Delaware Supreme Court Rules BYJU’S Defaulted On $1.2 Bn Loan

In a major blow to BYJU’S, the Delaware Supreme Court (SC) has ruled in favour of US-based creditors of the troubled edtech startup. 

With this, the Delaware’s highest court of appeal upheld the Court of Chancery’s earlier ruling that held that BYJU’S defaulted on a $1.2 Bn term loan B (TLB). 

“We find it difficult to see how judicial economy and finality can square with requiring the parties to retry the case, merely because appellants (BYJU’S) failed to address an issue which they now claim is vital to this case… After examining the record, we cannot conclude that this threshold has been met,” read the judgement by Justice Karen Valihura.

The Delaware SC’s order allows US-based lenders of BYJU’S to demand full repayment of the loan, take control of its US-based entity BYJU’S Alpha and appoint Timothy Pohl, who was appointed by Alpha as its CEO, as its sole director.

At the heart of the matter is the TLB availed by BYJU’S via a credit agreement in November 2021. As many as 37 financial institutions bought the loan under the agreement that they lenders would be free to enforce their rights if the edtech startup defaulted on loan payments. 

In turn, BYJU’S parent Think & Learn Private Limited’s US-based subsidiary BYJU’S Alpha pledged 100% of its equity as collateral for the term loans. Last year, the troubled edtech startup defaulted on payments, making the consortium of lenders, under Glas Trust, eligible for enforcing its remedies in accordance with the credit agreement. 

Quickly afterwards, Glas Trust filed a plea before the Delaware Court of Chancery and sought a declaration that their actions were valid. Thereafter in November last year, the Court delivered a ruling in favour of the consortium of lenders and agreed with Glas Trust’s interpretation of the credit agreement covenants and determined its actions, which included talking over BYJU’S Alpha, to be valid. 

Thereafter, the embattled edtech major filed an appeal before the Delaware SC, arguing that the Court of Chancery’s ruling should have been dismissed on account of a pending case filed by BYJU’S against Glas Trust before a court in New York.

On Monday, the SC dismissed the appeal and observed that the edtech startup waived its forum selection clause by not arguing it before the Court of Chancery. 

Simply put, a forum selection clause is a provision that allows parties to agree on a specific court to resolve any disputes related to a contract.

“… Even if we assume Aappellees were not unfairly surprised by the forum selection issue, appellants’ failure to join the issue prevented the issue from being determined by the trial court. Appellees and the trial court took the time, effort, and expense to litigate this case through extensive briefing and a trial. We find it difficult to see how judicial economy and finality can square with requiring the parties to retry the case, merely because appellants failed to address an issue which they now claim is vital to this case,” read the September 23 ruling by Justice Karen Valihura.

Responding to the court order, BYJU’S said it has no bearing on the ongoing legal proceedings in India, where Glas Trust has filed a plea with the Supreme Court challenging its removal from the committee of creditors. It has also sought ouster of BYJU’S interim resolution professional Pankaj Srivastava.

BYJU’S said that the Delaware Supreme Court order only upheld the lower court’s ruling on the validity of Pohl as the director of the edtech’s US-based entity BYJU’S Alpha Inc. 

“BYJU’S contractual right to disqualify certain aggressive lenders who deal in distressed debt remains intact. The disqualification of lenders holding over 60% of the TLB remains in effect, with no court decision on the contrary,” it said.

The latest blow comes at a time when the edtech major is trying to douse fires on multiple fronts. The company is facing a worsening cash crunch, insolvency proceedings, multiple legal cases and mass layoffs. 

Making matters worse is the mounting losses and rising expenses of the edtech major. BYJU’S reported a net loss of INR 8,245.2 Cr in the fiscal year 2021-22 (FY22), up 81% from INR 4,564.3 Cr in FY21.

Meanwhile, operating revenues jumped 120% year-on-year (YoY) to INR 5,014.6 Cr during the year under review.

Update: The story has been edited to include BYJU’S comments on the US court ruling.