Byju's faces a $1.2 billion loan default fallout as lenders assume control of key units

In a significant development for Byju's, once considered one of India's premier tech startups, lenders have formally declared a default on a $1.2 billion loan as they take control of a vital unit of the education technology provider, according to a ruling by Delaware Chancery Court Judge Morgan Zurn.

The lenders, including Redwood Investments LLC and Silver Point Capital LP, exercised their contractual rights to replace a board member related to Byju's founder, Byju Raveendran, on the board of Byju’s Alpha. This special-purpose company, established for financing purposes, faced the takeover with the lenders nominating their representative, a decision validated by Judge Zurn.

The court dismissed Byju's complaint that Timothy Pohl, appointed by the lenders to oversee the special-purpose entity, was not legitimately authorized to assume control. Judge Zurn stated that Pohl became the sole director of Byju's Alpha due to the defaults, emphasizing that he was "effectively seated."

The $1.2 billion loan, sought by lenders amidst Byju's financial distress following the decline of the pandemic-driven surge in online learning, has triggered a series of events. Byju's had been actively working on selling assets and addressing the loan issue when government investigators conducted searches at the company's offices earlier this year. This lender dispute has also led some investors to devalue their stakes in Byju's, one of the world's largest ed-tech companies.

Earlier this year, the lenders' legal representative clarified that Byju's Alpha was established as a holding company to protect their rights, with no intention to take over the entire ed-tech giant. Byju's, based in Bengaluru, India, has not immediately responded to requests for comment, but in the past, the privately held company refuted claims of default, deeming them baseless.

A spokesperson for the lender group expressed satisfaction with the Delaware Chancery Court's ruling, asserting that Byju's had repeatedly defaulted on its loan obligations. The lenders, maintaining all available rights, have been pressing for repayment of the loan.

According to Judge Zurn's 2 November 2023, ruling, the loan terms allowed lenders to take control of pledged Byju's Alpha shares in the event of a default. The lenders filed a notice of default in March after a company unit failed to secure the Indian government’s backing as a loan guarantor.

Following the defaults, Pohl, appointed as the sole director of Byju’s Alpha, removed all of the company’s officers and assumed the role of CEO. The lawsuit over the loan was initiated by Glas Trust Co., the trustee for the lenders, which appointed Pohl to oversee Byju's Alpha on behalf of the creditors. Byju's had contested Pohl's fees, but Judge Zurn rejected the argument, noting that his compensation was authorized by a "status quo" order entered to protect Byju's Alpha.