Inherent powers of the NCLT/NCLAT: Lessons from the Supreme Court ruling in the Byju case.

Introduction

The Supreme Court of India has continually navigated the complex intersection of corporate insolvency and inherent powers of the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 (Code). The recent Supreme Court ruling in Glas Trust Company LLC v. Byju Raveendran & Others (Civil Appeal No. 9986 of 2024 with Special Leave Petition (C) No. 21023 of 2024) (Byju) revisits key aspects of this intersection, and focuses on whether the National Company Law Appellate Tribunal (NCLAT) could utilise its inherent powers under Rule 11 of the NCLAT Rules, 2016 to approve a settlement without involving the Committee of Creditors (CoC). This judgment sheds light on the legislative evolution surrounding the withdrawal of the Corporate Insolvency Resolution Process (CIRP), particularly the intent to protect collective stakeholder interests while balancing the necessity for judicial discretion.

Brief facts

The Board of Control for Cricket in India (BCCI), an operational creditor, filed an Application under Section 9 of the Code before the National Company Law Tribunal (NCLT) against Think & Learn Pvt. Ltd., the Corporate Debtor (Byju’s). The objective of this Application was to initiate CIRP for Byju’s. The Application was admitted by the NCLT, and the CIRP was initiated.

While the Application filed by BCCI was pending, a financial creditor of Byju’s viz. Glas Trust Company LLC (Glas Trust) filed an Application before the NCLT under Section 7 of the Code also seeking initiation of CIRP for Byju’s. The NCLT disposed of this Application under Section 7 since BCCI’s Application had already been admitted, and the CIRP for Byju’s had since commenced. The NCLT granted liberty to Glas Trust to file its claim before the Interim Resolution Professional (IRP).   

The decision of the NCLT to initiate CIRP was challenged before the NCLAT by Mr. Byju Raveendran (former Director of Byju’s) and also by Glas Trust. While Mr. Byju Raveendran challenged the admission of the Section 9 Application and the consequent initiation of CIRP, Glas Trust challenged the disposal of its Section 7 Application. It is to be noted that the CoC had not been constituted by the IRP. while the appeals before the NCLAT were pending.Further, during the pendency of the appeals before the NCLAT, a settlement was proposed purportedly by Mr. Riju Raveendran (another Director of Byju’s), to clear the operational debt of the BCCI in tranches. Finding the settlement to be acceptable, the NCLAT, invoking its inherent powers under Rule 11 of the NCLAT Rules, set aside the order of the NCLT that heralded the commencement of CIRP for Byju’s.

Glas Trust vehemently opposed the approval of the settlement on various grounds, including the fact that the same violated Section 12A of the Code read with the Regulation 30A of the CIRP Regulations, 2016. It was also contended that the interests of all creditors must be considered while accepting a settlement, including Glas Trust, which had a substantial interest in relation to Byju’s.     

Aggrieved by the NCLAT’s Order, Glas Trust approached the Supreme Court.

Submissions before the Supreme Court

Glas Trust, inter alia, argued that the NCLAT should have refrained from exercising its discretionary power under Rule 11 of the NCLAT Rules, 2016 to sanction the settlement when there is a prescribed procedure for withdrawal and settlement under Section 12A of the IBC read with Regulation 30A of the CIRP Regulations 2016. Further, it was argued that the powers under Rule 11 of the NCLAT Rules are discretionary and should not be exercised mechanically in cases where the withdrawal of the application would prejudice other stakeholders.

Byju’s, inter alia, argued that the inherent powers of the NCLAT include the power to pass orders permitting the withdrawal of the CIRP against Byju’s.

View of the Court: inherent powers and their scope under the Code

Having heard the submissions of either side, the Court comprehensively analyses how an Application for CIRP may be withdrawn. It identifies four stages at which the withdrawal can be made:

• The first stage is where the Application is yet to be admitted by the NCLT. In such a case, the proceedings being in personam, the NCLT may allow the withdrawal of such a case based on the settlement between the creditor and the corporate debtor.
• The second stage is where the Application has been admitted by the NCLT, but the CoC has not been constituted At this stage, the application for withdrawal can be made by the IRP and the NCLT can allow a withdrawal only after hearing all stakeholders concerned as the proceedings are now in rem.
• The third stage is where the Application has been admitted by the NCLT and the CoC has been constituted, but the Expression of Interest (EOI) has not been issued. In this scenario, withdrawal may be allowed after following the mandate of Section 12A of the Code read with Regulation 30A of the CIRP Regulations 2016.
• The fourth stage is where the Application is admitted, CoC has been constituted, and EOI has been issued. In this scenario as well, the mandate under Section 12A of the Code will have to be followed along with the added requirement that reasons must be given by the Applicant for withdrawing the Application (Proviso to Regulation 30A (1)).     

Since the present case fell under stage two, it was imperative that the Application for Withdrawal be moved by the IRP before the NCLT and the NCLT hear all stakeholders concerned before allowing the withdrawal. However, this procedure was not followed. The Application for Withdrawal was moved not by the IRP, but by the former director of Byju’s; and it was moved before the NCLAT instead of the NCLT. Furthermore, by invoking its inherent powers under Rule 11 of the NCLAT Rules, the NCLAT allowed the withdrawal without hearing all the stakeholders concerned, including creditors like Glas Trust. In view of these irregularities, the Supreme Court set aside the decision of the NCLAT.

The Takeaway

This ruling emphasises the legislative framework that evolved to streamline insolvency processes and prioritise collective stakeholder resolution over individual settlements. It also brings clarity to Rule 11’s applicability, noting that while tribunals possess inherent powers to prevent abuse or rectify procedural gaps, the application of these powers should align with the statutory framework.

Beyond that, the ruling has significant implications for insolvency law in India. It reaffirms the high threshold for settlements post admission of CIRP, and emphasises that the Code is not a mechanism for debt recovery, but a tool for holistic corporate reorganisation. The judgment discourages the use of inherent powers in a manner that might circumvent the legislative framework, or act in a manner that defeats the rights of stakeholders who have a legitimate interest in the CIRP process. In conclusion, it may be said that this decision strengthens the Code’s goal of achieving fair and balanced creditor resolutions, and further refines the legal landscape for corporate insolvency in India.