Decree Holder’s Claim Under IBC
Table of Contents
A decree holder is a person in whose favour a decree has been passed or an order capable of execution has been made. Decree Holder’s Claim Under IBC is recognised as a creditor, but their claim does not automatically qualify as a financial or operational debt, creating ambiguity in their status. The IBC imposes a moratorium on the execution of decrees, requiring the claim of a decree holder to be examined within the insolvency resolution process, yet the IBC lacks clear guidelines on how such claims should be classified or treated. This lack of clarity is crucial for both creditors and debtors, as it impacts the ability of decree holders to initiate corporate insolvency resolution process (CIRP) and affects the prioritization and resolution of claims during insolvency proceedings.
Who is a Decree Holder’s Claim Under IBC ?
Under section 2(3) of the Code of Civil Procedure, 1908 (CPC), a “Decree Holder’s Claim Under IBC” is defined as any person in whose favour a decree has been passed or an order capable of execution has been made. This definition is broad and not limited to the plaintiff. It includes any individual, even if they were not a party to the original suit, provided the decree or executable order is in their favour. The term encompasses individuals whose name appears on the decree, whether as plaintiff or defendant, as long as they are legally entitled to seek its execution. The Supreme Court has affirmed that a decree-holder can be any person in whose favour a decree is passed, regardless of their participation in the original proceedings.
Read more Section 34 of Arbitration Act
Recognition of Decree Holder’s Claim Under IBC
A Decree Holder’s Claim Under IBC is recognised as a creditor under section 3(10) of the IBC, which explicitly includes them within the definition of “creditor” alongside financial, operational, secured, and unsecured creditors. However, judicial interpretations consistently hold that the decree holder does not qualify as a “financial creditor” or “operational creditor”, as the nature of their claim is derived from a court decree, not from a financial or operational transaction. The Supreme Court and various tribunals have emphasized that the IBC does not allow for the classification of a decree holder as a financial creditor, even if the underlying debt was financial, because the claim is an adjudicated amount and not a debt disbursed for the time value of money. Thus, the IBC treats decree holders as a distinct class of creditors, separate from financial and operational creditors, and their claims must be filed using specific forms, like Form F, designated for “other creditors”.
Decree Holder as a Financial Creditor
A decree holder can be classified as a financial creditor if the underlying debt that led to the decree qualifies as a financial debt, such as when it arises from a transaction involving the time value of money. The National Company Law Appellate Tribunal (NCLAT) observed that the cause of action for initiating proceedings under section 7 of the IBC arises when the debt is acknowledged by the debtor. Further, the Supreme Court in Vishal Chelani and others v. Debashis Nanda, held that homebuyers who secure a decree under the Real Estate (Regulation and Development) Act are not different from other financial creditors under the IBC.
Decree Holder as an Operational Creditor
A Decree Holder’s Claim Under IBC can be classified as an operational creditor when the underlying debt arises from a commercial transaction, such as the supply of goods or services, and the decree is for an undisputed operational debt. The NCLAT in Kirusa Software Private Ltd. v. Mobilox Innovations Private Ltd. held that a decree holder may be considered an operational obligation. This view was reinforced by the NCLAT in Urgo Capital Ltd. v. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd. where it ruled that a decree holder, as a creditor under section 3(10) of the IBC, can initiate insolvency proceedings under section 9 if the debt qualifies as operational. However, the NCLAT is Digamber Bhondew v. JM Financial Asset Reconstruction Company Ltd. later held that a decree holder cannot be classified as an operational creditor, emphasizing that the IBC’s provisions for operational creditors do not include decree holders.
Enforcement of Decree During CIRP
- Enforcement of a decree against the corporate debtor is prohibited during the moratorium under section 14 of the IBC.
- The moratorium does not bar the execution of a decree against the directors or officers of the corporate debtor.
- A decree can be enforced against the directors or officers of a company undergoing CIRP, even the moratorium period, provided they are otherwise liable.
Filing of Claims by Decree Holders in CIRP
Decree holders must file claims during the insolvency process by submitting a copy of the decree, the order, and the execution papers as supporting documentation. The timelines for filing claims is 14 days from the appointment of the interim resolution professional (IRP), with the last date specified in the public announcement. The IRP is required to verify each claim within 7 days of receiving it, completing the verification process by the 21st day from the appointment of the IRP. The list of creditors must be maintained and updated accordingly, with the initial list to be filed within 21 days of the first claim receipt or as updates occur.
