The author through this article attempts to explain that permitting any judgment or decree (particularly one which is not deemed to be a decree under its law for initiating insolvency proceedings under the Code) would be legally unsustainable. This proposition is premised on the fact that such a decree cannot by itself be equated with a financial debt as defined under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (the “Code”).
The Code mandates that the debt must arise out of a disbursal against consideration for the time value of money. Therefore, unless the statutory framework under which the decree is passed expressly provides for its treatment as a financial debt or a valid trigger for insolvency, it cannot automatically give rise to a cause of action under the Code.
Decree holder not necessarily a financial creditor
Under Section 3(10) of the Code, a creditor is defined. It lays down five categories of creditors, which are (a) financial creditor; (b) operational creditor; (c) a secured creditor; (d) an unsecured creditor; and (e) a decree-holder. For ready reference, Section 3(10) of the Code is reproduced herein below:
“3
… … …
(10) “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;
… …”
Under Section 3(6) a claim is defined as a right to payment, whether or not reduced to judgement. For ready reference, Section 3(6) of the Code is reproduced herein below:
“(6) “claim” means—
(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;”
A debt is defined under Section 3 (11) of the Code as a liability or obligation in respect of a claim which is due and includes a financial debt and an operational debt. For ready reference, Section 3(11) of the Code is reproduced herein below:
“(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;”
On a plain reading of the definitions of a creditor, a claim and debt it is clear that there are 5 types of creditors within the meaning of the Code. One such category is of those persons who have a decree in their favour. Meaning thereby, by virtue of passing of a decree by a competent court, the decreed amount becomes a valid claim and if unpaid, becomes a debt within the meaning of Section 3(11) of the Code. However, this debt merely is a debt arising out of a claim and does not fall within the category of a financial debt under the Code.
A financial creditor is separately defined under Section 5(7) of the Code as a person to whom a financial debt is owed and includes a person to whom such a debt has been legally assigned or transferred. Further, a financial debt is defined under Section 5(8) of the Code as a debt along with interest, if any, which is disbursed against the consideration for the time value of money.
The legislature while drafting the Code has consciously kept a creditor having a decree in its favour and a financial creditor in different categories. Merely by having a favorable decree in its favour, a creditor does not become a financial creditor within the meaning of the Code and a debt arising out of a claim does not become a financial debt. Therefore, the Code treats a decree holder as a class separate from a financial and/or an operational creditor.
Insolvency is not a recovery tool
In Swiss Ribbons v. Union of India (2019) 4 SCC 17, the Honourable Supreme Court of India held that the Code is not a mere recovery legislation for the creditors but rather a beneficial legislation intended to revive and rehabilitate the corporate debtor. The relevant observation reads as under:
“28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.”
Similarly, in Pioneer Urban Land & Infrastructure Ltd. & Anr. v. Union of India & Ors. (2019) 8 SCC 416, the Supreme Court reiterated that the Code is not a debt recovery mechanism. The relevant observation reads as under:
“41. It is also important to remember that the Code is not meant to be a debt recovery mechanism (see para 28 of Swiss Ribbons). It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it. Thus, any allottee/home buyer who prefers an application under Section 7 of the Code takes the risk of his flat/apartment not being completed in the near future, in the event of there being a breach on the part of the developer. Under the Code, he may never get a refund of the entire principal, let alone interest. […]”
The principle was also reiterated in Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd., (2022) 1 SCC 401. It was also held that the focus of the Code is more on ensuring the revival and continuation of the corporate debtor rather than mere recovery of the debt owed by the corporate debtor to its creditors. The relevant observation reads as under:
“88.2. In the judgment delivered on 25-1-2019 in Swiss Ribbons (P) Ltd. v. Union of India [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] (hereinafter also referred to as the case of “Swiss Ribbons”), this Court traversed through the historical background and scheme of the Code in the wake of challenge to the constitutional validity of various provisions therein. One part of such challenge had been founded on the ground that the classification between “financial creditor” and “operational creditor” was discriminatory and violative of Article 14 of the Constitution of India. This ground as also several other grounds pertaining to various provisions of the Code were rejected by this Court after elaborate dilation on the vast variety of rival contentions. In the course, this Court took note, inter alia, of the pre-existing state of law as also the objects and reasons for enactment of the Code. While observing that focus of the Code was to ensure revival and continuation of the corporate debtor, where liquidation would be the last resort, this Court pointed out that on its scheme and framework, the Code was a beneficial legislation to put the corporate debtor on its feet, and not a mere recovery legislation for the creditors.”
