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Navya Bassi and Ekta Gupta are fourth year students at National Law University Odisha
The Indian corporate structure is known for its fierce competition giving opportunities to only those who are the most resilient in the market. The advent of the Insolvency and Bankruptcy Code (“IBC”) in 2016, has further intensified the challenges making it more difficult for companies to survive.
In a recent event, the Indian Education Technology Company (“EdTech”), Byju’s, underwent the National Company Law Tribunal’s (“NCLT”) scrutiny as the Corporate Insolvency Resolution Process (“CIRP”) had been initiated against its parent company i.e., Think and Learn Private Limited (“Parent Company”). This action was primarily triggered as Byju’s failed to pay the sponsorship dues to the Board of Control for Cricket in India (“BCCI”) for using its advertising and marketing-related services (“Sservices”) amounting to Rs. 158.9 crores approximately.
In response, Byju’s had moved to the National Company Law Appellate Tribunal (“NCLAT”) challenging the initiation of CIRP proceedings contending that the company is still solvent and can repay the debt if given reasonable time. Though a settlement has been reached among the parties, it is a critical case to examine as it brings forth the inadequacies in the current legislation. To draw a holistic picture, there needs to be clear understanding of the initiation of the CIRP.
Invoking CIRP: The Creditors’ Recourse
Under IBC, there are two categories of creditors- financial and operational creditors who can trigger the CIRP procedure. Financial creditors are the conventional lenders who provide funds for the company giving rise to a financial debt. On the other hand, operational creditors are the providers of goods or services necessary for the day-to-day functioning of the company comprising of the operational debt.
Concerning Byju’s, BCCI has approached the NCLT as an operational creditor under Section 9 of the IBC for providing services to it. The aforementioned section mandates the operational creditor to send a demand notice to the corporate debtor for payment of dues. In case the dues are not paid within 10 days, the person can approach the Adjudicating Authority (“AA”) for commencing of CIRP process attesting the proof of non-payment which can be in form of a copy of the contract, invoices, record from information utility, etc. If the AA is satisfied that a default has occurred, the application gets admitted.
In the present case, the NCLT dealt with many questions such as the liability of payment of a debt, whether it is a financial or operational debt and the existence of an agreement between the parties. However, it did not assess the financial condition of the company which is the most crucial factor for repayment of a debt. Thus, the initiation of CIRP is rather convenient for the creditor but can lead to the demise of the debtor company which we will be expounding upon hereafter.
Navigating the Grey Areas: Shortcomings in the IBC
According to the Report of the Insolvency Committee on the ‘English Insolvency Law’, the insolvency of a corporate entity is a matter of significant public importance as it contains the interests of various stakeholders. In Byju’s case also, thousands of employees were at risk of losing their jobs if the company had gone under the rug. In India, IBC being the guiding framework transcends beyond mere financial restructuring but the current legislation faces lacunae which need to be resolved for the effective implementation of the law.
To begin with, the IBC was conceptualized with the objective of “maximisation of value of assets of the corporate person and balancing the interests of all the stakeholders.” This was also reiterated in Binani Industries, where the NCLAT held that the balance can be achieved only if the resolution is able to maximise the value of assets of the corporate debtor which cannot be attained by giving benefit to one set of stakeholders unduly at the cost of another. This shows that equitable treatment among different stakeholders like corporate debtor, creditor, employees, etc. is a necessary element for achieving the objectives of the IBC.
However, the current regime has tilted in favour of the creditors. For instance, in India Resurgence Arc Private Limited case, the Supreme Court (“SC”) held that the approval of the resolution plan is within the commercial wisdom of the Committee of Creditors (“COC”). Even for the withdrawal of the CIRP application under Section 12A of the IBC, the assent of ninety per cent of the COC is mandatory. This entrusts disproportionate trust in the COC which is not the intended aim of the legislation.
