Background
The present case arose out of default of two agreements. First, a Team Sponsorship Agreement between Think and Learn Pvt. Ltd. (“Corporate Debtor/Respondent No. 3”) and Board for Control of Cricket in India (“Operational Creditor/Respondent No. 2”). Second, a Loan Facility/Credit Agreement availed by Byju’s Alpha Inc from a consortium of lenders represented through their Administrative Agent i.e. Glas Trust Company LLC (“Appellant”). Corporate Debtor being the holding company of Byju’s Alpha Inc., acted as a guarantor of the said Loan Facility. Respondent No. 1 i.e. Byju Raveendran was the former director of the Corporate Debtor.
Upon default by Byju’s Alpha Inc under the Loan Facility/ Credit Agreement, the Appellant initiated proceedings before the Delaware Court, which resulted in the removal of existing directors and a preliminary injunction restraining the transfer, dissipation, or movement of USD 533 million transferred by Byju’s Alpha Inc. to the hedge fund. Thereafter, upon default in honouring the guarantee provided by Respondent No. 1, the Appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
In relation to the Team Sponsorship Agreement, Corporate Debtor defaulted in making payments against certain invoices of Operational Creditor raised for the financial year 2022-2023. Consequently, Operational Creditor filed an application under Section 9 of IBC for initiation of CIRP against the Corporate Debtor, which came to be admitted by the NCLT, Bangalore. While admitting the Section 9 application, the NCLT disposed of the Section 7 application filed by the Appellant, granting liberty to revive the same “depending on the subsequent developments at the appellate level, if any”.
The orders passed by the NCLT were challenged by Appellant and Respondent No. 1 before the National Company Law Appellate Tribunal (“NCLAT”), Chennai. Corporate Debtor assailed the admission of CIRP on the ground that proposal for settlement was put forth, pursuant to which part-payment had been made by Mr. Riju Raveendran in his personal capacity and the Operational Creditor is also in favour of withdrawal of CIRP. The Appellant, however, raised various objections, inter alia, apprehending that the funds of Byjus’s Alpha Inc. are being offered to settle dues in India, in violation of the preliminary injunction by Delaware Court. In response, Mr. Riju Raveendran filed an affidavit and undertaking stating that settlement money was being offered out of his personal funds generated in India and not linked to the proceedings before Delaware Court. Accepting the said undertaking/affidavit and observing that there is no evidence to believe that money offered in settlement is related to proceedings before Delaware Court, the NCLAT invoking its inherent powers under Rule 11 of NCLAT Rules, 2016 (“NCLAT Rules”) approved the settlement and set aside the order of the NCLT, Bangalore initiating CIRP against Corporate Debtor (“Impugned Judgement”).
Prior to the pronouncement of judgement by NCLAT, Byjus’s Alpha Inc and Appellant, on 01 August 2024, moved a motion before the Delaware Court seeking a restraining order against Mr. Riju Raveendran from using its personal assets to satisfy the dues to the Operational Creditor in India. The said motion was rejected by the Delaware Court.
Aggrieved by the impugned judgement of the NCLAT, the Appellant approached the Hon’ble Supreme Court under the present SLP.
Issues and Decision
Whether the appellant, who is not a party to the settlement between Respondent No.2 and Respondent No.3, has locus in the proceedings before this Court.
Respondent No. 1challenged the locus of the Appellant in instituting the present appeal contending that the Appellant being a third-party creditor is not to be heard on a settlement entered between the operational creditor and the corporate debtor, as Appellant can adopt other remedies for their claims. The Respondent No. 1 also highlighted that despite the liberty to the Appellant to revive Section 7 Application, the Appellant has attempted to ‘piggyback’ on the Section 9 NCLT order, due to its weak case on the maintainability of Section 7 and is indulging in Forum Shopping.
The Supreme Court taking note of scheme of the IBC and its intention to eliminate parallel proceedings and collective distribution, opined that the admission of CIRP alters the nature of the stakeholders involved, making them ‘necessary’ in adjudications subsequent to original petition, thereby changing the nature of the proceedings from being in personam to in rem [¶ 42].
