In most cases a company files Chapter 11 when it realizes it can't pay all its bills but believes it can find new funding or make deals with its creditors if it gains some breathing room.
When that happens, the indebted brand fills out the needed forms and asks the court to protect it against lawsuits by its creditors in return for the court's oversight of its operations.
Once that happens, the company then negotiates with its creditors, who may take equity, forgive debt, or even take over the company. In some cases, deals can't be reached and the court proceedings end with the company liquidating.
Related: Key healthcare company files for Chapter 11 bankruptcy
A voluntary Chapter 11 bankruptcy essentially gives the company and its creditors a chance to figure out the best solution. Sometimes that means continued operations; in other cases, an asset sale returns the most value to creditors.
An involuntary Chapter 11 bankruptcy filing is much rarer, but in some situations creditors will force a debtor to file for bankruptcy involuntarily.
"This involves creditors filing the petition for bankruptcy on behalf of the debtor," Justia reports. "An involuntary bankruptcy involves a business debtor more often than an individual debtor, although sometimes a wealthy individual may be targeted. This is because a creditor will find it worthwhile to go through this process only if the debtor has meaningful assets from which to collect."
The creditors of Byju's, a company that owns multiple children's-education brands, have taken this rare step and have filed for Chapter 11 bankruptcy on behalf of the company.
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Byju's forced into involuntary Chapter 11
While you may not know the Byju name, the company owns a number of popular education brands including Epic, Neuron Fuel, and Tangible Play. Technically, Epic is no longer under Byju's brand as it was taken over by one of the creditors involved in the involuntary Chapter 11 bankruptcy filing in March 2023.
"Byju's is an innovative global edtech leader at the intersection of content, media, and technology," the company says on its website. "From our beginnings in one classroom in Bengaluru, India, Byju's today has grown its presence to 100+ countries across the world.
"As the trusted learning partner of 150+ million students, we bring the future of education to the present through technology-enabled, personalized, and engaging learning journeys."
The company's lenders and creditors "seek to protect and maximize value of Byju’s U.S.-based operating entities for the benefit of all stakeholders and prevent further diversions of assets and corporate mismanagement," according to a news release.
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Byju's creditors made the filing after the company had "numerous events of default on the term loan B since November 2022 and defiance of court orders to disclose the location of $533 million in fraudulently transferred loan proceeds from Byju’s Alpha."
The creditors do not intend to disrupt operations at Epic, Neuron Fuel and Tangible Play.
More details on Byju's involuntary bankruptcy
The involuntary Chapter 11 bankruptcy was filed in U.S. Bankruptcy Court for the District of Delaware by a group of lenders in relation to $1.4 billion in term loans. The group that initiated the filing includes certain holders of the term loans and Glas Trust Co., as administrative agent and collateral agent of the term loans.
"Since Byju’s began to default on its term loan obligations shortly after we provided Byju’s Alpha with financing in 2021, we have made every effort possible to work productively and collaboratively to help BYJU’s cure its multiple defaults," the lenders said in a press release. "However, it is clear that BYJU’s management has no intention or ability to honor its obligations under the term loans."
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The filing parties also made a bold allegation against Byju's leaders.
"Indeed, Byju’s founders, who also serve as the three directors of the overall enterprise — Byju Raveendran, Riju Ravindran, and Divya Gokulnath — unlawfully diverted $533 million in loan proceeds, the whereabouts of which are still unknown," the release stated.
The creditors want the affected brands to survive.
“Among other important goals, we have taken this action to protect and preserve the value of Epic, Neuron Fuel, and Tangible Play," the creditors said. "We remain committed to their success and stand ready to infuse the capital necessary to reorganize the businesses.
"Under supervision of the court, the lenders hope that Epic, Neuron Fuel, and Tangible Play will benefit from much-needed oversight while a plan is developed to maximize the value of these assets for the benefit of all stakeholders.”
TheStreet attempted to contact Byju's for comment via the email listed on its website under media inquiries. That email bounced.