Further, the CIRP procedure can be initiated readily by the creditors by showcasing a mere default in payment which causes inconsistencies in the decision of the courts at each level. For instance, in the case ofChitra Sharma, the entire CIRP for the corporate debtor was restarted by the SC and in Gayatri Polyrub Private Limited, NCLAT put a halt to the liquidation by ordering a relook at the revised bids of the company. This clearly indicates that due to lack of assessment at the earlier stage, the matter gets prolonged and till the time it gets reversed, the company tends to lose its business and its working capital starts drying up as well as their interpersonal relationships get strained.
In all these scenarios, the corporate debtor is rendered toothless. To resolve this, we can incorporate lessons from USA where the country has a more comprehensive framework for the debtor’s self-revival under Section 706(a) of the US Code, 1926, Title 11, in which an absolute right is granted to the debtor to convert their insolvency into a revival plan, enabling the debtor to repay his debts instead of a long- drawn battle in the court. In India, the same process is a dual-layered structure involving consultation with Resolution Professional and the court’s discretionary power which makes it impenetrable for the debtor.
Akin to the USA model, an absolute right can also be incorporated in the Indian structure or the company can be allowed to present a repayment plan before the beginning of the CIRP procedure as opposed to the present situation where this plan can only be presented after the CIRP has been started and a ‘cooling-off’ period can be granted during which the debtor can repay its debts if it claims to be solvent. To prevent its misuse, there can be the imposition of a higher penalty in case the claim turns out to be fallacious. This will ensure a better assessment at the commencement of the dispute by considering all the relevant factors such as assets, liabilities, revenue, etc. necessary for evaluating the financial standing of the company and will also aid in providing equal opportunities to all the parties and not just the creditor.
Another issue highlighted by the Report of the Insolvency Law Committee, 2020, is that there should be a minimum threshold number of creditors for initiation of the CIRP as sometimes a single creditor can put undue pressure on the corporate debtor which might be the result of a minor dispute. However, this option may not be the best recourse as sometimes, a single creditor may be owed an enormous amount of debt. So, not allowing them to claim their dues will be prejudicial to their interest. Instead, the admissibility should depend upon the proportionality between the claim and the company’s assets so that the company is not put to an unjust halt.
Lastly, this Creditor-in-Control (“CIC”) model also gives rise to continuation bias which means that more often than not, a company ends up getting liquidated instead of its revival. It is believed that taking away control from the hands of defaulting corporate debtors and placing it with the CIC will lead to an exponential increase in returns. However, this proves to be a false notion as creditors themselves take up to 75% haircuts on their loans because the entire CIRP process takes a toll on the business and its management. Thus, it is fatal to all the parties involved in the process.
To address this issue, the suspended management should not be completely ousted from the company and should be a part of the activities required for its regular functioning by taking insights from UK wherein though an administrator is appointed for oversight of the company’s affairs, the daily operations of the company stay in the hands of the directors of the company. This is because the management has expertise in the business and its core nature. For instance, Byju’s being an edtech company has a different modus operandi which requires a distinct skillset of strategic sales. Maintaining the status quo in management will ensure that the business operates smoothly and creditors also get a fair return on their claims. Integrating these suggestions can make IBC more effective and equitable for all the stakeholders, realising its primary objectives.
Concluding Remarks
As law is considered transitory in nature, it is imperative that IBC undergoes revisions for an egalitarian approach towards all the stakeholders which will allow for efficient handling of cases resulting in revival of the companies.
Coming to Byju’s Case, BCCI was an operational creditor which had a diminished probability of recovering a substantial amount of its claim as under IBC, the disbursal of proceeds from the company’s liquidated assets is done through a waterfall mechanism under Section 53(1) wherein the creditors are placed hierarchically for receiving their dues. Notably, the operational creditors are placed at the bottom of that hierarchy, making their condition even more precarious.
On the other hand, Byju’s entire business was also at stake, including the reputation that it had nurtured through these years. Thus, the viable solution for both the parties was to reach a settlement as it rightfully did rather than dragging this matter indefinitely in the court. Nevertheless, this is a provisional measure which can be adopted until the legislation’s flaws are cured.
