India: Decree Holders-Financial Creditors Under IBC?

In a recent judgement of the National Company Law Appellate Tribunal ("NCLAT") (Delhi), passed on 14th August 2020 in the matter of Sushil Ansal v. Ashok Tripathi and Ors¹, a better understanding of whether a decree holder is a financial creditor under the Insolvency and Bankruptcy Code, 2016 ("Code") has been provided.

FACTS OF THE CASE

The Respondent Nos. 1 and 2 are individuals and had jointly booked a unit with M/s Ansal Properties and Infrastructure Limited ("Corporate Debtor") in Sushant Golf City developed at 'High Tech Township'. Sector-P, Sultanpur Road, Lucknow and the Respondent No. 2 had booked another flat thereafter. A joint "Built Up Agreement/ Builder Buyer Agreement" dated 12th September, 2014 in respect of the first unit and Flat Buyer Agreement dated 28th September, 2014 for the second unit had been executed inter se the respective parties. The Corporate Debtor had undertaken to complete the construction and to deliver possession of the units to allottees within two years from the date of commencement of construction on receipt of sanctioned plans from the authority. The project start date notified on the website of 'Real Estate Regulatory Authority' ("RERA") was 22nd September, 2015. The Corporate Debtor had to deliver possession of the first unit to the Respondent Nos. 1 and 2 latest by 22nd September, 2017 and the second unit within 36 months from the date of sanction of building plans. However, even after lapse of five years, the Corporate Debtor neither completed the construction of these units nor refunded the amount to the allottees.

Thereupon, the Respondent Nos. 1 and 2 approached the Uttar Pradesh RERA ("UP RERA") where they were awarded a decree of Rs. 73,35,686.43/- (Rupees Seventy-Three Lakhs Thirty Five Thousand Six Hundred and Eighty Six and forty three paisa only) in their favour and UP RERA had also issued a recovery certificate against the Corporate Debtor.

Thereafter, the Respondents filed an application under Section 7 of the Code to recover the sums before the National Company Law Tribunal ("NCLT") and as a result of the same, NCLT vide its order dated 17th March 2020 ("Impugned Order")  allowed the appointment of an interim resolution professional and the Corporate Debtor was placed under moratorium.

ISSUE

One of the issues that came up for consideration in this matter before the Hon'ble Tribunal was whether the application filed by the Respondent Nos. 1 and 2 under Section 7 of the Code was maintainable?

FINDINGS

The Hon'ble Tribunal observed that the Respondent Nos. 1 and 2 had not approached the adjudicating authority in their capacity as allottees of a real estate project which would bring them within the category of financial creditors under the Code. Instead, their contention of coming within the purview of 'financial creditors' rested on the strength of the definition of creditor in terms of Section 3(10) of the Code which includes a decree holder and therefore they had claimed to be decree holders against the financial debt of the Corporate Debtor.

This raised the question as to whether a decree holder, though covered by the definition of a creditor, is a 'financial creditor' under the Code? The Hon'ble Tribunal opined that a 'decree-holder' is undoubtedly covered by the definition of 'creditor' under Section 3(10) of the Code but would not fall within the class of creditors classified as 'financial creditor' unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of 'financial debt' is inclusive in character. The case set up by the Respondent Nos. 1 and 2 before the adjudicating authority was not on the strength of a transaction having the commercial effect of  borrowing, thereby giving them the status of 'financial creditors' but was on the strength of being 'decree-holders'.

While answering the question whether a decree-holder would fall within the definition of 'financial creditor', the Hon'ble Tribunal stated that it has to be an emphatic 'No' as the amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money and does not fall within the ambit of any of the clauses enumerated under Section 5(8) of the Code.

CONCLUSION

The Hon'ble Tribunal summarised its judgement as under:

1. Respondent Nos.1 and 2 could not claim to be allottees of a Real Estate Project after issuance of a recovery certificate by UP RERA; on their own  showing they were decree holders seeking execution of money due under the Recovery Certificate which is impermissible within the ambit of Section 7 of the Code and their application for triggering the corporate resolution process is not maintainable as allottees
2. 'Decree holder' though included in the definition of a 'creditor' does not fall within the definition of 'financial creditor' and cannot seek initiation of Corporate Insolvency Resolution Process as 'financial creditor'.

Whilst acknowledging the fact that setting aside the Impugned Order would derail the entire resolution process since there were a number of claimants including the allottees before the Interim Resolution Professional, the NCLAT ultimately ruled that the Impugned Order initiating Corporate Insolvency Resolution Process against the Corporate Debtor cannot be sustained. The application preferred by the Respondent No.1 and 2 under Section 7 of the Code was dismissed.

Footnotes

1 Company Appeal (AT) (Insolvency) No. 452 of 2020 (arising out of order dated 17th March, 2020 passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi Court - II in (IB)-2584/ND/2019).