Decree Holders Are Not Financial Creditors…

DECREE HOLDERS ARE NOT FINANCIAL CREDITORS UNDER THE IBC: SUBHANKAR BHOWMIK V UNION OF INDIA & ANR^[[1]]

Facts

The High Court was considering a writ petition where the Court was requested to: (i) declare that the definition of “financial creditor” under the IBC should include a “decree holder” and (ii) a claim of a “decree holder” should be treated at par with that of a “financial creditor” and be “amenable to all consequential rights available to a financial creditor”.

High Court Decision

 The High Court dismissed the writ petition, holding that:

1. The provisions of the IBC suggest that the “Parliament in its wisdom” recognised 5 types of creditors, being financial creditor, operational creditor, secured creditor, unsecured creditor and decree holder;
2. Though “financial creditor”, “operational creditor” and “secured creditor” are defined in 5(7), §5(20) and §3(30) respectively, “decree holder” is not defined;
3. The omission is not inadvertent. The right of a decree holder is inchoate as the execution of the decree is open to objections and subsequent challenges. Once a moratorium is declared under 14 of the IBC, the decree holder cannot proceed to, or with, execution of the decree.
4. The IBC protects the interests of a “decree holder” as it recognises it as a creditor in 3(10), albeit as a separate class. “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”.
5. 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 disputes that resulted in the quantification ceases to exist”.

Conclusion

It appears that even if the underlying debt which led to the decree was a financial debt, once the decree is issued the creditor would not be treated as a financial creditor.

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[1]     Decision dated 11 April 2022 passed by the Supreme Court of India in SLP (C) No 6104 of 2022.