SC Clarifies the Limit of NCLAT’s Inherent Powers in IBC Settlements

The Hon’ble Supreme Court of India, in the case of GLAS Trust Company LLC v. BYJU Raveendran & Ors., 2024 SCC OnLine SC 3032, dated October 23, 2024, recently set aside an order by the National Company Law Appellate Tribunal (NCLAT) that allowed ed-tech giant Byju’s (Think and Learn Pvt Ltd) to withdraw from insolvency proceedings following a settlement with the Board of Control for Cricket in India (BCCI). This decision arose from a challenge brought by Glas Trust Company LLC, a U.S.-based lender, which argued that the NCLAT’s approval of the withdrawal did not adhere to the procedures established under the Insolvency and Bankruptcy Code (IBC), 2016.

The insolvency case began in June 2024 when the National Company Law Tribunal (NCLT) in Bengaluru initiated corporate insolvency resolution proceedings against Byju’s due to a ₹158.9 crore default related to a sponsorship agreement with the BCCI. Following the initiation of proceedings, Byju’s reached a settlement agreement with the BCCI. However, instead of following the formal withdrawal process prescribed by the IBC, they submitted their settlement directly to the NCLAT, invoking its inherent jurisdiction under Rule 11 of the NCLAT Rules, 2016. Based on this agreement, the NCLAT, relying on its inherent powers, allowed the withdrawal of the insolvency proceedings. This decision was contested by Glas Trust Company LLC, a lender to Byju’s, which argued that the NCLAT’s actions bypassed the proper statutory procedures.  It argued that the NCLAT approved the settlement without adhering to Section 12A of the IBC or constituting a Committee of Creditors (CoC)

The Hon’ble Supreme Court of India found that the NCLAT exceeded its authority by closing the proceedings under Rule 11. The Court emphasized that, once an insolvency application is admitted, any withdrawal must comply strictly with Section 12A of the IBC and Regulation 30A of the Corporate Insolvency Resolution Process (CIRP) Regulations, 2016, which require that the IRP submit the withdrawal application. The Court highlighted that the NCLAT should not act as a “post office” by merely approving withdrawal applications based on settlements between parties.

The Court further highlighted the necessity of this mechanism, reiterating its crucial role in protecting stakeholder interests and ensuring that the decision reflects the interests of all creditors, thereby safeguarding collective rights and maintaining procedural integrity. The judgment also noted that Regulation 30A of the CIRP Regulations was amended to address various stages of the CIRP process, including situations where the CoC has not yet been constituted. Therefore, the Hon’ble Supreme Court of India held that the ₹158 crore in escrow deposited by the BCCI, per a prior order, must be transferred to the escrow account managed by the CoC, which will decide the next steps in accordance with IBC procedures.