STATUS OF DECREE HOLDER UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

STATUS OF DECREE HOLDER UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

A first-time litigant is under the initial assumption that  by filing a particular suit/Arbitration and being awarded a money decree,  the litigant will be given the money he is owed. But, in reality the same rarely happens,. After issuance of a decree by court, the litigant who becomes a decree holder has to file execution petition to recover the decretal amount, the process of execution petition is long and problematic and thus experience with this petition has not been encouraging.. To solve this problem, Insolvency and Bankruptcy Code, 2016 (IBC) incorporated decree holder as a creditor, so that a decree holder could avail benefits of speedier disposal of cases under IBC.

Lately, the status of Decree holder under IBC has been an issue in some of the judicial decisions. There are contradictory judgments of NCLAT (National Company Law Appellate Tribunal) in this aspect but the Hon’ble Supreme Court in its recent judgment held that, not only can a decree holder initiate the insolvency proceedings under IBC but also for the purpose of calculating the limitation period the relevant period is the date of recovery certificate or the date of decree.

DECREE HOLDER

Decree holder has been included in the definition of “Creditor” under Section 3(10) of IBC. Section 3(10) of the IBC-

            3 Definitions-

            XXXXXXX

            (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.

 But, unlike financial creditor or operational creditor, who have specific provisions and procedures for initiating insolvency proceedings under section 7 or 9 of IBC respectively, a decree holder does not have any dedicated section under IBC. Hence, like secured creditor and unsecured creditor, decree holder has to be included in either Section 7 or Section 9 as financial creditor or Operational Creditor, depending upon the fact and circumstances of a particular case. A Decretal amount is a crystalized amount, it usually contains interest component also. But, for deciding whether the decree holder be considered as financial creditor or operational creditor, the nature of the claim in a particular suit, in which decree has been received, should be looked into. So, it could be safely said that decree holder may be financial creditor or operational creditor.

Further, it is undisputed that a financial or operational creditor can move an application for initiation of insolvency proceedings against a corporate debtor. In the light of the same reasoning, it could be asserted  that a decree holder is equally qualified to initiate an insolvency proceedings, as a decree,upon attaining finality, is a crystallized debt and is payable in law.

Although there have been contradictory judgments of NCLAT on this aspect. On one hand, the NCLAT in the cases of G.Eswara Rao vs Stressed Assets Stabilization Fund (87(IBC) 57/2020); Digamber Bhondwe, Director Raipur Treasure Island Private Limited vs JM Financial Asset Reconstruction Company (165(IBC) 130/2020) andHDFC Bank Ltd. vs Bhagwan Das Auto Finance Ltd. (Company Appeal (AT)(Insolvency)No.1329 of 2019), held that a decree holder cannot initiate insolvency proceedings as         

            “19…..Section 3 is in Part I of I&B Code. Part II of I&B Code deals with     “Insolvency Resolution and Liquidation for Corporate Person”, & has its own set of definitions in Section 5. Section 3(10) definition of “Creditor” includes “financial creditor”, “operational creditor” “decree holder” etc. But, Section 7 or Section 9 dealing with “Financial Creditor” and “operational creditor” do  not include “decree holder” to initiate CIRP in Part II.”(supra Didamber  Bhondwe).

Further,

            “4……. If the appellant intends to rely on the award, we hold that there is no         default and thereon application under Section 7 is not maintainable.” (supra HDFC Bank).

Whereas NCLAT in its another judgment titled as “Ugro Capital Ltd. vs Bangalore Dehydration And Drying (Company Appeal (AT) (Insolvency) No. 984 of 2019 held that decree holder can initiate insolvency proceedings-

            “….Based on the decree of the Court this Petition was filed under Section 7 of the   Code. Since the definition of the word creditor in I&B Code includes decree-holder, therefore if a petition is filed for the realization of decretal amount, then it cannot be dismissed on the ground that applicant should have taken steps for filing execution case in Civil Court…..”

As both, HDFC Judgment and Urgo Capital Judgment, are three Judge Bench Judgments, hence none would get primacy.

