to settle the adjudicated debts.
References:
[2] (2022) ibclaw.in 1185 NCLAT
[3] (2023) ibclaw.in 958 NCLAT
[6] Comp. App. (AT)(Ins.) No. 536 of 2024 (Matter is currently sub-judice)