In this light, it is also relevant to state that Section 65 of the Code also prohibits filing of insolvency applications with fraudulent or malicious intent. Where the sole purpose of the application under Section 7 of the Code is to enforce an award or recover money, it falls foul of Section 65 of the Code. The relevant part of Section 65 of the Code is reproduced hereinbelow:
“Section 65: Fraudulent or malicious initiation of proceedings.
65. (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.”
In this regard, reliance is placed upon the judgement of Honourable NCLAT in Sh. G. Eswara Rao v. Stressed Assets Stabilisation Fund and Ors., CA(AT)(I) 1097 of 2019 wherein it has been held that by filing an application under Section 7 of the Code, a decree cannot be executed. It has been further held that such cases will be covered by Section 65 of the Code which stipulates filing of the insolvency resolution process fraudulently or with malicious intent for any purpose other than for the resolution of a corporate debtor.
The law in Dena Bank and beyond
The judgement of Dena Bank v. C. Shivakumar Reddy and Another, (2021) 10 SCC 330, has stated that a recovery certificate holder is a financial creditor under Section 5(7) of the Code and an award holder or decree holder is a financial creditor under Section 5(7) of the Code.
In Dena Bank Judgment, this Honourable Court held that a judgment and/or decree for money in favour of the financial creditor passed by any tribunal or court or the issuance of a certificate of recovery in favour of the financial creditor. The relevant paragraph is as follows:
“130. We see no reason why the principles should not apply to an application under Section 7 IBC which enables a financial creditor to file an application initiating the corporate insolvency resolution process against a corporate debtor before the adjudicating authority, when a default has occurred. As observed earlier in this judgment, on a conjoint reading of the provisions of the IBC quoted above, it is clear that a final judgment and/or decree of any court or tribunal or any arbitral award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 IBC.
Moreover, a judgment and/or decree for money in favour of the financial creditor, passed by the DRT, or any other tribunal or court, or the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor, to initiate proceedings under Section 7 IBC for initiation of the corporate insolvency resolution process, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the certificate of recovery, if the dues of the corporate debtor to the financial debtor, under the judgment and/or decree and/or in terms of the certificate of recovery, or any part thereof remained unpaid.”
This principle has been followed by the Honourable Supreme Court in Kotak Mahindra Bank v. Balakrishnan, (2022) 9 SCC 186 and in Tottempudi Salalith v. SBI & Ors., (2024) 1 SCC 24.
However, it is respectfully submitted that this may requires re-consideration.
Firstly, recovery proceedings cannot be allowed to be initiated through Section 7 of the Code, as it would be in the teeth of the judgement of the Supreme Court – Swiss Ribbons Judgment, Pioneer Urban Judgment and Jaypee Kensington Judgment.
Secondly, the Adjudicating Authority has been fastened with the requirement to independently assess whether the criteria under the Code are met, including the existence of a financial debt and a default thereof and such subjective ascertainment cannot be automatic. In this regard, the judgement of Honourable High Court of Tripura in Sri Subhankar Bhownik v. Union of India, WP(C)(PIL) No. 04/2022 is relevant, wherein the Honourable High Court after analysing various provisions of the Code, came to a conclusion that decree holders as a class of creditors are separate from “financial creditors” and “operational creditors”. The Honourable High Court further held that the Code treats decree holders as a separate class, recognized by virtue of the decree held by them. This view of the Honourable High Court was further upheld by the Honourable Supreme Court while dismissing the Special Leave to Appeal (c) No. 6104/2022 by its order, dated 11/04/2022.
Thirdly, the fact of the case of Dena Bank Judgment, Kotak Mahindra Bank Judgment and Tottempudi Salalith Judgment were of recovery certificates. Under Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993 – a recovery certificate is deemed to be a decree for the purpose that it can be used for insolvency proceedings to be initiated. The relevant section is reproduced herein below:
“(22A) Any recovery certificate issued by the Presiding Officer under sub-section (22) shall be deemed to be decree or order of the Court for the purposes of initiation of winding up proceedings against a company registered under the Companies Act, 2013 (18 of 2013) or Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009) or insolvency proceedings against any individual or partnership firm under any law for the time being in force, as the case may be.”
