Decree Holder is a Financial Creditor: NCLAT at Crossroads? – By IP Deepika Bhugra Prasad and Adv. Amar Vivek

Decree Holder is a Financial Creditor: NCLAT at Crossroads?

(By Deepika Bhugra Prasad, Senior Partner at AAA Insolvency Professionals LLP and Adv Amar Vivek for AAA Insolvency Professionals LLP)

Background

A civil court of relevant jurisdiction is the basic mechanism that is available to any creditor for debt recovery. If the loan is backed by security, this is enforced as a contract under the law. The Recovery of Debt Due to Banks and Financial Institutions Act (RDDBFI Act), 1993 gives banks and a specified set of financial institutions greater powers to recover collateral at default.

Much hoax has been created with regard to the status of decree holders as ‘financial creditor’ under the Insolvency and Bankruptcy Code, 2016. The National Company Law Tribunal (NCLAT) has faced the same question on multifarious occasions.

There was lack of clarity on this aspect as the NCLAT differed in its opinions. However, the recent approach by NCLAT in the matter of Sushil Ansal v. Ashok Tripathi [2020] ibclaw.in 43 NCLAT towards determining the status of decree holder as financial creditor was quite a peculiar one but did not in effect clear the uncertainty.

Introduction

The term ‘decree’ has been defined under section 2(2) of Civil Procedure Code, 1908. It means, ‘the formal expression of an adjudication which conclusively determines the rights of the parties with regard to all or any of the matter in controversy in the suit’. The raison d’etre of decree is conclusive adjudication of the amount of claim in a proceedings. The money decree precedes the issuance of a recovery certificate as the amount of claim in the suit stands adjudicated and thereby recoverable. The procedure may vary depending upon the nature of proceedings and debt. However, proceedings under the Insolvency and Bankruptcy Code, 2016 are not for recovery. On the contrary, it is for reorganization and insolvency resolution of corporate debtors. The Code only entails the right to initiate CIRP over financial creditor, operational creditor and the corporate debtor.

It is of significance that for triggering the process by financial creditor, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor. Therefore, the debt must certainly qualify as a financial debt for an applicant to trigger Section 7.  

Decree is a financial debt?

The definition of financial debt has been provided under Section 5 (8) of the Code, that it is a debt together with interest, if any, which is disbursed against the consideration for time value of money. Thus, the relevant consideration for determination of ‘financial debt’ would be whether the debt was disbursed against the consideration for the time value of money. Thus, Section 5(8) of the Code in no manner explicitly provides that a decree is a financial debt.

The Hon’ble NCLAT in the matter of Sushil Ansal v. Ashok Tripathi [2020] ibclaw.in 43 NCLAT in this regard has observed as follows: “A ‘decree-holder’ is undoubtedly covered by the definition of ‘Creditor’ under Section 3(10) of the ‘I&B Code’ but would not fall within the class of creditors classified as ‘Financial Creditor’ unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of ‘financial debt’ is inclusive in character”. This reinforces the point that the inclusion of decree holder under the definition of Creditor provided in Section 3 (10) of the Code. This is for the purpose that decree holders be included in the corporate insolvency resolution process.

However, NCLAT in the matter of Ugro Capital Ltd v. Bangalore Dehydration and Drying [2020] ibclaw.in 143 NCLAT has made an observation that, “Since the definition of word creditor in I&B Code includes decree- holder, therefore if a petition is filed for the realisation of decretal amount, then it cannot be dismissed on the ground that applicant should have taken steps for filing execution case in Civil Court”. This observation may seem the most literal but certainly misses out the object of the Code being insolvency resolution. In that regard, Hon’ble Supreme Court in the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited has inter alia held that IBC, 2016 is not intended to be substituted to a recovery forum. It is an undeniable fact that decree is granted under recovery proceeding. Therefore, any minute chances that a decree may be considered as a financial debt further stands negated.

Conclusion

The inclusion of decree holder in the definition of creditor under Section 3 (10) is certainly a mirage. It necessitates the application of golden rule of interpretation that, to take the whole statute together, and construe it all together, giving the words their ordinary significance, unless when so applied they produce an inconsistency, or an absurdity or inconvenience so great as to convince the court that the intention could not have been to use them in their ordinary significance.

The definition of term ‘financial debt’ must always be construed in the light of the object of the code that is, ‘to provide an effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development’. Since, the Code was enacted for insolvency resolution of corporate person, thus including the decree under the definition frustrates the objective of the Code as it certainly is not a mode for recovery of debt.

Therefore, this brings us to the conclusion that the legislature has intentionally kept out decree from the definition of financial debt and has abstained the decree holder to initiate CIRP under Section 7 as a financial creditor.