Insolvency Law: Decree Holder not at par with a Financial / Operational Creditor

Posted On - 9 May, 2022 • By - Souvik Ganguly


The Insolvency and Bankruptcy Code, 2016 (“Code”) was enacted with a primary objective of timebound reorganisation and insolvency resolution of corporate debtors. Under the Code, financial or operational creditors of a corporate debtor can approach the National Company Law Tribunal (“NCLT”) to initiate insolvency resolution process against a corporate debtor upon occurrence of a default by the corporate debtor.

In light of diverse views expressed in various judgements of the National Company Law Appellate Tribunal (“NCLAT”), the rights of a decree-holder (explained below) to initiate insolvency proceedings against a corporate debtor was in uncertain territory as the NCLAT was divided on the fact whether a decree-holder is a financial creditor. The process to initiate insolvency proceedings by a financial creditor is very different as compared to the process to be used by an operational creditor.

It is now relevant to explain the concepts of ‘decree’ and ‘decree holder’. A ‘decree’ is an official proclamation of the adjudication by a judge explaining the rights of the parties concerned with the suit, and the person in whose favour a decree has been passed is the ‘decree holder’.

The Supreme Court of India has recently upheld the judgment of the Tripura High Court in Sri Subhankar Bhowmik v. Union of India & Anr. (“Subhankar Bhowmik Case”) clarifying that under the Code, a decree-holder cannot be treated as a financial or an operational creditor, and thus cannot initiate insolvency resolution process against such a corporate debtor.

In this article, we analyse the judgment of the Tripura High Court in the backdrop of the objective of the Code.

Divergent views of the NCLAT on the status of a decree-holder

The Code defines a ‘creditor’ as any person to whom a debt is owed, including a financial creditor, an operational creditor, secured creditor, an unsecured creditor and a decree-holder. Though the Code also defines an ‘operational creditor’, ‘secured creditor’, and ‘financial creditor’, the term decree-holder is not defined. Moreover, the term decree-holder does not find a mention under the definition of the term ‘operational creditor’ or ‘financial creditor’, leading many to argue that decree-holders are neither operational nor financial creditors. It should be noted that under the Code, an important consideration to determine whether a debt is a financial debt is that it must be disbursed against the ‘time value of money’.

Previously, the NCLAT in Sushil Ansal v. Ashok Tripathi, held that a decree-holder would not be treated at par with a financial creditor due to the reason that the amount claimed under a decree is in the nature of an adjudicated debt and not a debt which is disbursed against the consideration for time value of money. Similar view was also taken by the NCLAT in C. Shivakumar Reddy v. Dena Bank. Interestingly, in Ashok Agarwal v. Amitex Polymers (P) Ltd. the issue before the NCLAT was whether a consent decree falls under the definition of an ‘operational debt’. The NCLAT relied upon the definition of a creditor under the Code which includes a decree-holder and ruled that a decree-holder cannot be excluded from the definition of an ‘operational creditor’.

However, this legal proposition was then changed by the NCLAT in Digamber Bhondwe v. JM Financial Asset Reconstruction Company Ltd., where the NCLAT held that that a decree-holder cannot come within the ambit of ‘financial creditor’ or ‘operational creditor’ and therefore cannot initiate insolvency proceedings based on a decree. This view was followed in the case of Akram Khan v. Bank of India Ltd., wherein the NCLAT further opined that an application filed by a decree-holder for initiating insolvency proceedings suggest that such application is filed for a purpose other than resolution of insolvency or liquidation of a corporate debtor.

However, this position was again reversed in Urgo Capital Ltd. v. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd., where NCLAT ruled that as a decree-holder falls under the ambit of a creditor, it would be entitled to be a ‘financial creditor’ under the Code and initiate insolvency resolution process against the corporate debtor. The NCLAT seemed to be at crossroads on the status of a decree-holder under the Code and hence urgent clarification was required to demystify this legal conundrum.

High Court clarifies that decree-holder is not a financial creditor

The Tripura High Court in Subhankar Bhowmik Case was again faced with the issue of the position of decree-holders under the Code. In this case, Sri Subhankar Bhowmik had approached the High Court and sought that the claims filed by a decree-holder should be treated and considered at par with the claims filed by financial creditors. While adjudicating upon the issue in controversy, the High Court observed that once a decree is passed in its favour, the decree-holder has to approach the court for execution of the decree under the Code of Civil Procedure, 1908 (“CPC”). A decree-holder is not directly entitled to the decretal amount until the full and final enforcement of the said decree. The High Court opined that at best, a decree signifies a claim that has been judicially determined and an unexecuted decree cannot be executed using the provisions of the Code.

The High Court further noted that under the Code, once insolvency proceedings are initiated, a moratorium is imposed prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. Looking at the framework of the Code, the High Court ruled that as execution of a decree is subject to the fetters of the moratorium, the Code rightly categorizes a decree-holder as a creditor only in order to acknowledge its claims in the insolvency resolution process. Looked at from another angle, the decree-holder gets a statutory status as a creditor under the Code by virtue of the decree. Since the decree cannot be executed by operation of the moratorium, the Code makes a provision to protect the interests of a decree-holder by recognizing it as a creditor. Looking at the scheme of the Code which provides for filing of claim forms by ‘Creditors (Other than Financial Creditors and Operational Creditors)’, the High Court held that the rights of a decree-holder are well segregated and cannot by any implication fall under the category of operational or financial creditors, thereby putting the controversy to rest.

The High Court’s order holding that decree-holders are not at par with operational or financial creditors was challenged before the Supreme Court of India. The Supreme Court of India agreed with the High Court’s view and dismissed the appeal.

Our thoughts

In our opinion, the judgment of the Tripura High Court upheld by the Supreme Court was long overdue and substantially settles the position of a decree-holder that was subjected to much uncertainty in the recent past. The judgment throws light upon the intention of the Code towards the classification and treatment of operational creditors, financial creditors and other creditors and clarifies how inclusion of the decree-holder under the class of financial creditor would defeat the objective of the Code.

The judgment is consistent with the purpose of the Code, i.e., rescue and value maximisation of stressed assets is the key objective of the Code and that the Code is not to be used as a recovery tool. Had the decree-holders been treated at par with financial creditors, it would have rendered the execution provisions of decrees under the CPC otiose. Insolvency proceedings under the Code are not a substitute for recovery proceedings, especially when the corporate debtor is a viable company with sufficient assets, and the view of the High Court is a welcoming development!

Authors: Souvik Ganguly, Altamash Qureshi and Richa Phulwani

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident or any other cause.