Decree holders are not financial creditors under the Insolvency and Bankruptcy Code, 2016 – Supreme Court confirms

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The Honorable Supreme Court has recently upheld a judgment of the Divisional Bench of the High Court of Tripura in the case of Sri Subhankar Bhowmik v Union of India (1) in which it was held that a decree holder cannot be treated on equal terms with financial creditors in a corporate insolvency resolution (CIRP) process initiated under the Insolvency and Bankruptcy Code, 2016 (the Code).

The Public Interest Litigation (PIL) was filed by the Petitioner in the Hon’ble Tripura High Court with the request that the Court issue a writ of certiorari declaring that Section 3(10) of the Code was read with Regulation 9A ultra vires and struck out the same as it violates Article 14 of the Constitution of India insofar as it does not define the term “other creditors” or the challenged provisions be interpreted harmoniously to include the words “holders of decrees”. Petitioner further requested that a writ of certiorari be issued declaring that claims filed under a CIRP by an Executive Order Holder under Rule 9A of the CIRP Rules be considered equivalent to claims filed by “financial creditors “.

It was the Petitioner’s submission that the Code does not classify which class of creditors the term “holder of the decree” belongs to and therefore the same had to be ironed out. It was also suggested that since there was no specific classification of “decree holders” in a specific class of creditors, all decree holders fell into the residual category of other creditors, which was arbitrary and contrary in clause 14.

Examining in detail the provisions of the Code, the Court indicated that the parliament recognized five types of creditors namely financial creditors, operational creditors, secured creditors, unsecured creditors and decree holders. The tribunal further stated that the terms financial creditors, operational creditors, secured creditors have been defined in Articles 5(7), 5(20) and 3(20) respectively and, by necessary implication, any creditor not qualifying as a secured creditor under the provisions of Article 3(30) would mean an unsecured creditor.

The Court observed that although it appears that a “decree holder” is omitted, a closer look at the Code reveals otherwise. She further observed that a right of the holder of a decree is the right to execute the decree in accordance with the law. He further stated that even if a decree goes through the appeal process and achieves finality, the only remedy available to the holder of the decree is to execute it in accordance with the relevant provisions of the Code of Civil Procedure 1908. The Court further stated that as a moratorium comes into effect under Article 14(1) of the Code, the execution of a decree itself is frozen.

The Court further held that the Code properly recognized the Order Holder’s claim under CIRP. However, it also imposes a moratorium under Section 14 on the enforcement of the By-Law Holders’ claim against the Corporate Debtor on the grounds that the true purpose behind enacting the Code is to preserve and the true purpose behind promulgation of the Code is to preserve and maximize the assets of the Debtor Company and to ensure that the assets of the Debtor Company are protected in order to achieve the intention of the legislator which is to ensure the revival and continuation of the Debtor Company by protecting the Debtor Company from its own management and from corporate death by liquidation.

The Court observed that, “When viewed in the aforementioned context, a decree holder’s claim is subject to the full rigors of the resolution process and must be satisfied with all other claims, pursuant to the cascading mechanism contemplated by Baccalaureat. Since claims cannot be categorized as operational or financial, the appropriate provisions (Rule 9A) and forms (Form F) for filing claims are provided in the IBBI Rules (Insolvency Resolution Process for legal persons), 2016.

This is also reflected in the title of Form F which reads “Proof of Claim by Creditors (Other than Financial Creditors and Operational Creditors). It is commonplace to say that the assets of a corporate debtor benefit all creditors, the holders of decrees being one of them. The distinction of the decree holder’s creditors between “financial creditors” and “operational creditors”, as seen above, is intelligible and supports the objective of the IBC. The same cannot be called discriminatory or arbitrary”.

The Court further held that the petitioner’s plea for a decree holder to serve on the creditors’ committee was untenable because a decree holder holds a decree following the determination of a dispute through a adversarial litigation process. The Court held that the process as envisioned by the BAC being a non-adversarial one in nature, to put the same with the person who is an adversarial plaintiff would defeat the purpose of the Code and ultimately dismissed the query.

(1) WP (C)(PIL) No. 04/2022

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