Furthermore, Hon’ble Supreme Court vide its order dated 14.08.2018 in “K. Kishanvs Vijay Nirman Company Pvt. Ltd. ((2018)17 SCC 662)held that decree holder may initiate the Insolvency Proceedings.

            “28. We may hasten to add that there may be cases where a Section 34 Petition     challenging an arbitral award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the court that period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no  petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may than be   put into operation.

Hence, it could be conclusively stated that a Decree holder can initiate insolvency proceedings under IBC. Although a decree holder should keep in mind that until there is finality of the decree, it would not be undisputed debt. As there may be a possibility that corporate debtor may get a favorable decree in appeal. So, decree(s), against which  no appeal lies or an appeal lies, but the same is barred by limitation,can act as an instrument by way of which Insolvency Proceedings can be initiated .

DECREE HOLDER AND LIMITATION PERIOD

As per Section 238A of IBC, The Limitation Act would be applicable to applications, filed under IBC and Article 137 of the limitation act would get attracted and according to it, the limitation period for applications under IBC is three years and it would start when “the right to sue accrues”, i.e. when a default occurs. The issue arose that, can date of decree or the date of recovery certificate be the relevant date for calculating the limitation period?

If decree holder is allowed to initiate the insolvency proceedings under IBC, date of recovery certificate should be the relevant period for calculating the limitation period. Otherwise, it would defeat the whole purpose of the legislation. If only the date of default in payment of the dues amount would be considered as a relevant period, then no decree holder would be able to seek relief under IBC, because litigations may take more than three years times to be adjudicated or reach finality. Hence, date of decree or the date of recovery certificate should also be a relevant date when right to sue accrues.

  In this aspect, there are contradictory judgments of NCLAT. But, one three judge bench of NCLAT and one judgment of Hon’ble Supreme Court held that date of recovery certificate would be relevant date for calculating the limitation period.

On the one hand, according to G. EswareRao (supra) judgment and (supra) DidamberBhondwe judgment, the date of decree and recovery certificate will not be a relevant date for calculating limitation period for applications under IBC.

G. EswareRao (supra)-

            “A decree passed by the Decree Recovery Tribunal or any suit cannot shift            forward the date of default.”

Further, in (supra) Didamber Bhondwe

            “17. …We are unable to hold that date of NPA is to be ignored &limitation is to    be counted from Date of Recovery Certificate for Section 7 of I&B Code.

            18…. Once the time starts running,subsequent filing of the application to DRT      and judgment passed by DRT does not make a difference, for the purpose of            provisions of I&B Code.”

On the other hand, one of the judgment of Hon’ble Supreme Court vide its order dated 02.09.2019 in “Vashdeo R. BhojwaniVs. Abhyudaya Co-operative Bank Ltd. &Anr. (Civil Appeal No. 11020 of 2018) held that a matter based on Recovery Certificate of loan, which has been declared as NPA (Non-Performing Asset), is maintainable and certificate date would be relevant for calculating the period of limitation. WhereasUrgo capital (supra) judgment has held that date of decree is the date for counting limitation period. Hence, date of decree or date of recovery certificate (whichever would be applicable) would be the relevant date for calculating limitation period.

Vasudev (supra) judgment-

            “4…. When the Recovery Certificate dated 24.12.2001 was issued, this       Certificate injured effectively and completely the appellant’s rights as a result   of which limitation would have begun ticking.”

Further in Urgo Capital (supra)-

            “It is also made clear that for the purpose of the Article 136 of the Limitation        Act i.e. for execution or for purpose of Article 137 of the Limitation Act i.e. for             filing Application under Section 7 of the I&B Code, the period of limitation is to           be calculated from the date of decree becoming enforceable.”

As Vasudev (supra) judgment is of Hon’ble Supreme Court and Urgo Capital (supra) is of NCLAT judgment, comprising three judges bench. Hence, these two judgment would get primacy over G. EswareRao (supra) judgment and (supra) DidamberBhondwe judgment, which is of NCLAT Judgment and of two judges bench.

Hence, it could be conclusively concluded that for calculating the period of limitation period, date of decree and date of recovery certificate would be relevant date for a decree holder who would initiate insolvency proceedings under IBC.

