Introduction
GLAS Trust Company LLC v. Byju Raveendran & Ors. is an influential ruling in the Indian insolvency law that has raised issues with regard to creditors’ rights, corporate responsibility, and judicial independence under insolvency proceedings. This case is an account of intricate financial disputes involving Byju’s, creditors, and other concerned parties, ultimately leading to a legal battle with regard to suspension of insolvency proceedings.
Facts of the case
At the center of this case is Think & Learn Pvt. Ltd. (Byju’s), India’s top ed-tech company. In November 2021, Byju’s had obtained a $1.2 billion loan through its U.S.-registered subsidiary, Byju’s Alpha Inc., with GLAS Trust Company LLC acting as the representative of the lender. But Byju’s later fell into a critical financial crisis and defaulted on repayments. A Delaware Bankruptcy Court probe exposed suspicious withdrawals of $533 million to a hedge fund that led to assets freeze on Byju’s.
At the same time, Byju’s suffered financial difficulties in India. Creditor Board of Control for Cricket in India (BCCI), owing ₹158 crore of sponsorship amount, initiated insolvency proceedings against Bengaluru-based Byju’s before the National Company Law Tribunal (NCLT) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). NCLT admitted the case on July 16, 2024, imposed moratorium, and appointed an Interim Resolution Professional (IRP).
Prior to the Committee of Creditors (CoC) formation, Byju’s paid off its ₹158 crore dues to BCCI through purported use of personal funds of Riju Raveendran (brother of Byju Raveendran). The National Company Law Appellate Tribunal (NCLAT), Chennai, exercised Rule 11 of the NCLAT Rules, 2016, to sanction Byju’s withdrawal from insolvency.
This ruling was controversial as GLAS Trust objected citing:
- Undisclosed source of settlement funds, possibly contravening Delaware’s freeze order.
- Going around Section 12A of IBC, which necessitates 90% creditor sanction.
- Selective treatment, favouring BCCI and leaving other creditors in the dark.
The Supreme Court stepped in, holding that Rule 11 cannot supersede Section 12A, and selective settlements infringe on the collective insolvency process. It restored Byju’s insolvency proceedings and directed the ₹158 crore settlement to be kept in escrow.
Issues Raised
1. Does a financial creditor (GLAS Trust) have the locus standi to challenge a settlement between Byju’s and BCCI?
GLAS Trust, which is a secured financial creditor, was not a party to the settlement with BCCI but contended that insolvency law is a collective exercise and all creditors need to be taken into account. The Court needed to decide whether a creditor that had been excluded from the process could challenge a settlement that impacted the insolvency process.
2. Did NCLAT commit a mistake in applying Rule 11 to supersede the formal process of withdrawal under Section 12A of the IBC?
The National Company Law Appellate Tribunal (NCLAT) based its approval on Rule 11 of the NCLAT Rules, 2016. Section 12A of the IBC mandates 90% creditor consent for an insolvency withdrawal, which was circumvented in the present case. The question was whether Rule 11 was capable of overruling a statutory provision (Section 12A).
3. Was selective payment to BCCI a breach of the rule of equal treatment of creditors?
Byju’s paid ₹158 crore to operational creditor BCCI, leaving GLAS Trust and other financial creditors in the cold. The Supreme Court had to consider whether preferential settlements undermine the collective insolvency regime.
4. Should insolvency settlements be permitted if the source of funds is in dispute or under international legal challenge?
The settlement funds for BCCI were said to be from Riju Raveendran’s personal funds, but GLAS Trust complained of possible breaches of a U.S. court’s freeze order on Byju’s Alpha Inc. The Court had to rule on whether tribunals are required to ensure the legality of settlement funds prior to permitting insolvency withdrawal.
5. Is it possible to withdraw an insolvency case prior to the constitution of the Committee of Creditors (CoC)?
The Committee of Creditors (CoC) had not been constituted, i.e., significant financial creditors had no voice in the settlement. The Supreme Court was required to decide if insolvency proceedings can be withdrawn prior to the opportunity for creditors to vote.
