Decree Holders as Financial Creditors - Can they approach NCLT under IBC?

Recently, the National Company Law Appellate Tribunal (NCLAT) has recapitulated that a decree holder cannot initiate a corporate insolvency resolution process (hereinafter referred to as 'CIRP') for execution of a decree. The tribunal had the occasion to examine the issue in Sushil Ansal vs. Ashok Tripathi [Company Appeal (AT) (Insolvency) No, 452 of 2020] wherein the court held that, although the decree holder falls under the ambit of definition of a 'creditor' under Sec. 3(10) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'IBC'), it cannot initiate an insolvency process with the objective of executing a decree. In this case, the Respondents approached Uttar Pradesh Real Estate Regulatory Authority ('UP RERA') to recover their dues against the Appellant i.e. Ansal Infrastructure as the latter had failed to complete the work within timelines stipulated in the builder-buyer agreement. UP RERA granted an order in favour of the Respondents, allowing them to recover the amount against the Appellants. However, instead of filing execution proceedings, the Respondents approached the National Company Law Tribunal (NCLT) seeking initiation of CIRP against the Appellants i.e Ansal Infrastructure under Sec. 7 of IBC. In furtherance of the same, NCLT admitted the application, initiated CIRP against the Appellants and appointed an interim resolution professional. The Appellants thereafter, approached the NCLAT against the order of NCLT initiating CIRP. The NCLAT, while examining the maintainability of an application for initiation of CIRP by a decree holder, analysed the definition of 'financial creditor' and 'financial debt' under Sec. 5(7) and Sec. 5(8)(f) of IBC, respectively. The Appellate Tribunal held that Sec. 5 provides that any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing would fall within the ambit of ‘financial debt’. The explanation added to the sub-section provides that any amount raised from an allottee under a Real Estate Project shall be deemed to be an amount having the commercial effect of a borrowing. Thus, the relevant consideration for determination of ‘financial debt’ would be whether the debt was disbursed against the consideration for the time value of money which may include amount raised from an allottee under a Real Estate Project. Such a transaction may be deemed to be an amount having the commercial effect of a borrowing. Since the initial transaction was an allotment under a Real Estate Project, there can be no doubt that such transaction has the contours of a borrowing as contemplated under Section 5(8)(f) of the ‘I&B Code’. However, the case set up by the Respondents before NCLT is not on the strength of a transaction having the commercial effect of a borrowing. The respondents were clothed as ‘Financial Creditors’ but, in effect, approaching in their capacity as ‘decree-holders’. Therefore, the tribunal held that a decree-holder would not fall within the definition of ‘Financial Creditor’ 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 ‘I&B Code’. The Respondents had approached the tribunal as decree holders and not as allottees in a real estate project. As a result, the NCLAT set aside the order passed by NCLT admitting the application and initiating CIRP. Concluding the aforementioned, the allottees of a real estate project can approach the tribunal for initiation of CIRP under IBC in their capacity as financial creditors, as per the provisions of Sec. 7 of IBC as amended by Insolvency and Bankruptcy (Amendment) Act, 2020. However, once the allottees obtain a decree in their favour from RERA, they cannot invoke the jurisdiction of NCLT under IBC to recover the amount as decree holders. The appropriate means to recover the amount as decree holders is filing for execution of the said decree. This decision has contributed to the courts discouraging the use of IBC as an instrument of debt recovery.