'Decree Holders' cannot be treated at par with 'Financial Creditors'

The Supreme Court has recently upheld the decision of the Tripura High Court1 by refusing to interfere with its judgement which held that 'Decree Holders' cannot be treated at par with 'Financial Creditors' under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Petitioner had sought for a declaration of Section 3(10) of IBC read with Regulation 9(a) as ultra vires in as much as it failed to define the terms "other creditors" and prayed for striking them down. In the alternative, the Petitioner prayed that the impugned provisions may be interpreted harmoniously to include the words "decree holder" as existing in Section 3(10) to be at par with "financial creditors" under Regulation 9(a), to save them from unconstitutionality.

As such, the issue was one of classification. The Petitioner stated that the IBC and/or the Regulations framed thereunder, do not prescribe the class of creditors to which the term "decree holder" belongs, and therefore there exists a need to iron out the creases. It was suggested that without such prescription in the IBC, the class of "decree holders” falls into the residual class of "other creditors", which it stated is manifestly arbitrary and therefore violates Article 14 of the Constitution of India.

The High Court 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 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. Thus, 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.

At best, a decree signifies a claim that has been judicially determined and in that sense is an "admitted claim" against the corporate debtor. Thus, the High Court concluded by observing that in the books of a corporate debtor, the decree will show only as a liability and not as a financial debt or operational debt and therefore the same cannot be said to be arbitrary, or unreasonable.

By - Lakshmi Raman

  1. WP(C)(PIL) No.04/2022