6. What are the boundaries of judicial discretion in insolvency proceedings?
The IBC is a law creditor-oriented, but the NCLAT used judicial discretion to grant an out-of-court settlement. The Supreme Court had to articulate whether insolvency law should remain strictly procedural or open itself up to judicial intervention in exceptional situations.
contentions
Contentions of the Appellant (GLAS Trust Company LLC)
Represented by lawyers Kapil Sibal and Shyam Divan, GLAS Trust proceeded to file an appeal against the NCLAT order. They contended that:
1. NCLAT Went Beyond Its Jurisdiction
IBC Section 12A mandates 90% creditor consensus for withdrawal of insolvency, which was not heeded. Allowing Rule 11 to supersede statutory law is a negative precedent with serious ramifications.
2. Byju’s Preferred BCCI Over Other Lenders
The sole entity remunerated was the BCCI, as the rest, including the GLAS Trust, were regretfully omitted to receive any form of compensation. This was against the IBC’s principle of collective decision-making.
3. Settlement Funds Might Have Been Illegal
The origin of the massive amount of ₹158 crore was not clear or transparent, and fears were rising that it could have violated the freeze order that had been issued by the Delaware Court. If the money was utilized in an erroneous manner, then the settlement was unlawful.
4. Byju’s Was in Financial Crisis
Multiple defaults, unpaid wages, and withdrawals by investors indicated severe financial distress. Leaving insolvency without invoking extensive input and feedback from all the creditors involved was legally flawed and problematic.
5. Judiciaries cannot override insolvency law
Giving judicial discretion to exclude strict statutory procedures can lead to a case where corporations are able to apply insolvency legislation to their benefit and advantage.
Arguments of the Respondents (Byju’s & BCCI)
They were represented by Tushar Mehta and Abhishek Manu Singhvi and upheld the settlement and order of NCLAT, which stated:
1. Rule 11 pertains to the definition of Allowed Settlement– Throughout history, courts have always allowed individuals to withdraw from cases where a settlement was actively pursued or negotiated.
2. GLAS Trust Had No Standing- The transaction was between Byju’s and BCCI alone—GLAS was not directly involved.
3. Financing was through own resources- Riju Raveendran submitted an affidavit confirming that the money was personal, and not that of the company.
4. Byju’s operated as a fully and functioning business entity. – With 27,000 staff and 150 million students, bankruptcy would damage its future business.
5. IBC Encourages the Pursuit of Settlement Rather than Winding Up- Swiss Ribbons v. Union of India (2019) was more focused on revival rather than liquidation.
Rationale
The Supreme Court ruling in GLAS Trust Company LLC v. Byju Raveendran & Ors. was a result of a rigid enforcement of insolvency law and a need to adhere to statutory requirements. The Court held that the National Company Law Appellative Tribunal (NCLAT) erred in sidestepping the process of insolvency as mandated by statute, which placed significant legal principles:
1. Rule 11 Cannot Preempt Section 12A of IBC- The Court held that Rule 11 of the NCLAT Rules of 2016, which grants inherent powers to the tribunals, cannot be used to bypass the express provisions of the Insolvency and Bankruptcy Code (IBC), 2016. In particular, Section 12A of the IBC provides that withdrawal from insolvency should be approved by 90% of the creditors, which process has been completely disregarded in the present case. The Court reiterated the fact that tribunals do not have the power to override statutory protection by exercising discretionary powers.
2. Preferential Treatment of One Creditor over Another Violates the Insolvency Paradigm- A core tenet of insolvency law is the equitable treatment of all creditors. The Court determined that Byju’s preferential payment to BCCI, while neglecting other creditors such as GLAS Trust, constituted an inequity. This action transgressed the collective decision-making framework inherent in insolvency proceedings, which mandates that all creditors must be afforded an opportunity to contribute to discussions. The ruling emphasized that settlements cannot be designed to benefit a single creditor to the detriment of others.
3. Settlement Funds Source Must Be Validated- The Court has serious doubts about the authenticity of the ₹158 crore utilized for paying BCCI’s dues. Byju’s asserted that the funds were out of Riju Raveendran’s own pocket, but independent cross-verification was not furnished. Considering that an American court had previously frozen Byju’s funds for suspected financial mismanagement, the Supreme Court asserted that tribunals need to perform proper due diligence before they approve settlements.