The Supreme Court taking note of appeal provisions in Section 61 and Section 62 of the IBC and the phrase “any person aggrieved” observed that it “indicates that there is no rigid locus requirement to institute an appeal challenging an order of the NCLT, before the NCLAT or an order of the NCLAT, before this Court. Any person who is aggrieved by the order may institute an appeal, and nothing in the provision restricts the phrase to only the applicant creditor and the corporate debtor.” [¶ 75]
Observing the above, the Hon’ble Supreme Court held that the Appellant is not an unrelated party in the dispute and falls within the ambit of “any person aggrieved” and thus has the locus standi to institute the present appeal.
Whether the NCLAT erred in invoking its inherent powers under Rule 11 of the NCLAT Rules 2016 in the presence of a prescribed procedure for withdrawal of CIRP and settlement of claims between parties.
The Appellantargued that the NCLAT erred in exercising its discretionary powers under Rule 11 of NCLAT Rules, disregarding the established under Section 12A of IBC and Regulation 30A of the CIRP Regulations, 2016 (“Regulations”).
Respondent No. 1 contended that even after insertion of Section 12A, the NCLAT has invoked its inherent power under Rule 11 to allow withdrawal of CIRP in several other judgements. Respondent No. 2 contended that Regulation 30A is not applicable as the settlement is made using personal funds and not the funds of Corporate Debtor. Moreover, Regulation 30A is directory as no consequence on non-compliance is stipulated and the NCLT is not required to adjudicate the factum of the settlement.
The Hon’ble Supreme Court opined that Rule 8 of the NCLT Rules, Section 12A of the IBC readwith Rule 30A of the CIRP Regulations is an exhaustive procedure for withdrawal of an admitted application, when Committee of Creditors (“CoC”) has not been constituted [¶ 63]. Hence the invocation of Rule 11 of NCLAT Rules was not warranted to subvert legal provisions providing for exhaustive procedure. The Supreme Court further observed that NCLAT did not provide reasoning for invoking its inherent powers under Rule 11; hence, “The correct course of action by the NCLAT would have been to stay the constitution of the CoC and direct the parties to follow the course of action in Section 12A read with Regulation 30A of the CIRP Regulations 2016”. [¶ 80]
On the contention of Respondent No. 2 that Regulation 30A is a mere technicality and could be dispensed with, the Supreme Court held that the provision to move application through IRP is necessary, as insolvency proceedings become collective in nature and the interests of former management stand dissociated from those of the corporate debtor. Further, the NCLT is not to act as a post office and is required to undertake an adjudicatory exercise while considering withdrawal, after hearing all concerned parties, and cannot mechanically approve such applications [¶ 66].
Without prejudice to the above, whether the NCLAT adequately addressed the objections raised by the appellant, while exercising its discretionary power under Rule 11 of the NCLAT Rules 2016.
The Appellant argued that the NCLAT failed to consider concerns that were raised regarding ongoing proceedings in Delaware and inability of the Corporate Debtor in meeting its financial obligations owing to its significant drop in valuation. The Appellant further contended that setting aside the CIRP merely because one of the creditors has recovered its dues by way of a settlement agreement, runs contrary to the settled position that the IBC cannot be used as an individual recovery mechanism.
The Supreme Court concluded that in spite of the Appellant raising detailed objections before the NCLAT regarding the source of funds of Mr. Riju Raveendran and concerns regarding round tripping, the NCLAT summarily dismissed these concerns relying solely on the affidavit of Mr. Riju Raveendran.
Holding the above, the Supreme Court set aside the impugned judgement of the NCLAT.
Significance
This judgment decisively affirms that once CIRP is admitted, insolvency proceedings assume an in rem character, granting locus standi to all aggrieved stakeholders, including third-party creditors. It curtails the misuse of inherent powers under Rule 11 by holding that statutory mechanisms under Section 12A and Regulation 30A constitute the exclusive route for withdrawal of CIRP. The ruling reinforces that the IBC is a collective resolution framework, not a tool for individual debt recovery through private settlements.
Case Details
Citation Codes: 2024 INSC 811
Date of Judgement: 23 October 2024
Court: Supreme Court of India
Coram CJI Dr. Dhananjaya Y Chandrachud; Justice J B Pardiwala; Justice Manoj Misra
Author(s)
Riffat Soin
Student at UILS, Panjab University