Delaware court upholds lenders' right to take control over Byju’s Alpha in $1.2 billion loan dispute

A Delaware court has affirmed the authority of a consortium of US-based lenders, who has provided a $1.2-billion Term Loan B (TLB) to Byju’s, to assume control over Alpha Inc, a non-operative US subsidiary established by the edtech start-up to receive the TLB.

Byju’s has been entangled in a legal battle with TLB lenders due to delays in repayment. The term loan, availed during the peak of its growth in 2021 to support an aggressive acquisition spree, has been a major pain point for the company even as it fights a plethora of problems including a severe cash crunch. Byju’s spent close to $3 billion across 13 deals between 2020-21, and the TLB was raised primarily to bankroll the acquisitions. As growth slowed down and equity became scarce, the company found itself ensnared in the consequences of its high-risk gamble.

In June, the Bengaluru-based company initiated legal action in the Supreme Court of the State of New York County of New York against the acceleration of the TLB and the disqualification of Redwood in response to what Byju’s claims to be a series of predatory tactics employed by the lenders, led by Redwood. The company said the lenders unlawfully accelerated their account and tried to take control of Byju’s Alpha by appointing their own management at the company.

The case now reaches a critical juncture as Delaware Chancery Court Judge Morgan Zurn has ruled that the lenders correctly cited a default on a $1.2 billion loan, enabling them to take control of the unit and that they were legally entitled to replace Riju Raveendran, brother of Byju Raveendran, from Alpha's board, as per a Bloomberg report.

Zurn dismissed Byju’s complaint alleging the improper authorization of Timothy Pohl, appointed by the lenders to manage the special-purpose entity (SPV), stating that Pohl was deemed the sole director of Byju’s Alpha due to the defaults, as articulated in the judge's 41-page ruling.

According to the report, the loan terms permitted lenders to assume control of pledged Byju’s Alpha shares if a default triggered that right, as outlined in Zurn's ruling on November 2nd. Subsequently, following a failure of the company unit to secure the Indian government’s endorsement as a loan guarantor, the lenders issued a notice of default in March, as revealed in a transcript of the judge's decision announcement. The report further said following his appointment as the sole director of Byju’s Alpha, Pohl removed all of the company’s officers and assumed the role of CEO.

Byju’s has put two of its group firms -- kids-focused digital reading platform Epic and higher education platform Great Learning – on sale to raise immediate funds to meet the repayment obligations towards the term loan. As per recent reports, the company is in advanced talks to sell its Epic for about $400 million to Joffre Capital Ltd.

In September, the company presented a repayment proposal to its lenders, offering to pay back its entire term loan in less than six months. Byju’s has offered to repay $300 million of the distressed debt within three months if the amendment proposal is accepted and the remaining amount in the subsequent three months. The company hopes to gain close to a billion dollars from these divestments.

Byju’s will first divest Epic, the proceeds from which will go towards repaying the first tranche of $300 million if the amendment proposal is accepted.