4. Insolvency Process Should Be Respected Without Premature Interference- The Supreme Court also rebuked the NCLAT’s interference prior to the creation of the Committee of Creditors (CoC). The CoC plays a crucial role in determining the direction of insolvency proceedings, and its lack led to the creditors being totally excluded from the decision-making process. The Court directed that the tribunals will not give permission for insolvency withdrawals unless and until they have conducted formal consultations with creditors.
5. Strategic Settlements are Forbidden under Insolvency Laws- The court ruled that the intent of insolvency law is to provide a just process of resolution and not enable corporations to choose to pay off their debts selectively and avoid responsibility. The Court underscored that Byju’s financial difficulties could not be ignored just because one of the creditors had been paid. This ruling prevents corporations from using insolvency laws as a bargaining tool of preferential settlements. Final Decision The Supreme Court reversed the NCLAT order, revived Byju’s insolvency case, and directed the ₹158 crore settlement amount to be kept in escrow pending further legal scrutiny. The verdict enforced the significance of transparency, creditor rights, and strict compliance with the insolvency process.
Defects of law
Supreme Court judgment in GLAS Trust Company LLC v. Byju Raveendran & Ors. protected creditor rights but is problematic with respect to insolvency law rigidity, Rule 11 interpretation, and financial distress management for the company.
1. Strict Interpretation of Section 12A Can Prevent Real Settlements- The Court relied on Section 12A of the IBC, which mandates 90% creditor consent for withdrawals in insolvency. This discourages misuse but could suppress genuine settlements and postpone recovery. The inflexibility of the rule could discourage proper out-of-court settlements.
2. Limited Scope for Judicial Discretion Under Rule 11- The judgment restricted Rule 11, stating that tribunals are not permitted to use inherent powers to bypass laws. However, judicial discretion has been supported by the Supreme Court in rare circumstances (e.g., Swiss Ribbons v. Union of India, 2019). The ruling does not permit tribunals to use Rule 11 to expedite settlement of debt, even when there are legitimate grounds.
3. No Certain Way to Verify Settlement Funds- The Court ruled Byju’s did not prove the genuineness of the ₹158 crore for the BCCI settlement. But it did not provide a mechanism for verification of the source of future settlement money, leaving tribunals in doubt about funding scrutiny.
4. Potentially Severe Impacts on Business Sustainability- The Court revived insolvency proceedings against Byju’s, which has 27,000 employees and 150 million students. In protecting creditor rights, it disregarded the broader economic consequences of focusing on operating businesses. This question is raised as to whether insolvency law should distinguish between troubled companies and operating businesses. 5. Cross-Border Insolvency Uncertainty The Court recognized Delaware’s freeze order on Byju’s money but did not specify how Indian insolvency law must conform to international financial restrictions. This points to a lacuna in Indian insolvency law, the lack of a mechanism to address cross-border disputes.
Inference
The ruling in GLAS Trust Company LLC v. Byju Raveendran & Ors. upholds the sanctity of insolvency proceedings, ensuring fairness to creditors, transparency in finances, and a strict adherence to legal norms.
1. Maintaining Insolvency Integrity – The Court dismissed NCLAT’s resort to Rule 11, emphasizing that settlements must be under Section 12A and must obtain 90% creditor consent in order to avoid selective bailouts.
2. Collective creditor rights require that insolvency is a structured process and not a private deal; Byju’s preferential treatment of BCCI was unjust to other creditors.
3. It’s about money transparency – With the impending Delaware Court freeze order, the Court properly insisted on verifying settlement funds to avoid misuse of funds.
4. Restraining Judicial Excess – The decision restricts discretionary powers of the tribunals, emphasizing statutory adherence above judicial discretion.
5. Future Effect – This ruling will deter misuse of Rule 11, encourage fiscal responsibility, and tighten insolvency law in order to serve creditors better.
Conclusion- By reviving Byju’s insolvency proceedings, the Court secured creditor rights and financial integrity, ensuring that insolvency law is transparent, ordered, and proof against abuse.
Written by- Krishna Ajmera
Manipal University Jaipur