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Conflicting Views Of NCLAT On Rights Of A Decree Holder Under The Insolvency And Bankruptcy Code, 2016

P. Nagesh & Akshay Sharma
23 Aug 2020 4:00 AM GMT
Conflicting Views Of NCLAT On Rights Of A Decree Holder Under The Insolvency And Bankruptcy Code, 2016
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The National Company Law Appellate Tribunal (NCLAT) very recently on 14.8.2020 ,in the case of Sushil Ansal v Ashok Tripathi (Sushil Ansal) seems to dilute the interests of Decree Holders under IBC. The said judgement held that a Decree Holder cannot be classified as a Financial Creditor for the purpose of initiating Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (Code). NCLAT was seized of the question while dealing with a case of an Allottee , who had obtained a decree under RERA, as to "whether a decree holder will be considered as a Financial Creditor under the Code" . Answering the same it held that;

"The answer to the question whether a decree-holder would fall within the definition of 'Financial Creditor' has to be an emphatic 'No' as the amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money and does not fall within the ambit of any of the clauses enumerated under Section 5(8) of the 'I&B Code"

In the past, NCLAT held in the cases of Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment&HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd, where the position regarding the treatment of Decree Holder as a financial creditor was discussed, that Decree Holders in some cases do fall within the definition of a Financial Creditor . However, none of them made an effective ruling on the issue holding that the amount claimed under the decree is an adjudicated amount and not a debt. However, now in the light of Sushil Ansal case, the issue become unclear.

In para 20 of the judgment of Ansals(ibid) , NCLAT has rightly observed that a Decree holder will come under the definition of a creditor as mentioned under Section 3(10) of the code but the same alone will not put him in the category of "Financial Creditor" unless the debt was disbursed against the time value of money or falls within any clause of definition of financial creditor as mentioned under Section 5(8) of the code (Para 20). However, when it gave its finding as a ratio of the case in (para 23) , it took a narrower interpretation. It laid down as a general ratio that a Decree-Holder, though included in the definition of 'Creditor', does not fall within the definition of 'Financial Creditor' and cannot seek initiation of CIRP. The two paragraphs namely Para 20 and Para 23 give two different views..

In our view, the ratio laid down by the NCLAT in Ansals case is primarily inconsistent with well settled previous Judgments of NCLAT as well as that of Supreme Court . We may hasten to add that NCLAT seems to ignore the legislature's intention and judicial pronouncements placing the Decree Holder either as a Finacial Creditor or as an Operational Creditor. NCLAT could not have stretched to the extent of saying that a Decree Holder cannot be considered as a Financial Creditor under any circumstances whatsoever. A single yardstick as prescribed by NCLAT cannot be used to move out all Decree Holders from the class of Financial Creditors.

Earlier, a three judge bench of NCLAT in the case of M/s. Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd. held that;

"...Since the definition of word creditor in I&B Code includes decree holder, therefore if a petition is filed for the realization of decretal amount, then it cannot be dismissed on the ground that applicant should have taken steps for filing execution case in Civil Court"

This particular observation was also noted by the NCLAT in SushilAnsal Case but NCLAT neither decided the correctness of Ugro case(Supra) nor distinguished it. Both the judgments, i.e. Ugro and Sushil Ansalare are by three judge benches and will add more uncertainty to the issue now. Since, NCLAT in Sushil Ansal laid down a general ratio concerning the Decree Holders then it should have ideally decided the correctness of Ugro Case or referred the issue to a Larger Bench.

It is well known by now that CIRP can be initiated based on an arbitral award also. The Supreme Court was dealing with the same issue in the case ofK.Kishan v. Vijay Nirman Company, wherein it held that;

"19. We may hasten to add that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation."

In the abovementioned judgment, the Supreme Court has clearly laid down that CIRP can be initiated based on an arbitration award fulfilling certain conditions. But the Supreme Court did not state that only those Arbitration awards can be considered for filing Petition under IBC if the claim arises out of a debt disbursed against the time value of money Though an arbitral award is not equivalent to a decree but in the case of Sundaram Finance Ltd. v. Abdul Samad, Supreme Court while interpreting Section 36 of the Arbitration& Conciliation Act, 1996 held that;

"The aforesaid provision would show that an award is to be enforced in accordance with the provisions of the said Code in the same manner as if it were a decree. It is, thus, the enforcement mechanism, which is akin to the enforcement of a decree but the award itself is not a decree of the civil court as no decree whatsoever is passed by the civil court. It is the Arbitral Tribunal, which renders an award and the tribunal does not have the power of execution of a decree. For the purposes of execution of a decree the award is to be enforced in the same manner as if it was a decree under the said Code."

Thus, it can be concluded that an Arbitration award or a Decree obtained under any Act like RERA, or through a civil suit, or a Decree obtained before the Debt Recovery Tribunal can be subject matter of initiating proceedings under IBC as long as it is a Financial Debt or an Operational Debt under IBC. When CIRP can be initiated on the basis of an award which is an adjudicated amount then the same should be allowed in cases of decree of any forum as well. When a Home Buyer falls within the Definition of a Financial Creditor under Section 5(8) of IBCA, the Home Buyer cannot be disqualified to file a Petition under section 7 merely on the ground that the Home Buyer Claim has been adjudicated by another Forum and a decree has been obtained .At this juncture, it is worth mentioning that an arbitration award can be passed both in the cases of financial debt (loan, advances dispute) and an operational debt also.

Furthermore, Part V of Form 1 of IBBI (Application to Adjudicating Authority) Rules provides for decree, order of any court or tribunal or award as an evidence of default by the corporate debtor. This was affirmed by the Supreme Court in K. Kishan (Supra). If a decree from a civil court will not considered as an evidence of default then why at the very first place, legislature would have provided for the same under Part V of Form 1. NCLAT failed to take the same into consideration.

Therefore, in the SushilAnsal case, NCLAT could not have rejected the initiation of CIRP based on a decree by stating that the amount in a decree is not a Financial Debt but an adjudicated amount. How can NCLAT exclude a Financial Debt, when it is adjudicated, from the rigors of the IBC? The judgement is therefore fundamentally flawed and goes contrary to the Scheme of IBC which recognizes that an adjudicated amount can also become a financial debt. One of the two conflicting views of NCALT needs to be endorsed by a larger bench of NCLAT at the earliest otherwise it may put many Decree Holders in an avoidable predicament.

Views are personal only.

(Authors are Delhi based Lawyers)

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