'Decree Holders' Can't Be Treated At Par With 'Financial Creditors' Under IBC : Supreme Court Upholds HC Verdict

The bench of Justices SK Kaul and MM Sundresh, while dismissing a Special Leave Petition filed against the High Court judgment, observed :

"We are not inclined to interfere with the impugned judgment. The special leave petition is dismissed. Pending applications stand disposed of."

In the petition before the High Court, the petitioner Subhankar Bhowmik had sought for declaration of Section 3(10) of the Insolvency and Bankruptcy Code 2016 r/w Regulations 9A as ultra vires in as much as it failed to define the terms "other creditors" and for striking them down. Relief was also sought for including the words "decree holder" existing in Section 3(10) to be at par with "financial creditors" under Regulation 9(a).

Petitioner had also sought for 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.

Section 3(10) of IBC defines "creditor" as, "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".

Case Before Tripura High Court

The petitioner had submitted before the High Court that IBC and the Regulations framed thereunder, did not prescribe the class of creditors to which the term "decree holder" belonged, and therefore there existed a need to iron out the creases by the High Court. Petitioner had also contended that without such prescription in the IBC, the class of "decree holders" fell into the residual class of "other creditors", which was manifestly arbitrary and therefore violative of Article 14.

The bench of Justices Indrajit Mahanty and S G Chattopadhyay said :

"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. Suffice it to say, that the provisions contained in Order 21 provides for the manner of execution of decrees in various situations. The said provisions also provide for the rights available to judgement debtors, claimant objectors, third parties etc., to ensure that all stake holders are protected. The provisions of the CPC, therefore subjects the rights of a decree-holder to checks and balances that an executing court must follow before the fruits of such decree can be exercised. Given the same, 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."

Referring to Section 14(1) of IBC which by express mandate of moratorium puts a fetter on execution of the decree itself had said,

"In terms of Section 14(l)(a), the right of the decree- holder to execute the decree in civil law, freezes by virtue of the mandatory and judicially recognized moratorium that commences on the insolvency commencement date. 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."

The High Court had further said, "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."

"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".

The Court further observed, "once a decree quantifies a debt due the nature of the dispute that resulted in the quantification ceases to exist. In the books of a corporate debtor, it will show only as a liability and not as a financial debt or operational debt. The same cannot be said to be arbitrary, or unreasonable".

Another argument was that the decree holders as a class of creditors have been discriminated as they do not find a place on the Committee of Creditors in terms of Section 21 of the IBC and in terms of Regulation 16 of the CIRP Regulations. This too was rejected.

While dismissing the writ, the bench had said, "To put the steering wheel of a non-adversarial process to revive a corporate debtor, in the hands of an adversarial claimant, would defeat the very purpose of the IBC. As such, we find no merit in the contentions raised by the petitioner. Writ petition stands dismissed."

Case Title: Shubhankar Bhowmik v Union of India & Anr| SLP 6104/2022

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