This article is written by Uma Shankar Mishra, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from Lawsikho.com.

Introduction

Any insolvency law should have certain objectives to achieve namely to restore debtor company to profitable trading, to maximise the return of creditors as a whole, to establish a fair and equitable system for ranking and distribution of assets, identify the causes of failure of company and imposing sanctions for culpable management by its directors and creditors. The Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted keeping in mind these objectives to provide value to the creditors. This law was passed by the Parliament of India in the year 2016. IBC has distinguished between two classes of creditors i.e. financial creditors and operational creditors. In simpler terms a financial creditor is an entity which provides financial debt to a corporate debtor and the financial debt is used by the corporate debtor in running the company. Operational creditors are the service providers of goods and services to the corporate debtor and the consideration payable to them for providing the goods and services is known as operational Debt.  Hon’ble Supreme Court of India in the case of Swiss Ribbons Pvt. Ltd. v. Union of India^[i]  while upholding the constitutional validity of various IBC provisions stated that the classification between financial and operational creditors is neither discriminatory, nor arbitrary, nor violative of Article 14 of the Constitution of India, and that there is obviously an intelligible differentia between the two classes of creditors which has a direct relation to the objects sought to be achieved by the Code.

Who is a decree holder?

Suppose one person has a dispute with corporate debtor and they go to civil court and is able to prove his/her claim in a civil court or any adjudicating authority and the civil court or the adjudicating authority gives the order in his/her favour, it is known as decree and the person in whose favour decree is passed is known as decree-holder. Decree holders have been defined or given the status of creditors under Section 3 (10) of the IBC.

Decree holder: financial creditor or operational creditor

Though the IBC designates a decree holder as a creditor as per Section 3 (10) of the IBC, it does not prescribe whether a decree holder for the purpose of filing application under code would come under financial creditor (Section 7) or operational creditor (Section 9).  Most of the time it is difficult to execute the decree provided by a court, as there would be long – drawn litigation and delay while executing the decree. In order to escape from the long-drawn delays and litigation, many decree holders from civil courts, arbitral tribunal or any other competent court or tribunal are approaching National Company Law Tribunal (“NCLT”) with a plea to execute the decree. However one needs to keep in mind that IBC is not a law for recovering money unlike Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002(“SARFAESI”)  and  Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDBFI”) whose main purpose is to recover money of banks and other financial institutions. The intent of the IBC is the resolution of corporate debtors and maximisation of value of corporate debtors.  To prevent the abuse of IBC section 65 which deals with fraudulent or malicious initiation of proceedings exists in the IBC according to which if Corporate Insolvency Resolution Process (“CIRP”) is initiated only for the purpose of recovering the debts of the creditor it is liable to be dismissed and adjudicating authority can impose a penalty ranging from one lakh rupees to one crore rupees. There have been conflicting decisions of NCLT, NCLAT and Supreme Court of India on the issue that whether decree holders can execute their decree under IBC and if they can execute the decree, they will come under which category of creditors – financial or operational as decree holders do not have separate provision like Section-7 for financial creditors or Section- 9 for operational creditors. One cannot straightaway claim that decree holders are financial creditors or operational creditors, this should be decided by a competent tribunal or court by taking into consideration the nature of the claim in a particular suit and facts and circumstances of a particular case. While decree holders can be considered a financial or operational creditor depending upon the nature of claim in the case and facts and circumstances of a particular case, the larger question which arises is whether decree holders can execute their decree under IBC.

Can decree holders execute their decree under IBC?

While the IBC designates a decree holder as a creditor as per Section 3 (10) of the IBC there are conflicting decisions of NCLT and NCLAT regarding the fact that decree holders can execute their decree under IBC.

Cases supporting decree holders

Urgo Capital Limited v.  Bangalore Dehydration and Drying^[ii] – In this case  Hon’ble three judge bench of NCLAT held that decree holders can file for insolvency proceedings as the word creditor as defined under Section 3 (10)  of the IBC  includes decree and therefore if a petition is filed for execution of decree it cannot be dismissed on the fact that decree holder should file a decree for execution in civil Court.

