Insolvency: A "decree holder" is different from all other types of creditors

Citation : Sri Subhankar Bhowmik vs Union of India and Anr., WP(C)(PIL) No.04/2022

Date of Judgment/Order : 14/3/2022

Court/Tribunal : High Court Of Tripura (Subsequently reafirmed by the Supreme Court on 11-04-2022 vide Petition(s) for Special Leave to Appeal (C)  No.6104/2022)

Corum : Indrajit Mahanty, CJ.

Background

Writ was filed by the Petitioner 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.

The Petitioner stated 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 creases by this Hon’ble Court. 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.

Judgment

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;"

The right of a decree holder, in the context of a decree, is at best a right to execute the decree in accordance with law. Even in a case where 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 the decree in accordance with the relevant provisions of the Civil Procedure Code, 1908. 

Further Section 14 of the Insolvency Code specifically puts decrees under moratorium. This is because a decree, in a given case may be amenable to challenge by way of an appellate process, and/or by way of objections in the execution process. In that sense, the passing of the decree may be the recognition of a claim of the decree holder, however, the said claim itself is ultimately subject to doubt till the execution proceedings are finalized. For instance, a judgement & decree in a civil suit, may be upheld throughout the appellate chain right up to the Hon'ble Apex Court. However, even that would not automatically entitle the decree holder to the fruits of the decree. The same would still remain, subject to objections in

execution proceedings which if allowed, would frustrate the decree.

Therefore, whereas the 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.

A reading of the Section 14(1)(b) and Section 28 of the IBC. makes it clear that, in effect, 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).

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.

Financial creditors who have large exposure to a corporate debtor therefore get the first preference, followed by operational creditors, who are also interested in contained operations and therefore the revival of the corporate debtor. A decree holder on the other hand, holds a decree as a result of crystallizing and determining a dispute through an adversarial process of litigation.

The High Court concluded that the distinction of decree holders as creditors from "financial creditors" and "operational creditors", as seen aforesaid is intelligible and take forward the purpose of the IBC. The same cannot be stated to be discriminatory or arbitrary.