The Supreme Court of India, in the case of Shubhakar Bhowmoik v Union of India [SLP 6104/2022] dismissed the Special Leave Petition arising from the HC Tripura WP(C)(PIL) 04/2022 wherein the Hon’ble Tripura High Court held that the decree holders cannot be treated at par with the financial creditors and they shall be included within the ambit of “Other Creditors” only.
FACTS
Sri Subhankar Bhowmik (herein referred as “the Petitioner”) being the shareholder of the public listed companies has filed the petition under Article 226 of the Constitution of India before the Hon’ble Tripura High Court (“the Court”) wherein the Petitioner has challenged sub-Section 10 of Section 3 of Insolvency & Bankruptcy Code, 2016 (“the I&B Code”) read with Regulation 9A as ultra-virus that, the said provision fails to define the terms “other creditors” and shall be struck down as it’s a violation of Article 14 of the Constitution of India.
The Petitioner has also sought that the claims filed under Regulation 9A under CIRP by the decree-holder shall be treated and considered at par with the claims filed by the financial creditors.
However, considering the objective of the I&B Code, the High Court dismissed the petition of the Petitioner. Being aggrieved by the order, the Petitioner challenged the order before the Supreme Court of India by way of a Special Leave Petition (SLP) wherein the Apex Court of India upheld the decision of the High Court and dismissed the SLP of the Petitioner.
ISSUES BEFORE THE HIGH COURT
Whether Section 3(10) of I&B Code read with Regulation 9A is ultra-virus and shall be struck down as it’s in violation of Article 14 of the Constitution of India?
CONTENTIONS OF THE PETITIONER
The Petitioner contended that the major issue in the present Petition pertains to the treatment of the term “decree holder” who holds the claim against the Corporate Debtors under the I&B Code.
The Petitioner states that, neither the I&B Code or Regulations provides for the specific classification of the term “decree holder” i.e. it failed to provide the classification of the decree holder into a specific class of creditors as the decree holders under the I&B Code falls under the residuary category of “Other Creditors” which is a clear violation of Article 14 of Constitution of India.
DECISION AND FINDINGS
The Court after considering the submissions of the Petitioner observed that the real objective behind the enactment of I&B Code was to archive e efficiency and efficacy in the resolution process for corporate persons, partnerships and individuals.
The Court while observing the objectives of the I&B Code relied on the decision of Apex Court in the case of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and held that –
“That, maximization of the assets of a corporate debtor, is a cardinal principle of the IBC, has also been recognized by the Hon’ble Apex Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors. (2020) 8 SCC 531 and in Maharasthra Seamless Limited vs. PadmanabhanVenkatesh and Anr. (2020) 11 SCC 467.
The Court further analysed the provisions of Sub-Section 10 of Section 3 of I&B Code and noted that, the I&B Code provides for the recognition and definition of each class of creditor, however the term “decree holder” though recognised, is not specifically defined by the I&B Code.
The Court further observed the rights of decree holder and held 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 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 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.”
The Court noted that the right of a decree holder to execute the decree gets freeze in light of Section 14(1)(a) of the I&B Code, which mandates and imposed the moratorium on the Corporate Debtor as the decree holder may get the right to execute the decree by way of passing of decree in its favour however the decree is always subject to challenge at appellate authority till the execution proceedings are finalized.
The Court further held that the I&B Code rightly recognised the claim of decree holder under the CIRP process however it also imposed the moratorium under Section 14 of I&B Code on the execution of the claim of decree holders against the Corporate Debtor which is solely on the grounds that the real objective behind the enactment of the I&B Code is to preserve and maximise the assets of the Corporate Debtor and to ensure that the assets of the Corporate Debtor shall be protected as the intention of the legislature 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 Court further observed the objective of I&B Code and stated that the I&B Code specifically do not involve the decree holder into the ambit of specific class and provide them only with the status of Creditor as rights of each and every class of creditors i.e, either Financial creditor, Operational creditor or Other creditors are subject to the protection and maximisation of assets of the Corporate Debtor for the benefit of all shareholders and finally held that;
“it cannot be argued that the resolution professional should do what the court cannot. Seen in this backdrop, the reason for keeping decree holders as a separate class from the other identified classes in Section 3(10) is ex facie apparent. The resolution professional cannot look to the nature of the original claim that resulted in the decree as that would require looking behind the decree. Looked at in another manner, once a decree quantifies a debt due the nature of the dispute that resulted in the quantification ceases to exist. In the books of a corporate debtor, it will show only as a liability and not as a financial debt or operational debt. The same cannot be said to be arbitrary, or unreasonable.
Once seen in the aforesaid context, the claim of a decree holder, is subject to all the rigors of the resolution process and has to be satisfied along with all other claims, in accordance with the waterfall mechanism envisaged by the IBC. Since the claims cannot be classified as operational or financial, appropriate provisions (Regulation 9A) and forms (Form F) for filing of claims is provided in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. This is also reflected in the title to Form F which reads “Proof of Claim by Creditors (Other than Financial Creditors and Operational Creditors). It is trite to say that the assets of a corporate debtor inure to the benefit of all creditors, decree holders being one of them. The distinction of decree holders as Page – 14 of 16 creditors from “financial creditors” and “operational creditors”, as seen aforesaid is intelligible and take forward the purpose of the IBC. The same cannot be stated to be discriminatory or arbitrary”.
AMLEGALS REMARKS
Through this decision the Court has again enlighten upon the objective behind the enactment of I&B Code which has also been pronounce earlier on the similar issue by the National Company Law Appellate Tribunal in case of Sh. Sushil Ansal Vs Ashok Tripathi and Ors. The Court has also provided the detailed view on the intention of legislature towards the classification and treatment of operational creditors, financial creditors and other creditors.
The Court has rightly held that the specific inclusion of the decree holder under the class of financial creditor would defeat the real intention of legislature i.e. to protect and secure the assets and ownership of the corporate debtor as the decree by its nature can be challenged before the appellate forum till its final execution.
The present decision and position of courts have made it clear that the primary emphasis of the Resolution is to revive the Corporate Debtor. Moreover, the exclusion of Decree holders from Committee of Creditors (“CoC”) or suitable to initiate CIRP can be grounded on the fact that they may not have sufficient expertise or interest in Corporate Revival of Corporate Debtor or to the fact that they have recourse under CPC Order 21 before Moratorium and after Moratorium as separate class of creditors. Hence it cannot be said that their interest has been harmed. Thus, there is no requirement of treating the decree holders as financial creditors as far as it would be defeat the very purpose of I&B Code.
For any queries or feedback, please feel free to get in touch with siddharth.kakka@amlegals.com or tanmay.banthia@amlegals.com.
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