Glas Trust Co. LLC v. Byju Raveendran: Confronting Financial Cross-Roads

13th December, 2024 - 12:32 pm Categories: IBC Legal Case 0 Comments

In 2018, Byju Raveendran was the toast of India’s start-up world as his eponymous edtech company, Byju’s, was crowned a unicorn.[1] Similarly, signifying Byju’s downfall is the case of Glas Trust Co. LLC v. Byju Raveendran which is of great significance as it raises issues delving into the company’s fiduciary responsibilities to their creditors, the need for procedural adherence, and things also get intriguing from the International legal perspective as the proceedings in the United States have significant implications for proceedings in India. Byju’s, headquartered in India has enjoyed the status of one of the top education technology companies until lately when the company is facing considerable challenges pertaining to financial and operational difficulties because it sits at the nexus of corporate governance and insolvency issues, this intersection has drawn significant attention.

In 2011, Raveendran founded Byju’s, an education technology company with a mission of revolutionizing the way students learn. By 2015, it launched its flagship learning app, promising students personalized, interactive, and adaptive learning experiences tailored to their needs. Flush with funds, Byju’s started an ambitious plan to expand that raised the company’s value to an impressive $22 billion, making it one of the world’s most valuable education technology companies. Nonetheless, as the pandemic drew to a close, the company’s financial position began to deteriorate further, combined with operational inefficiencies and the debt burden. Intensifying issues of the company’s governance came when Deloitte, Byju’s Auditor cited a lack of cooperation and resigned from the Company.[2] This triggered serious discussions about the company’s level of financial transparency and operational ethics.

Glas Trust Co. LLC— a trustee for creditors—borrowed a $1.2 billion term loan through Byju’s U.S.-based subsidiary, Byju’s Alpha Inc., to sustain its hyper-global growth. The role of Glas Trust was not merely procedural; as a financial creditor, its position in any insolvency scenario was prioritized by law. The trust drew attention to reliance on complex financial structures to drive the company’s growth story. This was immediately followed by a sponsorship agreement with the Board of Control for Cricket in India (BCCI), establishing it as an operational creditor. This agreement formed the core of Byju’s aggressive marketing spend to cement its brand globally. The increasing financial strain on Byju’s worsened the legal and financial landscape lurking in its BCCI contracts, laying yet another layer of complexity into its insolvency cause.

The Insolvency and Bankruptcy Code (IBC), 2016 is a framework defining India’s corporate insolvency ambit, offering a structured mechanism for resolving financial distress. Section 5(7) of IBC, 2016 defines ‘financial creditor’ as awarded more rights under the IBC, which includes, among other things, a participatory role in summoning and managing the CoC, which is almost at the heart of the Corporate Insolvency Resolution Process (CIRP). Section 5(20) of IBC, 2016 envisages an ‘operational creditor’[3] i.e. BCCI. Concerning incorporeal assets, operational creditors will have a lesser number of rights than financial creditors regarding insolvency proceedings as they do not participate in the Committee of Creditors (CoC) and the distributions from liquidation according to Section 53 of the IBC[4]. Byju’s position as a Corporate Debtor is complicated as it has obligations to financial and operational creditors, with a different set of legal rights and duties.

Challenges were confirmed when the issue came under the jurisdiction of the Delaware Court in the United States, whereupon Glas Trust Co. LLC, on behalf of Byju’s lenders of a $ 1.2 billion term loan, claimed that Byju’s had defaulted on its debt servicing. The apparent disobedience of Byju’s prompted Glas Trust to seek legal protection in the interests of the creditors. Recognizing the seriousness of the case, the Delaware Court issued an order that froze Riju Raveendran, Byju Raveendran’s brother’s, assets of about $533 million, and as Byju’s grappled with U.S. legal proceedings, it simultaneously faced another set of challenges from India, with several other legal cases obscuring its fiscal trail. The operational creditor, the Board of Control for Cricket in India (BCCI) filed a petition, under Section 9 of the Insolvency and Bankruptcy Code (IBC) of 2016[5], dealing with the Application for initiation of the Corporate Insolvency Resolution Process by operational creditors. The BCCI claim, which is directed at Byju’s on the grounds of a sponsorship agreement, fell in line with the rest of the towering legal challenges that this company was confronting. Meanwhile, Glas Trust, as a financial creditor, filed a petition under Section 7 of the IBC[6], which deals with the Initiation of the Corporate Insolvency Resolution Process by financial creditors.

