2022 (3) TMI 998 - HC - Insolvency and Bankruptcy

Decree holders' rights in insolvency clarified by court decision

Sri Subhankar Bhowmik Versus Union of India and Anr.

The court upheld the constitutionality of Section 3(10) of the Insolvency and Bankruptcy Code (IBC) and Regulation 9A, concluding that decree holders are ... Constitutional validity of provisions of Section 3(10) of the Insolvency and Bankruptcy Code, 2016 read with Regulations 9A - claims filed under a CIRP by 'decree holder' under Regulation 9(a) of the CIRP Regulations, be considered at par with claims filed by ''financial creditors' - HELD THAT:- In effect, an unexecuted decree, in the hands of a decree holder under the IBC regime, cannot be executed. At best, a decree signifies a claim that has been judicially determined and in that sense is an 'admitted claim' against the corporate debtor. Therefore, the IBC rightly categorises a decreeholder, as a creditor in terms of the definition contained in Section 3(10). Execution of such a decree, is however subject to the fetters expressly imposed by the IBC (in addition to and over and above the requirements and limitations of the execution process under the CPC), which cannot be wished away. 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 that 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' - 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. Once a decree holder is recognized as a creditor, all provisions of the IBC that apply to creditors, including the waterfall provisions are applicable in all their force. The rights like each and every other creditor are subject to the overall objective of maximization of assets of the corporate debtor for the benefit of all stake holders in line with the commercial wisdom of the Committee of Creditors - Once admitted as a creditor, the efforts must be to preserve and maximise the assets of a corporate debtor. The resolution professional cannot look behind the decree. In the resolution process, he must acknowledge and admit the decree as an admitted claim, unless such decree has been set aside. Membership of the Committee of Creditors has to be seen in context of its role under the IBC. The IBC, therefore, put the onus of taking key decisions in a graded manner putting foremost the interest of the creditor concerned to bring a corporate debtor back on its feet. Financial creditors who have large exposure to a corporate debtor therefore get the first preference, followed by operational creditors, who are also interested in contained operations and therefore the revival of the corporate debtor. A decree holder on the other hand, holds a decree as a result of crystallizing and determining a dispute through an adversarial process of litigation. Writ petition stands dismissed. Issues Involved:1. Constitutionality of Section 3(10) of the Insolvency and Bankruptcy Code (IBC), 2016, and Regulation 9A.2. Classification and treatment of 'decree holders' under the IBC.3. Rights and recognition of decree holders in the Corporate Insolvency Resolution Process (CIRP).4. Inclusion of decree holders in the Committee of Creditors (CoC).Detailed Analysis:1. Constitutionality of Section 3(10) of the IBC and Regulation 9A:The petition challenges the constitutionality of Section 3(10) of the IBC and Regulation 9A, arguing that they fail to define 'other creditors' and exclude decree holders from being considered at par with financial creditors. The petitioner asserts that this omission is arbitrary and violates Article 14 of the Constitution of India. The court examines the provisions of the IBC, noting that the term 'creditor' includes financial creditors, operational creditors, secured creditors, unsecured creditors, and decree holders. The court concludes that the classification is not arbitrary as the IBC treats decree holders as a separate class of creditors, distinct from financial and operational creditors.2. Classification and Treatment of 'Decree Holders' under the IBC:The petitioner contends that the IBC does not adequately classify decree holders, leading to their arbitrary treatment. The court examines the definition of 'creditor' in Section 3(10) of the IBC and acknowledges that decree holders are recognized as a distinct class of creditors. The court explains that the rights of decree holders under the IBC are limited due to the moratorium imposed by Section 14, which prohibits the execution of decrees against the corporate debtor during the insolvency resolution process. The court emphasizes that the IBC's objective is to maximize the value of the corporate debtor's assets for the benefit of all stakeholders, and the classification of decree holders aligns with this objective.3. Rights and Recognition of Decree Holders in the CIRP:The court discusses the rights of decree holders within the CIRP framework. It highlights that while decree holders are recognized as creditors, their ability to execute the decree is restricted by the moratorium under Section 14 of the IBC. The court explains that the resolution professional must acknowledge and admit the decree as an admitted claim, but the execution of the decree is subject to the overall objective of preserving and maximizing the corporate debtor's assets. The court further notes that the IBC provides mechanisms for estimating the value of decrees that are not amenable to precise valuation, ensuring that decree holders' claims are addressed within the resolution process.4. Inclusion of Decree Holders in the Committee of Creditors (CoC):The petitioner argues that decree holders are discriminated against by not being included in the CoC. The court examines the role of the CoC, emphasizing that it is responsible for making key decisions in the insolvency resolution process, primarily aimed at reviving the corporate debtor. The court refers to the Supreme Court's observations in previous cases, highlighting that the CoC's decisions are based on commercial wisdom and the interests of financial creditors who have significant exposure to the corporate debtor. The court concludes that including decree holders, who are adversarial claimants, in the CoC would defeat the non-adversarial nature of the insolvency resolution process. Therefore, the exclusion of decree holders from the CoC is justified and not discriminatory.Conclusion:The court dismisses the writ petition, upholding the constitutionality of Section 3(10) of the IBC and Regulation 9A. It affirms that the classification and treatment of decree holders under the IBC are not arbitrary or discriminatory. The court emphasizes that the IBC's objective is to maximize the value of the corporate debtor's assets for the benefit of all stakeholders, and the recognition of decree holders as a separate class of creditors aligns with this objective. The court also rejects the contention that decree holders should be included in the CoC, as their inclusion would undermine the non-adversarial nature of the insolvency resolution process.