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Decree Holders As Creditors Under The IBC - Need For Clarity

Karan Bharihoke
4 March 2022 6:58 AM GMT
Decree Holders As Creditors Under The IBC - Need For Clarity

The Insolvency and Bankruptcy Code, 2016 ("Code"), right from its enactment has been the subject of legal debate. While various issues that have cropped up from time to time, have been ironed out, by amendments and by judgements, there still exist a plentitude of legal questions, waiting to be raised in the right case. One such question is the status of a "decree-holder" as a creditor....

The Insolvency and Bankruptcy Code, 2016 ("Code"), right from its enactment has been the subject of legal debate. While various issues that have cropped up from time to time, have been ironed out, by amendments and by judgements, there still exist a plentitude of legal questions, waiting to be raised in the right case.

One such question is the status of a "decree-holder" as a creditor. Section 3 (10) of the Code, defines a "creditor" as "any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;" Whereas the Code provides for and envisages the manner in which claims of "financial creditors" and "operational creditors" are to be treated by a Resolution Professional and the Adjudicating Authority, the same is not true for "decree holders". To understand the problem posed by this omission, one must go to the meaning of the word "decree".

For this one must go back to an older code, i.e., the Code of Civil Procedure, 1908 ("CPC"). Section 2 (3) defines a "decree holder" as "any person in whose favour a decree has been passed or an order capable of execution has been made." It must be understood that the passing of a decree is not the final step in a civil litigation. The final step is enforcement of a decree through the process of execution. In law, all decrees may not be executable. Recognizing the same, the Hon'ble Supreme Court, in the case of Ghanshyam Das v. Anant Kumar Sinha[1], was pleased to observe, that, "so far as the question of executability of a decree is concerned, the Civil Procedure Code contains elaborate and exhaustive provisions for dealing with it in all aspects. The numerous rules of Order 21 of the code take care of different situations providing effective remedies not only to judgment-debtors and decree-holders but also to claimant objectors, as the case may be."

The rights of a decree-holder are therefore not absolute and require further judicial intervention and determination in terms of Order 21 of the CPC. For instance, as held by the Hon'ble Supreme Court, in Balvant N. Viswamitra v. Yadav Sadashiv Mule,[2] a decree may be without jurisdiction, and hence a nullity. Another cardinal feature of a decree is, that an executing court cannot go behind the decree. In fact, the decree may be wrong, illegal, did not follow procedure, but unless set aside on appeal, the decree being a command of the court passing judgement, has to be enforced by the executing court, without looking behind the decree. Therefore, a decree, is subject only to the rigors of Order 21 of the CPC. Yet, being subject to such rigors, by itself a decree only crystalizes the existence and extent of a claim. Nothing less, nothing more.

The Code, as we know, puts a mandatory moratorium on execution of decrees. The question therefore arises, in what manner should the nature of the claim of a decree holder be determined by a Resolution Professional or the Adjudicating Authority acting under Code. The status of the decree holder as a creditor, stems only from the decree held by such creditor and not the judgement of the court. In that light, in case of a money decree, the decree- holder's status is that of a person owed money simpliciter, i.e., the claim in such a case, can neither be defined as a "financial claim", nor an "operational claim". It is for this reason that in Sushil Ansal v. Ashok Tripathi & Ors.[3], the Hon'ble NCLAT was constrained to hold that :

"23. We accordingly summarise our finding as under:

(i) Respondent Nos. 1 and 2 can no more claim to be allottees of a Real Estate Project after issuance of Recovery Certificate dated 10th August, 2019 by 'UP RERA' directing recovery of Rs. 73,35,686.43/- due thereunder as arrears of land revenue by the Competent Authority. On their own showing they are the decree-holders seeking execution of money due under the Recovery Certificate which is impermissible within the ambit of Section 7 of the 'I&B Code'. Clearly their application for triggering of Corporate Insolvency Resolution Process is not maintainable as allottees.

(ii) Decree-holder, though included in the definition of 'Creditor', does not fall within the definition of 'Financial Creditor' and cannot seek initiation of Corporate Insolvency Resolution Process as 'Financial Creditor'."

How thus is the claim to be examined? There seems to be no clear answer. Some may argue that the Hon'ble Supreme Court in the case of Dena Bank v. C. Shivakumar Reddy[4], clarifies the situation. In the said case the Hon'ble Apex Court was pleased to observe that "… a judgment and/or decree for money in favour of the financial creditor, passed by the DRT, or any other tribunal or court, or the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor, to initiate proceedings under Section 7 IBC for initiation of the corporate insolvency resolution process, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the certificate of recovery, if the dues of the corporate debtor to the financial debtor, under the judgment and/or decree and/or in terms of the certificate of recovery, or any part thereof remained unpaid." However, in that case, the Hon'ble Court was concerned with the issue of limitation and the issues raised herein, were not raised before the Hon'ble Court.

Somewhere, in the middle of the aforesaid judgements of the Hon'ble Supreme Court and the Hon'ble NCLAT, sits the recent judgement dated 11.02.2022 passed by the Hon'ble NCLT in IBA/1370/2019 titled as Sunitha Venkatesh v. Oragadam City Developers Limited[5]. The NCLT, in the said decision, notes the judgement of the Hon'ble Supreme Court in Dena Bank (supra) and the judgement of the NCLAT in G.Eswara Rao (supra). The NCLT however, takes the view that "A 'decree' of a court can be relied on as supporting document in order to prove that the amount is due and payable, however it cannot at any point of time relied on to show that a person is an 'Operational Creditor' or 'Financial Creditor'. Further, a 'decree' cannot change the essence and nature of a transaction." The NCLT in the said case, further held that "In the present case, from the order obtained from RERA it is evident that the Applicant herein is an 'allottee' of a Real estate project …". Therefore, where from the decree itself, the nature of the original debt is ascertainable, the same may perhaps be used as a guide for classification. This judgement of the NCLT, however, has not been tested by the appellate process.