The National Company Law Tribunal ruled differently on the two petitions by admitting the BCCI petition and rejecting the Glas Trust petition. Besides, NCLT ordered a settlement between Byju’s and BCCI without the constitution of the Committee of Creditors. The CoC, according to the IBC in Section 21[7], deals with the Constitution for the Committee of Creditors. This is the most important organ that is made up of the financial creditors who will be working together to discuss and make decisions regarding the resolution process for the corporate debtor. Therefore, by preventing the CoC from its role, there was a huge deviation from NCLT’s order from existing procedural norms under the IBC.

The issue opened the doors of critical forum to address grievances i.e. NCLAT. The heart of the case focused on the application of Rule 11 of the NCLAT Rules which states that ‘Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.’ [8] Glas Trust pleaded that the discretion exercised was unreasonably wide, and therefore it hampered the provisions of the IBC suitably Section 12A. Thus, arises the question of whether it would be appropriate to use Rule 11 to get around statutory requirements. It is said that such approval of settlement before the CoC is constituted dilutes the very essence of the resolution process and augurs unfavorably in the future for other similar cases.

The Supreme Court’s intervention was necessary for the resolution of the matters of both procedural and substantive law that had arisen because of the conflicting decisions of the National Company Law Tribunal and the National Company Law Appellate Tribunal. Glas Trust Co. LLC has claimed that the settlement is problematic for several reasons-

Firstly, sources of funds for settlement, suspecting that it was linked to USD 533 million frozen assets in the United States, violated Delaware Court’s injunction. In addition to it, the settlement constituted a preferential payment Lastly, NCLAT shouldn’t have approved the settlement using inherent powers under Rule 11 bypassing the process laid out in Section 12A of IBC and Section 30A of CIRP Regulations.[9]

The apex court brought into sharp focus the overriding importance of adherence to the procedural mandates provided in the Insolvency and Bankruptcy Code (IBC), especially Section 12A, also addressed the controversial application of Rule 11 of the NCLAT Rules in the matter, claiming that it had been abused to override the mandatory statutory protections contained in the IBC. The Court stated that while Rule 11 provides discretion, it cannot be used to circumvent the fundamental tenets of procedural fairness and equality entrenched in the IBC.

Therefore, The Supreme Court’s judgment is significant because it aims to provide procedural clarity on CIRP application procedures when COC has not yet been formed, withdrawals, and settlements, promoting greater predictability and fairness in insolvency proceedings.  However, the Supreme Court’s decision to set aside the NCLAT’s judgment sends a strong message about the need for adherence to establishing a legal framework under IBC. The Supreme Court’s decision reiterates the tendency that IBC is not merely for the recovery of debt instead achieving a balance among all stakeholders, including the corporate debtor, and sets indeed an important precedent in promoting clearer, fairer, and consistent management of multinational debt disputes in the protection of stakeholder interests within an increasingly globalized economy.

Author: Tanushree Drolia, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.eferences

[1] www.bbc.com, Byju’s: India’s once most valuable start-up is fighting to survive (last visited Dec. 5, 2024)

[2] Proquest.com, The Downward Trajectory of Byju’s: Is Revival Possible? (last visited Dec. 5, 2024)

[3] Insolvency and Bankruptcy Code,2016, § 5(20), No. 31, Acts of Parliament, 2016 (India).

[4] Insolvency and Bankruptcy Code,2016, § 53, No. 31, Acts of Parliament, 2016 (India).

[5] Insolvency and Bankruptcy Code,2016, § 9, No. 31, Acts of Parliament, 2016 (India).

[6] Insolvency and Bankruptcy Code,2016, § 7, No. 31, Acts of Parliament, 2016 (India).

[7] Insolvency and Bankruptcy Code,2016, § 21, No. 31, Acts of Parliament, 2016 (India).

[8] SCC Online, https://www.scconline.com/blog/post/2024/10/23/supreme-court-sets-aside-nclat-judgment-that-closed-insolvency-process-against-byju/ (last visited Dec. 6, 2024)

[9] The Economic Times, “Investors leaving board was the biggest setback; Byju’s now worth zero: founder Raveendran” (last visited Dec. 7, 2024)