CRITIQUE

Decree holder is a creditor under IBC and it can initiate the insolvency proceedings. Although NCLAT in some of its judgments observed that IBC is not a recovery law and NCLT is not a recovery forum. Hence, decree holder should go to civil court for execution of the decree by filing execution petition, rather than preferring NCLT.  Primary object of NCLT is for resolution of dispute, so that corporate debtor and the economy should remain solvent.

It is true that IBC is not a recovery law, because unlike, execution petition, NCLT does not focus on recovery of dues but it cannot be denied that hundreds of cases have been settled by the parties before admission giving hope to creditors that NCLT as a forum has been helpful in recovery of dues faster than any other forum in India. It is never a guarantee that financial operational creditors would get their complete due amount under CIRP process, but one the other hand, the time bound manner in which insolvency proceedings are dealt with and the level of participation and supervision creditors have over the insolvency proceedings helps ensure some degree of protection to the creditors and their debts

Hence, IBC proceedings cannot be a recovery law because it has completely different procedure and object. Nevertheless it could be said that allowing the decree holder to initiate insolvency proceedings is not against the objectives of the code. The Code provides for willful defaulters to be fearful of getting its entity insolvent, and to respect its liability bonafidely, so this forum is useful for better corporate governance.

Further, if decree holder is the part of creditor under IBC, it has every right to realize its due under IBC, although the object and purpose of the IBC is different from civil courts. By incorporating decree holder in the definition of creditor, the intention of legislature could easily be ascertained that it has given a decree holder every right to realize its debt amount, interpreting it otherwise would lead to absurdity, which need to be avoided.

 It is also pertinent to note that every  commercial litigation has its base on the recovery of the dues, although different statutes could have different objects and purpose. Hence, for IBC, recovery of dues could be means to achieve the end i.e. to keep the economy solvent.

CONCLUSION

With the help of logical reasoning and judgments of NCLAT and Hon’ble Supreme Court it could be said that decree holder can initiate insolvency proceedings under IBC and the relevant date for calculating the limitation period would be the date of decree or date of recovery certificate.

Further, IBC cannot be a recovery forum just like execution petition. But decree holder can initiate the insolvency proceedings for realizing its due amount so that the corporate debtor and the economy could remain solvent.

 This forum is turning out to be a great relief for decree holders, who were finding themselves helpless due to long drawn process of execution petitions. They were losing faith in Indian Judicial system. But, IBC has provided them a light of hope and this hope and faith ensures that we have a robust system of recovery keeps the economy running  and solvent. Hence, when the suspension period of IBC Proceedings would end, decree holders should opt for this effective option for their early realization of decretal amount.

 

Abinash Jha

Associate, Mimansa Law Offices,

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Krishnamohan K Menon

Krishna is one of the the Founding Partners of Mimansa and is also an Advocate on Record of the Supreme Court of India. Apart from a robust Supreme Court practice in different subjects, Krishna enjoys an expertise in the areas of taxation (including GST) and Commercial/Company litigation (including Insolvency) wherein he has successfully advised and handled the thousands of disputes of multifarious Domestic and International clients before various fora including the Supreme Court, various High Courts, Central Excise and Service Tax Appellate Tribunal and Company Law Tribunal/Appellate Tribunal. One of the pioneers of the idea of ‘Strategized Litigation’, Krishna has been instrumental in increasing the litigative efficacy of various clients with an analytical approach towards past data, closure of defunct proceedings and weighed choices of mode and forum of litigation in tune with the dynamic Indian legal system. Krishna’s litigative endeavors have enabled him to assist the Hon’ble Courts to lay down the law in many of the unexplored legal areas of Financial, Service and Taxation Laws. Krishna is a prolific speaker and has multiple industry and professional addresses to his credit.

Krishna traces his career back to a meritorious graduation from Pune University, execution of Code Drafting Projects in association with the Law Commission of India and handling of High-Stake litigations with a tier 1 taxation firm in addition to association with the Chambers of the Additional Solicitor General of India.

