Decree holders ‘not same as financial creditors’

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Decree holders ‘not same as financial creditors’

The Supreme Court has upheld a decision of the Tripura High Court by refusing to interfere with its judgment that decree holders cannot be treated the same as financial creditors under the Insolvency and Bankruptcy Code, 2016 (IBC).

A petitioner had sought a declaration of section 3(10) of the IBC, read with regulation 9(a) as ultra vires because it failed to define the terms “other creditors”, and requested striking them down. Alternatively, the petitioner requested that the impugned provisions may be interpreted harmoniously to include the words “decree holder” as existing in section 3(10) to be on par with “financial creditors” under regulation 9(a), to save them from unconstitutionality.

The issue was classification. The petitioner stated that the IBC and/or the regulations do not prescribe the class of creditors to which the term “decree holder” belongs, and therefore there was a need to iron out the creases. It was suggested that, without such prescription in the IBC, the class of “decree holders” falls into the residual class of “other creditors”, which it stated is manifestly arbitrary and therefore violates article 14 of the constitution.

The high court observed that the right of a decree holder, in the context of a decree, was at best a right to execute the decree in accordance with law. Even if the decree passed in a suit is subject to the appellate process and attains finality, the only recourse available to the decree holder is to execute it in accordance with the relevant provisions of the Civil Procedure Code, 1908.

The provisions in order 21 provide for the manner of execution of decrees in various situations. The provisions also provide for the rights available to judgment debtors, claimant objectors, third parties etc., to ensure all stakeholders are protected. The provisions of the Civil Procedure Code subject the rights of a decree holder to checks and balances that an executing court must follow before the fruits of such a decree can be exercised.

The rights of a decree holder, subject to execution in accordance with law, remain inchoate in the context of the IBC. This is principally because the IBC, by express mandate of the moratorium envisaged by section 14(1), puts a fetter on the execution of the decree itself. Thus, the right of the decree holder to execute the decree in civil law freezes because of a mandatory and judicially recognised moratorium that starts on the insolvency commencement date.

At best, a decree signifies a claim that has been judicially determined and is therefore an “admitted claim” against the corporate debtor. Thus, the high court concluded by observing that, in the books of a corporate debtor, the decree would show only as a liability and not a financial or operational debt and therefore it cannot be said to be arbitrary or unreasonable.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.