Introduction
In a significant ruling clarifying the interplay between inherent powers of tribunals and the statutory framework of the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court in GLAS Trust Company LLC v. Byju Raveendran & Ors. has held that the National Company Law Appellate Tribunal (NCLAT) erred in approving a post-admission settlement of Corporate Insolvency Resolution Process (CIRP) under Rule 11 of the NCLAT Rules, bypassing the statutory procedure in Section 12A of the IBC and Regulation 30A. The judgment underscores the importance of preserving the collective nature of CIRP and ensuring the interests of all stakeholders are protected.
1. Factual Background and Procedural History
The matter originated from a petition filed by the Board of Control for Cricket in India (BCCI), an operational creditor, against Think & Learn Pvt. Ltd. (BYJU’S), for unpaid dues under a sponsorship agreement. The NCLT Bengaluru admitted the Section 9 IBC application on 16 July 2024 and commenced CIRP.
GLAS Trust Company LLC, acting as agent for lenders under a USD 1.2 billion loan facility to BYJU’S US subsidiary (Byju’s Alpha Inc.), had separately filed a Section 7 application, which was disposed of in light of the Section 9 admission. GLAS was permitted to submit its claim and potentially revive the Section 7 proceedings.
While CIRP was ongoing and before the CoC was constituted, BYJU’S proposed a settlement with BCCI. The NCLAT approved the settlement using its inherent powers under Rule 11 of the NCLAT Rules, and set aside the NCLT’s admission of CIRP. GLAS, alleging that the source of funds for the settlement was linked to fraudulent transfers and in violation of a US Court injunction, challenged the NCLAT order before the Supreme Court.
2. Identification of Legal Issues
The Supreme Court considered the following legal questions:
- Whether a third-party financial creditor (GLAS) had locus standi to challenge the settlement between BYJU’S and BCCI.
- Whether NCLAT could invoke Rule 11 of the NCLAT Rules to approve a CIRP settlement after admission of an IBC petition but before CoC constitution.
- Whether the NCLAT erred in failing to address GLAS’s objections regarding the source of settlement funds and procedural compliance.
3. Arguments of the Parties
Appellant (GLAS Trust Company LLC):
- Asserted that post-admission withdrawal of CIRP must strictly follow Section 12A and Regulation 30A.
- Raised concerns that funds used in the settlement were linked to USD 533 million allegedly fraudulently transferred and restrained by a US court.
- Alleged preferential treatment to BCCI, and that the process circumvented the collective nature of CIRP.
Respondents (BYJU Raveendran and BCCI):
- Argued that settlement was financed through personal funds of Riju Raveendran, not from the corporate debtor or US funds.
- Asserted that Rule 11 of the NCLAT Rules permitted such settlement before CoC formation, as upheld in previous cases like Swiss Ribbons.
- Emphasized that insolvency would harm a functioning company with thousands of employees and millions of students.
4. Court’s Analysis and Reasoning
a. Locus Standi of GLAS
The Court held that after CIRP admission, the proceedings acquire an in rem character. Therefore, any stakeholder, including GLAS (a financial creditor), has the right to raise objections.
“Once the petition is admitted… the proceedings become in rem and all creditors of the corporate debtor become stakeholders.”
b. Inherent Powers vs. Statutory Scheme
The Court reaffirmed that Rule 11 cannot override the structured mechanism under Section 12A and Regulation 30A, especially after CIRP admission.
- The Court relied on Swiss Ribbons v. Union of India and Indus Biotech v. Kotak India Venture, holding that the procedure for post-admission settlement must ensure involvement of all stakeholders.
- It noted the evolution of Section 12A and the ILC Report’s emphasis on preventing misuse of IBC as a recovery tool.
- Regulation 30A, as amended, provides a mechanism for withdrawal before and after CoC constitution.
“NCLAT’s exercise of inherent power bypassed the statutory safeguard of collective stakeholder participation under Section 12A.”
c. Source of Funds and Compliances
The Court observed that NCLAT failed to sufficiently examine whether the funds used for settlement complied with US court orders and domestic regulatory norms.
- Despite an affidavit from Riju Raveendran claiming the funds were personal and not linked to Byju’s Alpha Inc., the Supreme Court emphasized that due scrutiny was warranted, given the seriousness of allegations involving contempt and international injunctions.
5. Final Conclusion and Holding
The Supreme Court allowed the appeal and set aside the NCLAT judgment approving the settlement. The CIRP against Think & Learn Pvt. Ltd. (BYJU’S) was restored, with directions for continuation under IBC framework.
Legal Principles Reaffirmed:
- Post-admission CIRP withdrawal must comply with Section 12A and Regulation 30A.
- Rule 11 cannot be used to override statutory mechanisms in insolvency law.
- CIRP is a collective process; all stakeholders must be heard.
- Inherent powers are not a substitute for procedural safeguards.
FAQs:
1. Can a settlement in IBC proceedings be approved without CoC consent?
No. After CIRP admission, any withdrawal or settlement must be approved under Section 12A of IBC with 90% CoC consent, unless CoC has not yet been constituted and the court uses inherent powers in rare cases.
2. What is the role of Rule 11 in IBC cases?
Rule 11 of the NCLAT Rules allows tribunals to exercise inherent powers in the interest of justice. However, it cannot override express statutory procedures like Section 12A for CIRP withdrawal after admission.
3. When do IBC proceedings become binding on all creditors?
IBC proceedings become in rem (binding on all) upon admission of the application. From that point, all creditors become stakeholders, and the CIRP is not limited to the petitioner and debtor.
4. What is Section 12A of the IBC?
Section 12A allows withdrawal of an admitted insolvency application with 90% CoC approval, ensuring that settlements consider the interests of all creditors.
5. Can personal funds be used to settle a corporate debtor’s IBC dues?
Yes, but the source must be disclosed transparently and must not violate any court injunction or regulatory bar. Courts scrutinize such settlements for fairness and legality.
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