Krishna has been a professional cricketer and has also co-founded one the biggest youth volunteer networks operating for the education of underprivileged children. He is a fitness enthusiast, yoga practitioner and enjoys a keen interest in the subject areas of theology, macroeconomics and astronomy. His hobbies include philately and nature walks.

Email: krishna@mimansalaw.in

Santosh Kumar Singh

Mr. S.K. Singh handles the tax advisory and revenue litigation portfolio at Mimansa. A Retd. IRS Officer and an Advocate, Mr. Singh brings in over 4 decades of experience through the ever-changing Financial Law regimes. Mr. Singh has successfully advised diverse Manufacturing and Service Sector clients through his in-depth experience of the regulatory hurdles of the taxation segment. Mr. Singh has been at the forefront of educating various Industrial Associations of the benefits and perils underlying the GST Regime. Mr. Singh’s dual segmental experience enables him operate as a bridge between the Regulator’s expectations and the Trade’s needs.

Mr. Singh’s academic proficiency and integrity was duly honored vide a Presidential Award for distinguished services to the Govt. of India.

A deeply spiritual person, Mr. Singh spends a substantial time reciting Vedic Mantras and reading Vedantic Philosophy.

E: sksingh@mimansalaw.in

 

Bhishma Ahluwalia

Bhishma, a holder of the dual qualifications of an Advocate & Chartered Accountant, is one of the founding partners of Mimansa, who vests his expertise in the subject area of Indirect Taxation. Having over a decade’s experience in Indirect Taxation, Bhishma has successfully advised various clients during the erstwhile Indirect Tax regime and transitioned them into the GST regime with enviable ease. Bhishma’s expertise with the operations of the domestic heavy manufacturing Sector has earned him considerable repute particularly in the Iron & Steel, Automotive and Electronic Segments. Bhishma’s foresightedness (as regards potential litigative risk exposures) has been instrumental in Mimansa’s success in Strategized Litigations, many of which prosecutions he was a part of. Bhishma is also an ardent speaker who has enlightened Industrial audiences with his various addresses.

Bhishma traces his career back to coveted Financial Law Advisory portfolio’s in Big 4 entities and tier 1 law firms.

Bhishma is a sports biker by passion and part of many cross country biking groups. He is a voracious reader and maintains his keen interest in the day to day developments in the automotive industry.

Email: bhishma@mimansalaw.in

Gautam Dhamija

Gautam handles the General Commercial litigation practise at Mimansa. A segmental expert in Commercial litigations, Arbitrations and Debt Recovery, Gautam has been instrumental in successfully prosecuting/defending litigations before various fora for multifarious clients including FMCG manufacturers, Builders, International Traders, Chemical Industries, Film producers etc. Gautam also enjoys a robust practice before the Statutory forums under Company Law, Debt Recovery Laws and the High Court. Gautam has advised various clients through the erstwhile Debt Recovery and Financial Restructuring regimes into the current Insolvency Law regime.

Gautam is a law graduate from Delhi University and has gained considerable experience in the segments of financial restructuring and recovery litigations during the course of his erstwhile association with various reputed law firms.

Gautam is a long-distance cyclist, tennis player and a passionate traveler. He is also a spirited student of the Vedanta Philosophy.

Email: gautam@mimansalaw.in

Chaitanyashil Priyadarshi

Chaitanya enjoys specifications in the Company Law and Insolvency Litigation Domain with a specific focus on recovery litigations and Builder-Consumer disputes. In addition to litigating & mediating through the Insolvency processes, Chaitanya has maintained close professional nexus with various Insolvency Resolution Professionals and assisted many in taking the resolution process to logical ends, thereby maximizing value for the Company’s investors as well as creditors. Chaitanya has spearheaded multiple litigations before National Company Law Tribunal and Appellate Tribunal and earned considerable repute as an effective practitioner in the domain.

A Pune University Graduate, Chaitanya has an illustrious past with Senior Supreme Court Lawyers where he handled general commercial litigations and appended dispute.

Chaitaniya is an avid traveller and also maintains a keen interest in macroeconomic policy making.

Email: Chaitanya@mimansalaw.in