Upholding Tripura High Court judgement, the Supreme Court has affirmed that 'Decree Holders' cannot be treated at par with 'Financial Creditors'.
The Division Bench of Justice SK Kaul and Justice MM Sundresh rejected an SLP filed challenging the view of the High Court dismissing writ for including the words "decree holder" existing in Section 3(10) to be at par with "financial creditors" under Regulation 9(a).
The petitioner had also sought 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.
The petitioner claimed his locus standi by stating that he is a shareholder of public listed companies, who are either creditors and/or corporate debtors in terms of IBC. Further stating that it also effect the general public, as they would be germane to almost all corporate insolvency resolutions under the IBC, the petitioner pointed out that there is no authoritative pronouncement of the Hon'ble Supreme Court or Hon'ble High Court on the questions raised.
He 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 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.
The High Court at the outset noted that maximization of the assets of a corporate debtor, is a cardinal principle of the IBC as recognised in COMMITTEE OF CREDITORS OF ESSAR STEEL INDIA LIMITED THROUGH AUTHORISED SIGNATORY vs. SATISH KUMAR GUPTA, 2019 Latest Caselaw 1113 SC, MAHARASHTRA SEAMLESS LIMITED vs. PADMANABHAN VENKATESH, 2020 Latest Caselaw 66 SC
The Court noted that in the Act, five types of creditors have been recognized i.e. financial creditor, operational creditor, secured creditor, unsecured creditor and decree-holder. However, IBC doesn't define 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."
It added 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."
It concluded that in terms of Section 14(l)(a), the right of the decreeholder 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 Court clarified 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 decreeholder, 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."
It added that the decree-holder gets a statutory status as a creditor under Section 3(10) of the IBC, by virtue of the decree and since it 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 as apparent from the fact that decree holders as a class of creditors are kept separate from "financial creditors" and "operational creditors".
"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."
"As a consequence, once a decree holder is recognized as a creditor, all provisions of the IBC that apply to creditors, including the waterfall provisions are applicable in all their force. The rights like each and every other creditor are subject to the overall objective of maximization of assets of the corporate debtor for the benefit of all stake holders in line with the commercial wisdom of the Committee of Creditors."
The Court also rejected the arguement 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 Regulation.
Noting that 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, the writ petition was rejected.
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