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Insolvency - Decree Holders Do Not Come Under The Definition Of Financial Creditors

IN THE MATTER OF Sh. Sushil Ansal vs Ashok Tripathi, appeal was filed before the NCLAT against the order of the NCLT admitting an application filed by the Respondents under Section 7 of the Insolvency Code.

The Respondents have been awarded decree for recovery of their money paid to the Corporate Debtor by the ‘Uttar Pradesh Real Estate Regulatory Authority’ (“UP RERA”). As per Adjudicating Authority, the decree proved the existence of financial debt and liability of Corporate Debtor. The Adjudicating Authority noted that the Corporate Debtor has failed to pay the principal amount along with penalty as decreed by the “UP RERA”. The Adjudicating Authority had passed the impugned order based on the Judgment of the Appellate Tribunal in “M/s. Ugro Capital Limited v. Company Appeal (AT) (Insolvency) Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd.-Company Appeal (AT) (Insolvency) No. 984 of 2019” wherein the Appellate Tribunal had observed that the definition of word ‘creditor’ in ‘I&B Code’ includes decree-holder and a petition filed for realisation of decretal amount could not be dismissed on the ground that the creditor should have taken steps for filing execution case in Civil Court.

The Appellate Tribunal observed that Respondent Nos. 1 and 2 neither asserted nor sought triggering of Corporate Insolvency Resolution Process in a purported capacity as allottees of Real Estate Project but sought initiation of Corporate Insolvency Resolution Process against the Corporate Debtor on the strength of being ‘decree-holders’ which owed its genesis to the Recovery Certificate issued by the ‘UP RERA’.

The Appellate Tribunal decided that the question was whether in their projected capacity as ‘decree-holders’ Respondent Nos.1 and 2 could maintain an application under Section 7 as ‘Financial Creditors’.

A ‘decree-holder’ is undoubtedly covered by the definition of ‘Creditor’ under Section 3(10) of the ‘I&B Code’ but would not fall within the class of creditors classified as ‘Financial Creditor’ unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of ‘financial debt’ is inclusive in character. A ‘decree’ is defined under Section 2(2) of the Code of Civil Procedure, 1908 (“CPC” for short) as the formal expression of an adjudication which conclusively determines the rights of the parties with regard to the matters in controversy in a lis. A ‘decree- holder’, defined under Section 2(3) of the same Code means any person in whose favour a decree has been passed or an order capable of execution has been made. Order XXI Rule 30 of the CPC lays down the mode of execution of a money decree. According to this provision, a money decree may be executed by the detention of judgment-debtor in civil prison, or by the attachment or sale of his property, or by both. Section 40 of the ‘Real Estate (Regulation and Development) Act, 2016’ lays down the mode of execution by providing that the RERA may order to recover the amount due under the Recovery Certificate by the concerned Authority as an arrear of land revenue, which the said authority has already done in this case against the application filed by the Respondents.

Based on the above, the Appellate Tribunal answered the question of whether a decree-holder would fall within the definition of ‘Financial Creditor’ with 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’.

As to the question of whether execution of decree on the strength of Recovery Certificate issued by the ‘UP RERA’ would justify triggering of the Corporate Insolvency Resolution Process at the instance of Respondent Nos.1 & 2, the Appellate Tribunal referring to the judgment of the tribunal in G. Eswara Rao v. Stressed Assets Stabilisation Fund and Ors.- held that an application under Section 7 of the ‘I&B Code’ cannot be filed for execution of a decree.

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