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 has been included in the definition of “Creditor” under Section 3(10) of IBC. Section 3(10) of the IBC-
(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).
“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.
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.
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.
Associate, Mimansa Law Offices,