Glas Trust Company LLC v Byju Raveendran: Reaffirming Collective Interest Principle in IBC Settlements
Preeti Thakur
Second Year LL.B. (Hons.), National Law School , Bengaluru
Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced to facilitate the timely resolution of insolvency proceedings, maximise the value of assets of corporate persons, and balance the interests of all stakeholders. Yet in 2023-24, the average time taken for resolution of an insolvency proceeding was 716 days, despite the 180-day time limit imposed under Section 12 of the IBC. Given the significant delays in insolvency proceedings, settlement is often considered a suitable option for parties. Typically, a settlement affects only the parties concerned in the agreement. However, settlements under the IBC framework take on a peculiar dimension because of its “collective” nature. Recently, in Glas Trust Company LLC v. Byju Raveendran (2024) ibclaw.in 275 SC, the apex court reaffirmed the boundaries of settlement between parties in an insolvency proceeding. It also decided on whether the National Company Law Appellate Tribunal (“NCLAT”) can invoke its inherent powers under Rule 11 of the NLCAT Rules, 2016 in cases where the prescribed procedure for withdrawal of the Corporate Insolvency Resolution Process (“CIRP”) and settlement of claims between parties has been laid down. The Supreme Court (“SC”) answered in the negative, concluding that the NCLAT erred in invoking its inherent powers to approve the settlement. The decision aligns with the objects and reasons of the IBC, which requires the court to consider the interests of all stakeholders, not just the parties to the settlement agreement, and regard the IBC as beneficial legislation rather than a mere recovery mechanism for a creditor.
Background
The present case is an SLP to the SC against the judgment of NCLAT Chennai approving the settlement of dues payable to the third respondent by the second respondent. Think and Learn Pvt Ltd. is the Corporate Debtor involved in the business of providing educational services (“third respondent”). Byju Raveendran (“first respondent”) and his brother, Riju Raveendran, are former directors of Corporate Debtor. The Board for Cricket in India is an Operational Creditor (“second respondent”) who entered into an agreement with the Corporate Debtor for sponsorship of the Indian cricket team.
The Corporate Debtor has a 100% owned subsidiary, Byju’s Alpha Inc., which secured a loan amounting to USD 1,200,000,000 under a credit and guarantee agreement. The Glas Trust Company LLC (“appellant”) is the administrative agent of all lenders. Under this agreement, the Corporate Debtor acted as the guarantor for Byju’s Alpha Inc. Upon default under this agreement, the appellant invoked the guarantee deed and demanded the Corporate Debtor pay the requisite amount. When Byju’s Alpha Inc. transferred USD 533 million to a hedge fund based in the United States, the Delaware Court issued an injunction restraining Riju Raveendran from spending, transferring, liquidating, or modifying any rights related to the hedge fund amount.
On 23.09.2023, the second respondent moved a petition under Section 9 of the IBC in respect of the operational debt amounting to Rs. 158 crores payable by the Corporate Debtor. The National Company Law Tribunal (“NCLT”) admitted the petition on 16.07.2024 and initiated the CIRP. The moratorium was imposed, and an Interim Resolution Professional (“IRP”) was appointed. The appellant also filed a petition under Section 7 of the IBC against the Corporate Debtor on 22.01.2024 but it was disposed of by the NCLT in view of the order admitting the Section 9 petition filed by the second respondent.
During the proceedings before NCLAT, the second respondent and first respondent reached a settlement stipulating that the second respondent would withdraw the petition upon full payment of the operational debt by 09.09.2024. The payment pursuant to the settlement offer was purportedly to be extended by Riju Raveendran in his personal capacity to the second respondent. NCLAT approved the settlement on 02.08.2024 by invoking its inherent powers under Rule 11 of the NLCAT Rules, 2016. The appellant raised objections to this settlement, arguing that the alleged payment would constitute a preferential payment to the operational creditor and apprehended that the funds of Byju’s Alpha Inc. were being offered to settle the dues in India.