Kirusa Software Private Ltd. v. Mobilox Innovations Private Ltd^[iii] (This decision of NCLAT was overturned by Supreme Court on different issue)  In this case Hon’ble NCLAT considering decree holders as operational creditors stated that in cases were decree or award of arbitral tribunal is decided and pending for execution, decree holders should be allowed to execute their decrees under IBC due to existence of form 5 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules 2016  under which a decree in suit and award has been shown to be a debt for the purpose of default on non-payment even if there are concerns over misuse of IBC to recover debt.

Kishan v. Vijay Nirman Company Private Ltd^[iv]–

Facts – In this case Vijay Nirman company private limited (“VNCP”) and M/s Ksheerabad Constructions Pvt. Ltd. (“KCPL“) entered into a road construction agreement and later both parties entered arbitration to settle their disputes. Arbitral tribunal allowed a claim of VNCP worth Rs. 1,71,98,302 and another claim of Rs. 13,56,98,624 and VNCP sent a notice to KCPL under section 8 of the IBC to pay an amount of Rs.1,79,00,166. KCPL disputed the invoice that was referred in the said notice, stating that the said amount in notice is the subject-matter of arbitration and VNCP should pay more to KCPL as per amount filed by KCPL before the Arbitral Tribunal. KCPL also challenged the arbitral award as per procedure given in section 34 of the A&C Act, 2015. After this VNCP filed Section 9 application under IBC before the NCLT in which, VNCP said that the amount claimed by it forms a part of the decree and therefore becomes an Operational Debt.

Judgement – Though Hon’ble Supreme court did not accept the respondent submission on ground that if there exists a Disputed debt application under Section 9 of IBC cannot be filed but it stated that in situations where a challenge petition under Section 34 of the  A&C Act,2015 is barred by limitation, in such cases  CIRP can be initiated. Court also said that though Arbitral Awards can be accepted as an operational debt it should be of nature of undisputed debt as given by this court in this case and the case of  Mobilox Innovations Private Limited v. Kirusa Software Private Limited^[v] (to enable initiation of the CIRP by operational creditors).

Cases against decree holders

International Asset Reconstruction Co. Pvt. Ltd. v. Jayant Vitamins Ltd^[vi]– In this Case NCLAT dismissed an application by a Financial Creditor for initiation of insolvency proceedings against Corporate debtors stating that application for initiating insolvency cannot be accepted if execution of a decree is pending.

HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd.^[vii]– In this case a  three-judge bench of the NCLAT clearly and unequivocally dismissed an insolvency application solely on the ground that the IBC could not be used to execute an arbitral award or decree.

Digamber Bhondwen v. JM Financial Asset Reconstruction Company^[viii]– In this case NCLAT stated that though “Creditor” as defined under Section 3(10) of IBC includes financial creditor, operational creditor and decree holder but, if we go through Section 7 and Section 9 of IBC which deals with financial creditor and operational creditor respectively, it do not include decree holder and thus decree holders cannot initiate insolvency proceedings.

Conclusion

From the cases discussed above we can say that Hon’ble NCLT and NCLAT would dismiss the application of creditors who initiate insolvency proceedings to increase their chances of recovering money instead of executing it as per procedure given in Code of Civil Procedure, 1908. The very act of said creditor approaching civil suit, arbitration, debt recovery tribunal for obtaining decree against corporate debtor instead of NCLT for resolution of corporate debtor itself proves that creditor is interested in recovery and not resolution of corporate debtor and thus the creditors plea for execution of decree should be dismissed along with proceedings under section 65 of IBC.  However, in the cases where financial debts existed before the legal proceeding i.e. awards and decrees were not decided by DRT or an Arbitral Tribunal or a Civil Court but were only validated by them, In such situations, decrees may be accepted by NCLT as the conduct of the financial creditor would show that by filing for proceedings in respect of the debt, the creditor clearly thought that the debt was recoverable. This issue relating to whether decree holders are financial creditors under IBC is not fully settled under law and it needs to be seen how courts decide it.

References

^[i] Writ Petition (Civil) No. 99 of 2018            

^[ii] (Company Appeal (AT) (Insolvency) No. 984 of 2019

^[iii]  Company Appeal (AT) (Insolvency) 6 of 2017

^[iv] (2018) 17 SCC 662

^[v] (2018) 1 SCC 353

^[vi] Company Appeal (AT) (Insolvency) No. 1472 of 2019

^[vii]  Company Appeal (AT) (Insolvency) No. 1329 of 2019

^[viii]  (165(IBC) 130/2020)

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