Edtech firm Byju’s insolvency proceedings have caused much concern among investors, creditors, employees, and parents of students. Here is what the insolvency process involves, including in terms of rights and obligations.
The National Company Law Tribunal (NCLT), Bengaluru, has directed the initiation of Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code 2016 against Think and Learn Pvt. Ltd., the parent company that owns Byju’s.
The NCLT further put Byju’s under moratorium and appointed an interim insolvency resolution professional (IRP) to take charge of the company.
The IRP published a public announcement inviting the creditors as well as those with debts, pending salaries, or fees paid for ongoing services to file their claims with proof by 31 July.
Byju’s filed a petition in the Karnataka High Court challenging the NCLT order. However, it withdrew the petition and has since filed a statutory appeal before the National Company Law Appellate Tribunal (NCLAT), Chennai, which has been listed for hearing on 29 July.
Although Byju’s erstwhile management has the right to challenge the NCLT’s 16 July order, unless the NCLAT stays it, the company remains under CIRP. The resolution professional will collate claims of various creditors and form the Committee of Creditors (COC), which usually comprises financial creditors such as banks and other lenders
If Byju’s former management and original petitioner (BCCI in this case) agree to settle the matter before the formation of the COC, then the CIRP can be closed. However, if no settlement is reached, then CIRP can only be closed with the consent of 90 per cent of the committee.
How it impacts creditors
The IBC was introduced in 2016 to deal, inter alia, with companies that defaulted on their debts. Under the IBC, if a default is committed, with the minimum default amount being Rs 1 crore, then on the application of the creditors or the company itself, the firm is put through CIRP. This is a process to resolve the debts of the company. Under the law, the insolvency process, including challenges by any parties, must be completed within 330 days, although this timeline is often breached.
When the process of CIRP commences, the management of the company is taken out of the hands of the former owners/directors and handed over to the IRP. The latter is also responsible for inviting and collating claims from creditors of the company and forming the Committee of Creditors (COC). The COC consists of the financial creditors of the company who step in to make all operational decisions and decide on the future of the company. This means that from the date of the commencement of CIRP, the erstwhile owners and management cease to have any control over the company or access to its assets.
The purpose of forming the COC is to resolve the debts of the company. To that effect, plans are invited from prospective investors to effectively buy the company as a running concern. During this time, a moratorium is in effect, which means all existing cases are put on hold and new cases cannot be filed against the company.
A plan filed by prospective investors/buyers may have drastic implications for creditors. If accepted by the COC and NCLT, subject to some exceptions and safeguards, the plan can, in the extreme, even extinguish claims of creditors such as students and employees. However, the plan, at times, does provide for some payout to creditors. But here’s the catch—even in such cases, only those creditors that had filed their claims would be entitled to such payouts. Creditors who failed to act in time get wiped out. These people would then have no recourse against the company and cannot recover their dues from the old management or the new buyers.
On the contrary, if the resolution process fails, the company will be liquidated and creditors will be paid out from the sale of the assets of the company in accordance with the waterfall mechanism that is provided under the IBC, where inter alia, secured financial creditors are paid before other creditors. If the creditors fail to file their claims, they are not entitled to receive any money from the sale of the assets of the company.
What a creditor with a claim must do
In Byju’s case, the IRP has published notices for creditors to file their claims by 31 July, which must be done if the NCLAT Chennai does not grant a stay on NCLT Bengaluru’s order to initiate CIRP. The COC will be formed based on the claims that are filed by that date.
Creditors can file claims up to 90 days from the start of the CIRP or from the date of the request for resolution plans, whichever is later. If the request date is beyond 90 days, the creditor must provide a valid reason for the delay.
For Byju’s, the 90-day period ends on 14 October. However, filing claims at the earliest is recommended for proper handling by the IRP.
Details on where to file claims are in the public announcement on the IBBI website. It is advisable to file a claim after taking legal advice. However, the claim can be filed without a lawyer as well.
As mentioned, the non-filing of a claim by creditors can have fatal consequences. Any potential payout from a successful CIRP may be denied to a claimant in such cases.
It is crucial for creditors to follow up with the IRP regarding the status of their claims and ensure they are duly reflected in the list of creditors published by the IRP. If the claim or any part of it is not accepted by the IRP, the only recourse is to file an application before the relevant NCLT. If applications are delayed and not filed by the time of approval of the resolution plan, the creditor will again be left without recourse.
Time to act
The bankruptcy proceedings against Byju’s have significant implications for all stakeholders, including employees, students, and other creditors. The CIRP process necessitates swift and informed action by creditors to secure their claims and safeguard their interests. Creditors must adhere to the prescribed timelines to recover their dues. Failure to do so could result in losing any potential payouts from the resolution plan or the liquidation process.
The rules governing the CIRP process are unforgiving to those who “sleep over their rights,” whether it is the company itself or its creditors.
The author is an Advocate-on-Record before the Supreme Court of India. He practices before various Courts and Tribunals across the Country. He holds a Master of Laws from The London School of Economics & Political Science. He can be reached at Ramchandramadan@gmail.com. Views are personal.
(Edited by Humra Laeeq)