Byju’s insolvency: What happens to the company now, how ex-employees can recover dues—and more

The NCLT also dismissed Byju's request to refer the dispute to arbitration. Furthermore, no assets of Byju's can be transferred while the company is under the corporate insolvency resolution process (CIRP). The Insolvency and Bankruptcy Code (IBC) that governs all such cases also prohibits the institution of any suits or pursuing any existing cases against Byju's.

Fall from grace

When the pandemic struck in 2020 and many tech startups saw their cash flows dwindle to zero overnight and fresh venture funding dried up for a few months, there was a sudden spike in the demand of mezzanine debt, a sort of debt-cum-equity financing.

There were always concerns about what would happen if large digital-oriented companies went bankrupt. Startups that build tech products such as e-commerce apps or websites rarely have any fixed assets. Most of the time, there is no intellectual property, or the IP is not valuable enough if it couldn’t help the company stay afloat.

The hypothesis was that if debtors came calling, they would essentially find three things: the brand, the platform’s database of users and usage patterns, and the app or website’s codebase.

Would these be valuable enough? 

Such doubts were sidelined as the pandemic ultimately led to a rush of digital adoption and mammoth venture fundraises when more than 50 tech startups became unicorns within a space of two years.

But those tricky questions could make a comeback over the next  few months' moratorium  that the embattled edtech company—once India’s hottest startup with a $22-billion valuation—has entered in the insolvency process. In this period, all debts and interest arising from them are frozen.

What happens to other creditors if Byju’s settles with BCCI out of court?

While sources claimed that the company will explore the possibility of an out-of-court settlement with the BCCI, the case does not just pertain to just BCCI as a creditor. Once admitted to insolvency in one case, it is considered to be admitted to insolvency with respect to all of its creditors, both financial and operational.

“Merely because BCCI has filed the petition which has gotten Byju’s into the insolvency process does not automatically entitle it to have any priority over other creditors. At the stage of process, the disbursal of funds to the creditors is governed by the provisions of the resolution plan, if any, submitted to and approved by the CoC. Ordinarily, the resolution plan envisages disbursement of funds to creditors in several tranches whereby outstanding CIRP cost is paid in priority,” said Tabrez Malawat, partner, The Guild Advocates and Associate Counsels.

While these aspects pertain to what the NCLT said about Byju’s, there are larger questions in play revolving around its employees and creditors as well.

What does insolvency mean for Byju’s management?

Byju’s will no longer be run by its earlier management, which was led by its founder Byju Raveendran. The day-to-day affairs of the company will vest with the Srivastava, the IRP, till the lenders hold a meeting to form a CoC.

The CoC will now run the company through the IRP for a maximum period of 330 days. If the CoC is able to sell the company to an interested party through a bidding process, the company could be revived. However, if the CoC fails to find a buyer in the stipulated 330 days, the NCLT will order the company to be liquidated.

The voting power in the CoC hinges on the lender’s financial exposure to the company. There are two kinds of creditors under the IBC: operational creditors (OCs), and financial creditors (FCs). OCs are those who provide goods and services to a business, but have not been paid; FCs are those who lent money to the company.

While the IBC enables both OCs and FCs to initiate an insolvency resolution process upon a minimum default of Rs 1 crore, the CoC formed after the admission of the case comprises only FCs. The commercial wisdom of the CoC is held to be paramount and it will continue to run the company as a going concern (a company that is capable of being run) through the resolution professional.

“As per Section 30(2) read with Section 53(1) of the IBC, the COC members, who are usually the secured financial creditors, are paid in priority over other creditors. Therefore, unless the BCCI has any secured financial debt, it will not take priority over the secured financial creditors,” said Shashank Agarwal, an advocate at the Delhi High Court.

Once the CoC is formed, it can choose to replace the IRP. The RP will then be responsible for the affairs of the company and will also report to the NCLT from time to time on the progress. Meanwhile, the CoC will have to come up with a plan to revive the company and/or sell it to an entity that will run it and return their dues over a period of time. This is called the resolution plan.

According to the IBC, a resolution process must be completed in 180 days and the NCLT has the powers to extend the period to a maximum of 330 days. If there is no resolution to a company's insolvency even at the end of 330 days, the NCLT has to order liquidation of the company.  The 330-day period for the company began on July 16.

What happens to the current employees?

The CoC will take a call on the company’s existing workforce depending on how they want to run the company over the next 330 days. The CoC in its commercial wisdom may choose to retain all current employees or terminate their services, depending on how they want to run the company. The employees' fate is dependent on the current revenues and the reserves available with the company.

In the recent past, grounded airline Go First retained 2,278 employees on its rolls. However, the company’s resolution professional in a written affidavit in December 2023 stated that none of the employees were reporting to work over non-payment of salaries, which in turn was due to non-availability of funds.

However, Byju’s case is expected to be different as Go First was grounded and, hence, had no revenue streams, while Byju’s is still making sales and earning revenue.

Can former employees recover dues?

Amidst shrinking revenues, the earlier management of Byju’s had laid off thousands of its employees. However, the former employees recently complained to the Karnataka labour commissioner that their full and final settlement was yet to be made. The commissioner told the media that 160 to 200 employees had approached the labour department, with total outstanding dues amounting to around Rs 4.5 crore. With the company going now under the insolvency resolution process, the ex-employees may have to approach the resolution professional, lawyers said.

“Any form of claim prior to admission of insolvency resolution process, whether of tax dues or salaries or invoice payments, would now have to be filed with the resolution professional of the company,” said Vidhan Vyas, founder, Vyas Legal.

While the IBC largely focuses on restructuring and resolution of a company, it provides for an order of importance as per which dues are to be settled. Agarwal said, “As per Section 53(1) of IBC, the first priority is given towards the costs incurred by the  resolution professional and/or by the liquidator in running the CIRP/liquidation process. Next in line are the workmen dues for  24 months  (prior to CIRP) and debts owed to secured creditors. Thereafter come the employee dues for the period of 12 months (prior to CIRP). Then come the financial debts of unsecured creditors.”

Thus, the dues to employees are high in priority under the IBC.

What happens to the tax dues of Byju’s?

On the day Byju’s was admitted to the insolvency resolution process, Moneycontrol reported that its current and former employees were in for an unwelcome surprise while filing their income tax returns as the company has allegedly not remitted the tax deducted at source (TDS) to the government since as early as July last year.

This makes the company liable to pay the TDS dues to the government. However, the larger question here is will the erstwhile management face action for this or will the resolution professional and CoC, which is now incharge of the company's affairs, be made to pay the same. 

“Once the insolvency process is initiated the liability for the non-payment of TDS lies on the suspended management, as the same is a fault of the management prior to initiation of insolvency,” said Amir Baavani, founder of law firm AB Legal.

However, if the government plans on recovering the dues from the resolution professional or the CoC, it cannot initiate any litigation owing to the moratorium. Thus, the government will have to file its claims with the resolution professional if it intends to recover the dues.

“Government entities can be a part of the insolvency proceedings by filing their claim with the IRP/RP; however, they cannot be the part of the CoC, as CoC only comprises the financial creditors,” Bavani said.

On the priority government dues get under IBC, Malawat said, “The dues of the government would become part of the operational debt which would be treated in terms of the resolution plan if applicable, or as per the waterfall mechanism under Section 53 of the IBC which puts such dues on lower side of it—rank 5 in the priority list.”