In case the decree is for specific performance, the situation gets even murkier. The scheme of the Code, as recognized in Swiss Ribbons (P) Ltd. v.Union of India,[6] is "reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. …" Therefore, while a decree-holder for a decree for specific performance against a corporate debtor, would be a creditor, his interest to have the decree executed would conflict with the mandate placed on a corporate insolvency resolution process to maximize assets of a corporate debtor. His interests would also conflict with those of other creditors, to whom the assets of a creditor would inure. To correctly appreciate the issue, take the case of an agreement to sell for immoveable property, where a considerable time has lapsed between the agreement and the decree for specific performance decree being passed. The lapse of time could result in differences in valuation of the underlying assets by a large amount. In such a case, maximization of assets of a corporate debtor, may lie in including the asset in the resolution process (where the value of the asset has increased over time), and in seeking to comply with the decree (where the value of the asset has decreased over time). In either scenario, the claim of the decree-holder cannot be kept higher than other creditors of the corporate debtor, to whose collective benefit the asset inures.

Take for example, a case of agreement to sell immoveable assets by a corporate debtor for which part payment has been received. If a decree for specific performance of such an agreement be passed, the decree-holder, no doubt will be a creditor of the corporate debtor. However, the debt itself having no nexus to the direct input to the output produced or supplied by the corporate debtor, it would not be considered as an "operational debt".[7] Similarly, the debt in such a case would not fall within the definition of a "financial debt". Further, even if the claims be considered as claims by "other creditors"[8], will the claim be considered to the extent of advances paid to the corporate debtor, or the direction contained in the decree to execute a conveyance?[9]

Similar would be the position for any decree holders who qualify as neither financial, nor operational, even if their relationship to a corporate debtor is to be looked at. For instance a person holding a decree for exemplary damages on a tortious claim against a corporate debtor, may de facto be its largest creditor. Nevertheless, the law as it stands today will give it no presence, let alone a voice on the Committee of Creditors.

In this context, reference of the reader Section 21(2) of the Code. The said provision envisages a Committee of Creditors constituted by financial creditors of a corporate debtor. The exception to the said provision is found in Regulation 16 of the Insolvency And Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016. Regulation 16, inter alia, provides for a situation where there is no financial debt, or qualified financial creditor. In such a situation the Committee is constituted by 18 largest operational creditors, one elected representative of all such workmen who do not form a part of the largest 18 operational creditors, and one representative elected by all employees who do not form a part of the largest 18 operational creditors. Therefore, irrespective of the extent / share of the debts owed to a decree-holder, in cases where courts refuse to go behind the decree to ascertain the nature of the transactions, and /or where the decree itself is found to be neither operational debt or financial debt, the law does not envisage a place for a decree-holder on the Committee of Creditors.

One may also look at the aforesaid as an exclusion of decree-holders by specific mention of the categories of creditors who can eb represented on and vote as members of a Committee of Creditors under the IBC. A classic example of the principle, "Expressio Unius Est Exclusio Alterius" in operation. In some ways this may be a justified exclusion and the intent of the Parliament may have been to remove parties who claim to be creditors on the basis of an adversarial process, away from the Committee of Creditors whose role is to conduct the resolution process in a non-adversarial manner. Whether the same is however deliberate, needs to be seen when these issues confront our law-makers or courts in an appropriate case.

The author is an Advocate on Record at the Supreme Court of India. Views are personal

[1] AIR 1991 SC 2251

[2] (2004) 8 SCC 706

[3] 2020 SCC OnLine NCLAT 680

[4] (2021) 10 SCC 330

[5] 2022 SCC OnLine NCLT 19

[6] (2019) 4 SCC 17

[7] Please see M. Ravindranath Reddy V/s G. Kishan & Ors, Company Appeal (AT) (Insolvency) No. 331/ 2019, NCLAT, judgement dated 17.01.2020.

[8] The IBC does not, in the definition sections, provide a definition for "other creditors". The same has to be culled out from a reading of Regulation 9A of the CIRP Regulations, which reads as under :

"9A.Claims by other creditors.

(1) A person claiming to be a creditor, other than those covered under regulations 7, 8, or 9, shall submit proof of its claim to the interim resolution professional or resolution professional in person, by post or by electronic means in Form F of the Schedule.

(2) The existence of the claim of the creditor referred to in sub-section (1) may be proved on the basis of –

(a) the records available in an information utility, if any, or

(b) other relevant documents sufficient to establish the claim, including any or all of the following:-

(i) documentary evidence demanding satisfaction of the claim;

(ii) bank statements of the creditor showing non-satisfaction of claim;

(iii) an order of court or tribunal that has adjudicated upon non-satisfaction of claim, if any."

[9] To the Author's mind, claims with regard to specific performance decrees for sale of immoveable assets ought to be treated as a claim for the advances paid to a corporate debtor. Any other interpretation would reduce the CIRP mechanism to an execution proceeding. The same would also obliterate the intent behind the moratorium on execution of decrees envisaged by Section1 4(1)(d) of the IBC.

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