In rem proceedings
Once an application under Sections 7, 9, or 10 is admitted by the NCLT, the Corporate Insolvency Resolution Process commences. Subsequently, the NCLT declares moratorium, issues a public pronouncement of initiation of CIRP, makes a call for submission of claims, and appoints an IRP.
When a petition is filed by a financial creditor, operational creditor, or the corporate applicant, the proceedings are still in personam, as the relevant stakeholders are the concerned applicant and Corporate Debtor only. However, the nature of proceedings changes once the petition is admitted by the NCLT; they become in rem (against the world at large) and all creditors become relevant stakeholders in the CIRP. Admission of a petition by NCLT is an important stage in an insolvency proceeding, especially with respect to withdrawal of CIRP and settlement.
Procedure for withdrawal and settlement of claims
The IBC framework has evolved in a piecemeal manner, through statutory amendments whenever a gap is identified by the courts. This is seen with respect to the issue of withdrawal of CIRP and settlement under insolvency proceedings as well. The present case delineates the procedure for the same at various stages of the Corporate Insolvency Resolution Process. Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 permits the withdrawal of applications made by the applicant under Section 7, 9, or 10 of the IBC on a request by the applicant before the admission of the application. And Section 12A of the IBC provides for the withdrawal of an application after it has been admitted by the NCLT, requiring a 90% voting share of the Committee of Creditors (“CoC”). Regulation 30A of the CIRP Regulations provides for the procedure to withdraw CIRP before the NCLT, both before and after the constitution of the CoC.
Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 explicitly addresses this situation. At this stage, the proceedings are in personam, so any withdrawal or settlement between the parties will not be adverse to the interests of other creditors.
- After the application is admitted by the NCLT the CoC has not been constituted
Regulation 30A of the CIRP provides the procedure for the above situation. At this stage, the proceedings are in rem. Therefore, an application for withdrawal must be made to the IRP, who is required to hear all concerned stakeholders.
- After the application is admitted by the NCLT, the CoC has been constituted, but the invitation for expression of interest has not been issued
In such a scenario, the application must be placed before the CoC, and only after ascertaining approval with a 90% voting share shall the Resolution Professional submit the application for withdrawal of CIRP to the NCLT.
- After the application is admitted by NCLT, the CoC has been constituted, and the invitation for expression of interest has been issued
The procedure is the same as in the third scenario, with the added requirement of the applicant to state reasons for withdrawal.
With delineated rules and regulations on withdrawal and settlement of claims, the discretion exercised by NCLT and NCLAT to approve settlements and withdrawal of CIRP has been reduced. Consequently, invoking the court’s inherent powers in deviation from the established statutory procedure is illegal and constitutes an abuse of the process of the court.
Settlement to be set aside
The SC in this case concluded that the recourse to Rule 11 of the NCLAT Rules to approve the settlement and withdrawal of CIRP was not warranted given the procedural infirmities and the nature of proceedings. The procedure for withdrawal of CIRP or settlement of claims is dependent upon the stage of insolvency proceedings. A private settlement between a single creditor and corporate debtor construes IBC as a debt recovery mechanism, in sharp contrast to the intended purpose of the IBC framework. This would place the interests of a single creditor over the entire body of creditors, who are the intended beneficiaries of the insolvency proceedings. The present judgment reinforces that the proceedings initiated under IBC must protect the interests of all stakeholders. Consequently, any resolution of claims or withdrawal of the Corporate Insolvency Resolution Process after the constitution of the Committee of Creditors necessitates a minimum of 90% voting share. The IBC consolidates the insolvency framework and aims to eliminate parallel proceedings against the Corporate Debtor by every creditor. Any settlement sanctioned by the NCLT should be in rem. In other words, it must account for the third-party rights of all creditors. It is essential that approval from all such creditors be obtained before any withdrawal or settlement of claims. Therefore, “collective interest” must be the guiding principle for all settlements or withdrawals under insolvency proceedings.
