The Supreme Court in Shubhankar Bhowmik v Union of India & Anr upheld the Tripura High Court’s judgment which had held that "decree-holders" cannot be treated at par with "financial creditors" under the Insolvency and Bankruptcy Code.
The Petitioner, before the High Court, sought for declaration of Section 3(10) of the Insolvency and Bankruptcy Code 2016 r/w Regulation 9(a) as ultra vires in as much as it failed to define the terms "other creditors" and for striking them down. Relief was also sought for including the words "decree holder" existing in Section 3(10) to be at par with "financial creditors" under Regulation 9(a).
He had also sought for declaring that claims filed under a CIRP by a "decree holder" under Regulation 9(a) of the CIRP Regulations, be considered at par with claims filed by ''financial creditors" and be amenable to all consequential rights available to financial creditors.
The High Court in its judgment referred to the preamble of the IBC and observed that the scheme of the IBC, in line with its stated objects, is to achieve efficiency and efficacy in the resolution process for corporate persons, partnerships and individuals. The provisions of the IBC are, therefore, guided by the said objective.
It also referred to the case of Swiss Ribbons (P)Ltd. v. Union of India, (2019) 4 SCC 17 wherein the Apex Court while considering the Statement and Objects and the Preamble of the IBC observed that “It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus beneficial legislation which puts the corporate debtor back on its feet, not being mere recovery legislation for creditors. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protect all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”
The Court observed that the definitions contained in the IBC do not provide any definition for a "decree holder". It further observed that before proceeding to define the same, it would be appropriate to understand the rights of a decree-holder per se, i.e. dehors the contours of IBC.
It, therefore, observed that “The right of a decree-holder, in the context of a decree, is at best a right to execute the decree in accordance with the 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. Suffice it to say, 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 the 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.”
In terms of Section 14(l)(a), the right of the decree- holder 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.
Looked at from another angle, the decree-holder gets a statutory status as a creditor under Section 3(10) of the IBC, by virtue of the decree. Since the decree 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 in the decree and not in the dispute that leads to the passing of the decree. This is apparent from the fact that decree holders as a class of creditors are kept separate from "financial creditors" and "operational creditors". No division or classification is made by the statute within this class of decree holders. The inescapable conclusion from the aforesaid discussion is, that the 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.