Where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the ‘debt’, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete.
With the recent judgment of the NCLAT in the matter of Sushil Ansal v Ashok Tripathi, the much contentious issue of whether a decree holder can initiate the Corporate Insolvency Resolution Process has again come into picture. The article aims to discuss the conflicting opinion of the Adjudicating Authorities (particularly NCLAT) on the impugned question, which transgresses upon the Hon’ble Supreme Court’s observation on the initiation of the Corporate Insolvency Resolution Pro- cess (CIRP) on the basis of an adjudicated amount.
Summary of the Judgement
In this case the Respondents are allottees of a flat in a housing project under a builder buyer agreement with Ansal Properties and Infrastructure Limited (Corporate Debtor). Due to the failure of the developer to complete the construction of the units within the given time frame or refund the amount to the allot- tees, the Respondents approached the Uttar Pradesh Real Estate Authority (UP RERA) for recovery of their dues. UP RERA issued a recovery certificate in the favor of the Respondents for the recovery of the amount as arrears of land revenue.
Post the grant of the recovery certificate by UP RERA, the Respondents approached the NCLT for initiation of a CIRP under Section 7 of the IBC against the corporate debtor. The NCLT admitted the application of the Respondents. The appellant (former director and shareholder of M/S Ansal Properties) filed an appeal against the order of the NCLT. However, during the pendency of the appeal before the NCLAT, the parties arrived at a settlement and did not contest the maintainability of the appeal under Section 7.
The NCLAT while dealing with the issue of whether the application filed by Respondent No.1 & 2 under Section 7 of IBC was maintainable or not, observed that the present case was brought by the Respondents in the capacity of decree holders and not as allottees of a Real Estate Project.
On the question of whether a decree holder would qualify as a financial creditor, the tribunal observed that the amount claimed under a decree is in the nature of an adjudicated debt and not a debt which is disbursed against the consideration for time value of money. Hence, the decree holder would not fall under the ambit of any of the clauses enumerated under Section 5(8) of IBC.
Conflicting opinion of the adjudicating authorities
Prior to Sushil Ansal’s case, the NCLT Mumbai in Al- chemist Asset Reconstruction Company Limited Vs. Dugal Projects Development Company Private Limited, where the Applicant received the recovery certificates from the DRT, Mumbai against the default committed by the respondent, admitted the Section 7 application of the Applicant to initiate the CIRP against the defaulter by taking reference to the Hon’ble Supreme Court’s ruling in In- noventive Industries Ltd. vs. ICICI Bank Ltd. that:
“Where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete…”
More recently, the NCLAT in M/s. Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd., where the Applicant/Appellant has filed Section Application in furtherance of the decree passed by the High Court in favour of the Applicant which includes the principle and the interest against the Corporate Debtor, took note of the definition of the ‘Creditor’ provided under Section 3(10) of the Code which says that “Creditor means any person to whom a debt is owed and includes
a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder.” The Tribunal admitted the Application of the Appellant (Financial Creditor) by observing that:
“Based on the decree of the Court this petition was filed u/s 7 of the Code. Since the definition of word creditor in I&B Code includes decree-holder, therefore 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.”
Moreover, the NCLAT in HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd, where the Applicant/Appellant wants to execute the arbitral award through initiation of CIRP, although declined to admit the Application of the Appellant (Financial Creditor) on account of Application being barred by limitation but was reluctant to dismiss the Ap- peal on account of decree/ award not executable under the Code.
In Sushil Ansal’s case, the NCLAT rejected the Application of the Appellant (Financial Creditor) by stating that:
“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 ‘I&B Code.”
Now, the NCLAT opinion in the impugned Judgment can be contradicted in the following manner:
Firstly, regarding debt disbursed against the time value of money: The NCLAT in Digamber Bhondwe v. JM Financial Asset Reconstruction Company Limited, rejected the Application of the Financial Creditor who wanted to initiate CIRP on the basis of decretal amount (bearing interest till the realization of the decree) passed in favor of him by the DRT. Thus, it is evident on the part of the NCLAT that, one side, it rejected the Application of the Financial Creditor in Sushil Ansal’s case by stating that the decree is not a debt disbursed against the time value of money, and, on the other side, it also rejected the Application of the Appellant/Financial Creditor in Digamber Bhondwe’s case where the decree passed in favor of the Appellant/Financial Creditor have time value of money attached to it.
Moreover, it is imperative to import the observation of the Hon’ble Supreme Court in K. Kishan vs. M/s. Vijay Nirman Company Pvt. Ltd., said that CIRP can be initiated on the basis of an arbitral award but it did not state that only those Arbitration awards can be considered for filing Petition under IBC if the claim arises out of a debt disbursed against the time value of money. The relevant excerpts of the Judgment states that:
“We may hasten to add that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed, It is only in such clear cases that the insolvency process may then be put into operation”.
Thus, implying that the NCLAT’s observation is being deviated from the settle principles established by the Apex Court.
Secondly, the decree being an adjudicated amount: In Sundaram Finance Ltd. v. Abdul Samad, the Hon’ble Supreme Court while interpreting Section 36 of the Arbitration & Conciliation Act, 1996 observed that:
“The aforesaid provision would show that an award is to be enforced in accordance with the provisions of the said code in the same manner as if it were a de- cree. It is, thus, the enforcement mechanism, which is akin to the enforcement of a decree but the award itself is not a decree of the civil court as no decree whatsoever is passed by the civil court. It is the arbitral tribunal, which renders an award and the tribunal does not have the power of execution of a decree. For the purposes of execution of a decree the award is to be enforced in the same manner as if it was a decree under the said Code.”
The aforesaid Judgment implies that when the CIRP can be initiated on the basis of the arbitral award which is considered to be an adjudicated amount then the same guiding principles needs to be accepted as a common yardstick to execute the decree/award under the IBC. It is an undeniable fact that the home allottees are considered as a ‘Financial Creditor’ under the Code to trigger the CIRP against the default commit- ted by the Corporate Debtor, hence, it would not be appropriate for the Tribunal to decline the Petition filed by the Allottees under Section 7 of the Code because the decree/amount being adjudicated by the other forum (like UP RERA in Sushil Ansal’s case). Ironically, considering the time driven litigation process in India, such execution through the Civil Court might not effectuate to be a most efficacious remedy, rather it may lead the interests of the Creditor’s in disdain, thus under- mining the object of the IBC to facilitate the revival of the Corporate Debtor, and realize the outstanding dues, in a time bound process.