However, Section 36 of the Arbitration and Conciliation Act, 1996, merely provides for arbitral award to be deemed to be a decree of a civil court for the purpose of enforcement of arbitral award and it does not confer any statutory authority to elevate an arbitral award to ‘financial debt’ to be able to treat it as a basis for initiating insolvency proceedings under the Code.
Fourthly, the Patna High Court’s finding in Ferro Alloys Corpn. Ltd. v. Rajhans Steel Ltd., 1999 SCC OnLine Pat 1196 as relied upon in Dena Bank Judgment was rendered in the specific context of Section 434(1)(b) of the Companies Act, 1956, which deemed a company to be unable to pay its debts if a decree or order in favour of a creditor was returned unsatisfied in whole or in part.
However, the applicability of this reasoning under the Code is misplaced, as the statutory test under the Code as held in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 is not “inability to pay debt” but rather the “existence of a financial debt and default” as defined under Sections 5(8) and Section 3(12) of the Code. Therefore, an unsatisfied decree cannot, by itself, constitute a sufficient ground to initiate insolvency proceedings under Section 7 of the Code. Relevant para of Babulal judgement is reproduced herein below:
“22.2 As observed by this Court, the legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”.
Fifthly, a reading otherwise would result in forum shopping, which undermines the integrity of specialised statutory forums. While the doctrine of election, as touched upon in Dena Bank Judgment, may not directly apply between a recovery proceeding and an insolvency resolution proceeding since they serve distinct purposes it becomes relevant where the creditor has multiple remedies for recovery. For instance, where a party has the option to proceed under an arbitration agreement or file a civil suit they are expected to elect one forum for recovery. However, having chosen and exhausted such a remedy—such as arbitration—it is impermissible to then invoke the Code merely to enforce the same claim under the guise of insolvency. Allow such conduct would amount to forum shopping and an abuse of the insolvency framework.
Conclusion
A decree holder is a mere creditor under the Code.
If the statutory provision of the law under which a decree is issued considers the decree to be a decree for insolvency, an application under Section 7 of the Code can be filed. For instance, a recovery certificate under Section 19(22A) of Recovery of Debts and Bankruptcy Act
A mere arbitral award holder under the Arbitration and Conciliation Act, 1996, as amended confers no substantive right of making it a basis of initiating insolvency. The Honourable Supreme Court in Dena Bank Judgment and Kotak Bank Judgment never laid down that a decree substitutes for financial debt. The financial character of the transaction must pre-exist.
Allowing an arbitral award to be a decree holder to be a financial creditor would turn the Code into an execution court/recovery court for every failed contract cloaked in arbitration, which is impermissible as per Swiss Ribbons Judgment, Pioneer Urban Judgement and Jaypee Kensington Judgment.
Principles laid down under the Companies Act cannot simply apply under the Code as we have shifted from inability to pay debts to determination of debt and default as laid down in Babulal Vardharji Gurjar Judgment.
Allowing an arbitral award to be a decree holder to be a financial creditor would result in forum shopping and be against the judgment as upheld by the Supreme Court in Shri Showbownik Judgment.
Way forward
The current state of the law creates uncertainty and risks subverting the Code’s objectives. The legislature should clarify whether and under what conditions decrees and arbitral awards may constitute financial debts or trigger insolvency proceedings; or
The Supreme Court should reconsider the broad holding in Dena Bank and limit it to cases where (i) the underlying transaction independently qualifies as a financial debt under Section 5(8), or (ii) a specific statutory provision deems the decree as triggering insolvency rights.
Without such clarity, the Code risks becoming what it was never meant to be: a backdoor debt recovery statute that bypasses its carefully crafted definitions, procedures, and purposes.
[1] Eshna Kumar, Advocate is the founder of Chambers of Eshna Kumar. She is a strong practitioner of insolvency law and commercial law, specifically arbitration and mediation. She regularly sits as an arbitrator. She also contributes as an educator by teaching in various courses of insolvency at NLU, Delhi, NALSAR Hyderabad – India Institute of Corporate Affairs etc.