The Supreme Court of India examined the legality of a settlement approved by the National Company Law Appellate Tribunal (NCLAT), which was challenged by the appellant, GLAS Trust Company LLC, a financial creditor. The case primarily revolves around whether NCLAT was correct in invoking its inherent powers under Rule 11 of the NCLAT Rules to allow a settlement between Byju Raveendran and the Board of Control for Cricket in India (BCCI) before the formation of the Committee of Creditors (CoC). The appellant objected, citing concerns over the source of the funds used for the settlement and alleged fraudulent financial dealings. The judgment explored the tension between settlements facilitated through NCLAT’s inherent powers and the statutory process outlined in Section 12A of the Insolvency and Bankruptcy Code (IBC).

1. Legal Conflict: The core legal conflict arises from whether NCLAT correctly used its inherent powers to approve a settlement prior to the constitution of the CoC, bypassing Section 12A of the IBC, which governs such withdrawals. The appellant contended that using inherent powers without the due CoC process prejudiced the financial creditors.

2. Appellant's Objections: GLAS Trust Company LLC objected to the settlement, raising concerns that the funds used might have been sourced through fraudulent means, as there was an ongoing investigation in the Delaware Court involving wire transfers made by Byju's Alpha Inc., the debtor’s subsidiary. They claimed the settlement funds might be linked to these transfers.

3. NCLAT's Approach: NCLAT approved the settlement based on affidavits stating that the funds used were personally sourced by Riju Raveendran, unrelated to the funds under the Delaware investigation. NCLAT invoked Rule 11, permitting a settlement before CoC formation.

4. Supreme Court Judgment: The Supreme Court upheld the invocation of Rule 11 but emphasized the need for such settlements to be thoroughly scrutinized to avoid prejudicing other creditors. The Court focused on balancing the interests of all stakeholders in insolvency cases, reaffirming the IBC's objective of collective creditor resolution.

1. Background:

• Parties Involved: GLAS Trust Company LLC (Appellant), Byju Raveendran and others (Respondents), with Byju's being the Corporate Debtor.
• Insolvency Proceedings: Initiated under Section 9 of the IBC by BCCI due to a debt owed by Byju's subsidiary.

2. Proceedings in Delaware Court:

• A separate legal action was ongoing in the Delaware Bankruptcy Court, where GLAS Trust Company LLC had initiated proceedings involving fraudulent transfers by Byju’s Alpha Inc., raising questions about the source of the settlement funds in India.

3. NCLAT's Use of Inherent Powers:

• NCLAT invoked Rule 11 to approve a settlement offer made by Riju Raveendran before CoC formation, settling the operational debt owed to BCCI.

4. Appellant’s Objection:

• GLAS Trust Company LLC objected, questioning the source of funds for the settlement and arguing that the settlement constituted preferential treatment for an operational creditor, potentially prejudicing financial creditors like themselves.

5. Supreme Court's Analysis:

• The Court reviewed the principles underlying the IBC, focusing on whether NCLAT properly exercised its discretion under Rule 11 in approving the settlement.
• It noted the lack of clarity on the source of funds but allowed for the settlement while ensuring that the rights of financial creditors were protected, particularly allowing GLAS Trust Company to revive its Section 7 petition if necessary.

Key Legal Sections Discussed:

1. Section 9, Insolvency and Bankruptcy Code (IBC): Governs applications by operational creditors.
2. Section 7, IBC: Governs applications by financial creditors.
3. Rule 11, NCLAT Rules, 2016: Grants inherent powers to the Tribunal to make necessary orders to meet the ends of justice.
4. Section 12A, IBC: Deals with the withdrawal of admitted insolvency applications with the approval of 90% of CoC members.

Ratio:

The Court affirmed that while NCLAT may exercise inherent powers under Rule 11 to approve settlements before CoC formation, it must carefully consider the interests of all creditors, ensuring that financial creditors are not prejudiced by such settlements. The judgment underscores that insolvency proceedings should not become tools for individual creditor recovery but must aim at collective creditor benefit.