Friday, August 19, 2022

Supreme Court upholds HC order on distinction between decree holders and financial creditors

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The Supreme Court has upheld a Tripura High Court order which said the distinction of decree holders as creditors from “financial creditors” and “operational creditors” is an intelligible purpose of the Insolvency and Bankruptcy Code, 2016, and the same cannot be stated to be “discriminatory” or “arbitrary”.

The bench of Justices Sanjay Kishan Kaul and M.M. Sundresh dismissed the plea challenging the judgment of the Tripura High Court, which in turn had dismissed a public interest litigation filed by Shubhankar Bhowmik. 

Bhowmik had filed the PIL against Section 3(10) of the Insolvency and Bankruptcy Code 2016, read with regulation 9A, inasmuch as it fails to define the term “other creditors” and the impugned provisions may be interpreted harmoniously to include words “decree holders” as existing in Section 3(10) to be at par with “financial creditors” under Regulation 9A. 

He had also sought directions to issue an appropriate Writ, Order or Direction more particularly in the nature of WRIT OF CERTIORARI or any other appropriate writ declaring that claims filed under a CIRP by “decree holder” under Regulation 9(a) of the CIRP Regulations, be considered at par with claims filed by ”financial creditors” and be amenable to all consequential rights available to financial creditors; and/or …”

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The High Court had noted, “Principally, the issues raised in the present petition deal with the treatment of “decree holders” who hold decrees against a Corporate Debtor under the insolvency resolution process. As such, the issue is one of classification. The petitioner states that the IBC and / or the Regulations framed thereunder, do not prescribe the class of creditors to which the term “decree holder” belongs, and therefore there exists a need to iron out the issue.  It is suggested that without such prescription in the IBC, the class of “decree holders” falls into the residual class of “other creditors”, which it is stated manifestly arbitrary and therefore violates Article 14.”

The word “creditor” is defined in Section 3(10) of the IBC which reads as under:

“3(10) “creditor” means 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;”

A reading of the aforesaid section suggests that the Parliament in its wisdom recognized five types of creditors being “financial creditor” or “operational creditor”, “secured creditor”, “unsecured creditor” and a “decree-holder”. A further examination of the provisions reveals that the phrases “financial creditor”, “operational creditor” and “secured creditor” are defined in Sections 5(7), 5(20), and 3(30) respectively. It would also be trite to note that a creditor who does not qualify as a “secured creditor” under Section 3(30), would by necessary implication mean an “unsecured creditor”. However, the definitions contained in the IBC do not provide any definition for a “decree holder”.

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“IBC rightly recognizes decree-holders as a class of creditors whose claims need to be acknowledged in a corporate insolvency resolution process, the IBC by express provision of Section 14 (l)(a) bars execution of a decree by the same decree holder against the corporate debtor,”

-said the high court. 

It further noted,

“An unexecuted decree, in the hands of a decree holder under the IBC regime, cannot be executed. At best, a decree signifies a claim that has been judicially determined and in that sense is an “admitted claim” against the corporate debtor. Therefore, the IBC rightly categorises a decree-holder, as a creditor in terms of the definition contained in Section 3(10). Execution of such a decree, is however subject to the fetters expressly imposed by the IBC (in addition to and over and above the requirements and limitations of the execution process under the CPC), which cannot be wished away.”

Furthermore it stated that, “Looked at from another angle, the decree-holder gets a statutory status as a creditor under Section 3(10) of the IBC, by virtue of the decree. Since the decree cannot be executed by operation of the moratorium under Section 14, the IBC makes a provision to protect the interests of a decree holder by recognizing it as a creditor. The interest recognized is that in the decree and not in the dispute that leads to the passing of the decree. This is apparent from the fact that decree holders as a class of creditors are kept separate from “financial creditors” and “operational creditors”. No divisions or classification is made by the statute within this class of decree holders. The inescapable conclusion from the aforesaid discussion is, that the IBC treats decree holders as a separate class, recognized by virtue of the decree held. The IBC does not provide for any malleability or overlap of classes of creditors to enable decree holders to be classified as financial or operational creditors.”

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“As a consequence, once a decree holder is recognized as a creditor, all provisions of the IBC that apply to creditors, including the waterfall provisions are applicable in all their force. The rights like each and every other creditor are subject to the overall objective of maximization of assets of the corporate debtor for the benefit of all stake holders in line with the commercial wisdom of the Committee of Creditors”

-held by the high court. 

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