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The author is Karan Nimish Vakil, Advocate, Tyabji Dayabhai (Advocates & Solicitors)
Introduction
The Insolvency and Bankruptcy Code, 2016 (the Code) is an extensive piece of legislation that provides a mechanism for corporate debtors carrying a specified minimum quantum of outstanding debt to be subjected to a corporate insolvency resolution process (CIRP) in accordance with the various provisions of the Code. Insomuch, the Code mandates at the stage of pre-admission of an application for initiation of the CIRP that the creditor applicant (not being the corporate debtor itself) identify itself as either a financial creditor or an operational creditor. Accordingly, the creditor applicant must file such an application either under Section 7 (in case of financial creditors) of the Code or under Section 9 of the Code (in case of operational creditors).
In the recent case of Subhankar Bhowmik v. Union of India & Another, 2022, the Tripura High Court held that a decree holder is not a financial creditor under the Code, thereby depriving decree holders of the recourse available under the abovementioned Section 7 of the Code. By analysing the bare text of the Code, the ruling in Bhowmik itself, and various judgments of National Company Law Tribunals (NCLTs) and the Supreme Court of India, this article will argue against the ruling in Bhowmik, in favour of the right of a decree holder to exercise its option under Section 7 of the Code.
The Definitions Argument
Section 3(10) of the Code provides a wide definition of “creditor”, including but not limiting it to mean inter alia a financial creditor, an operational creditor and a decree holder. In turn, Sections 3(7) and 3(20) of the Code define “financial creditor” and “operational creditor” respectively simply as a creditor to whom a financial or operational debt (as the case may be) is owed. Section 3(8) of the Code provides another wide definition, this time of “financial debt”, which is defined by way of a non-exhaustive list of debts that can be categorized as such. “Operational debt” on the other hand is given a precise definition under Section 3(21) of the Code as a debt arising from goods, services, employment or government dues. The rigidity of this definition was made clear by the National Company Law Tribunal (NCLT), New Delhi in Vinod Awasthy v. A.M.R. Infrastructures Limited, 2017 wherein it was held that an operational debt is confined to the four categories of goods, services, employment and government dues.
Having dealt with these definitions seriatim, it can be inferred from the plain text of the Code itself that a decree holder is a financial creditor. There can be no argument that a decree holder is not a creditor under the Code; this is undeniable in view of Section 3(10) of the Code. To avoid the absurd conclusion that a decree holder has no direct recourse under the Code, it must therefore fall under the more flexible definition of a financial creditor.
Section 3(10) of the Code specifically defines secured and unsecured creditors as creditors. This shows an overlap among the types of listed creditors under this Section. Secured and unsecured creditors find their vital categorization as operational or financial creditors depending on the species of the debt that is owed to them. Ergo, secured and unsecured creditors can be either operational or financial creditors. The NCLT, Bombay in HDFC Ventures Trustee Company Limited v. Kakade Estate Developers Private Limited, 2023 has held that this is equally true of decree holders. The Tribunal held that “the nature of the debt due under decree would depend on the nature of the transaction from which the decretal debt has arisen”.
The Ruling in Subhankar Bhowmik v. Union of India & Another, 2022
The Tripura High Court in Bhowmik took an extremely harsh view on the very ability of decree holders to seek direct recourse under the Code. The Court held that “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”. This is juxtaposed to earlier decisions such as that of the NCLT, New Delhi in Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Private Limited, 2020 wherein the tribunal held that “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”, and that of the NCLT, Bombay in Gannon Dunkerley and Co. Ltd. v. Sangeeta Aviation Services Private Limited, 2021 wherein the tribunal held that “the above Company Petition filed by the Financial Creditor basing on a decree is maintainable and is liable to be admitted”. However, despite these judgements, the ruling in Bhowmik is widely regarded as the prevailing authority on the issue of the maintainability of an application for initiation of the CIRP filed by a decree holder in its purported capacity of a financial creditor. A key reason for the general acceptance of Bhowmik is its apparent affirmation by the Supreme Court of India in the Special Leave Petition (SLP) filed by the aggrieved decree-holder petitioner.
Judicial Overlook
It is at this juncture that it must be pointed out that the Supreme Court of India did not hear Bhowmik on merits, stating in its three-sentence order that it was “not inclined to interfere with the impugned judgement”. Insomuch, the SLP was dismissed in limine, that is to say that it was dismissed without being heard on merits. Therefore, it does not constitute a binding interpretation of the law and does not have the force of Article 141 of the Constitution of India. This is a well-settled position of the law, recently upheld by a division bench of the Supreme Court of India in State of Orissa & Another v. Dhirendra Sundar Das & Others, 2019. This effectively reopens the question as to whether a decree holder may approach the adjudicating authority as a financial creditor for the purpose of filing an application for initiation of the CIRP.
The answer to the question raised in the preceding paragraphs can be found in a division bench of the Supreme Court of India’s decision in Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy & Another 2021. Here, it was unequivocally held that “on a conjoint reading of the provisions of the IBC quoted above, it is clear that a final judgment and/or decree of any Court or Tribunal or any Arbitral Award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 of the IBC”. It is extremely noteworthy here that despite being after Dena in point of time, the Tripura High Court in Bhowmik failed to consider it while formulating its decision.
Conclusion
There is an urgent need for the Supreme Court’s ruling in Dena to be understood as the final authority on the issue of a decree holder’s recourse by route of Section 7 of the Code, as a financial creditor. Not doing so would be to deny decree holders of any direct recourse under the Code. This is especially relevant for foreign decree-holders i.e. foreign creditors who have obtained money decrees in foreign jurisdictions against Indian debtors. The Supreme Court of India in Macquarie Bank Limited v. Shilpi Cable Technologies Limited, 2018, has made it abundantly clear that foreign creditors and domestic creditors have equal rights under the Code, without any distinction between them. With a view to ease business in India by solidifying the rights of decree holders under the Code, specifically those of foreign decree-holders, Indian Courts must take cognizance of Dena and restore the correct position of the law qua decree holders rights to initiate the CIRP under the Code.