Treatment of Decree Holder’s Claims in Liquidation
Decree holders, if they are secured creditors who have relinquished their security interest, are treated as secured creditors under section 53 of the IBC and rank pari passu with workmen’s dues for the preceding 24 months, placing them higher than unsecured creditors in the liquidation waterfall. The rights of decree holders in asset distribution are determined by their status as secured or unsecured creditors. Secured decree holders who release their security are prioritized in the distribution order, while unsecured decree holders are treated as unsecured financial creditors and rank lower than secured creditors but higher than operational creditors.
Judicial Precedents on Decree Holder’s Claims under IBC
The NCLAT held that a decree holder qualifies as a financial creditor under section 5(7) and section 5(8) of the IBC if the decree is based on a financial debt. This decision was grounded in the Supreme Court’s judgment in Dena Bank vs. C. Shivakumar Reddy & Anr. which established that a decree holder falls within the purview of a “financial creditor” when the underlying debt is financial in nature. The NCLAT emphasizes that the decree does not alter the character of the original financial debt, thereby, affirming the decree holder’s status as a financial creditor. The Supreme Court upheld the Tripura High Court’s judgment in Sri Subhankar Bhowmik v. Union of India, clarifying that a decree holder is not at par with a financial or operational creditor and cannot initiate insolvency proceedings solely based on a decree.
Challenges Faced by Decree Holder’s Claim Under IBC
Decree holders face legal and procedural issues due to:
- Delays in enforcement due to the IBC moratorium, which halts recovery actions including execution of decrees.
- Classification disputes arise as decree holders are not automatically deemed financial creditors under the IBC, requiring proof that the underlying transaction was financial in nature.
- Under liquidation waterfall, decree holders, if classified as operational creditors, receive payment only after secured creditors, workmen’s dues, and unsecured financial creditors, resulting in very low or zero recovery.
Practical Considerations for Decree Holder’s Claim Under IBC
- Decree holders must pursue execution of their decree through the CPC before seeking recognition in insolvency proceedings, as an unsecured decree does not grant them the same standing as financial or operational creditors.
- Timely action is critical, as delays in filing claims under the IBC can result in claims being barred, with courts generally refusing to condone delays without sufficient cause.
- Effective coordination with insolvency professionals is essential for decree holders to ensure their claims are properly documented, submitted within prescribed timelines, and considered during the resolution process.
Conclusion
Decree Holder’s Claim Under IBC are recognised as a distinct class of creditors, separate from financial and operational creditors, within their status derived solely from the decree itself. The IBC protects their interests by acknowledging them as creditors, but their claims are subject to the resolution process and extinguished if not included in an approved resolution plan. The future outlook depends on evolving jurisprudence, with recent rulings emphasizing the finality of approved plans and the need for timely participation in the insolvency process, suggesting a trend towards treating decree holders uniformly within the IBC framework rather than granting them special status.
FAQs
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Can a decree holder initiate insolvency proceedings under IBC?
A decree holder can initiate insolvency proceedings under the IBC if the decree is based on a financial debt.
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Does a decree holder qualify as an operational creditor?
A decree holder can be classified as an operational creditor when the underlying debt arises from a commercial transaction, such as the supply of goods or services, and the decree is for an undisputed operational debt.
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What happens to pending execution proceedings after CIRP begins?
Pending execution proceedings are stayed upon the commencement of the CIRP, as per the moratorium under section 14 of the IBC.
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How are decree holders treated in the liquidation waterfall under Section 53 IBC?
Decree holders who are not classified as financial or operational creditors are treated as ‘other creditors’ and fall under the category of ‘any remaining debts and dues’ in the liquidation waterfall, ranking below unsecured financial creditors and government dues.
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Can a decree holder challenge the resolution plan if their claim is ignored?
No, a Decree Holder’s Claim Under IBC cannot challenge the resolution plan if their claim is ignored, as claims not included in an approved resolution plan are extinguished and the plan’s finality binds all stakeholders, including decree holders.
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