13 四月 2022

Insolvency – Distinction of decree holders from financial creditors is intelligible

The Supreme Court has on 11 April 2022 dismissed a Special Leave Petition against the decision of the High Court of Tripura at Agarthala, wherein the High Court had held that the distinction of decree holders as creditors from ‘financial creditors’ and ‘operational creditors’, is intelligible and takes forward the purpose of the Insolvency and Bankruptcy Code, 2016, without being discriminatory or arbitrary.

The High Court in the case Shubhankar Bhowmik v. Union of India & Anr, [Order dated 14 March 2022] had dismissed the writ petition which had contended to declare the provisions of Section 3(10) of the IBC read with Regulations 9(a) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 as ultra vires inasmuch as it fails to define the terms ‘other creditors’ and accordingly, to strike them down on the vice of Article 14 of the Constitution of India.

The Petitioners before the High Court had also contended 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.

The High Court had noted that IBC treats decree holders as a separate class and does not provide for any malleability or overlap of classes of creditors to enable decree holders to be classified as financial or operational creditors.

It noted that in terms of Section 14(l)(a), 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.

The High Court had also noted that a decree, in a given case, may be amenable to challenge by way of an appellate process, and/or by way of objections in the execution process.

The Court had further noted that the resolution professional cannot look to the nature of the original claim that resulted in the decree and in the books of a corporate debtor, it will show only as a liability and not as a financial debt or operational debt.

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