NCLAT Rules: Civil Court Decree Does Not Alter Operational Creditor Status
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT) New Delhi, in a significant ruling, has clarified that an Operational Creditor does not lose its status merely because a decree has been obtained from a civil court. The bench comprising Justice Ashok Bhushan (Judicial Member) and Mr. Arun Baroka (Technical Member) ruled that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("Code"), cannot be dismissed solely on the basis that the creditor, having secured a decree, ceases to be an Operational Creditor.
Background of the Case
Venus Buildtech India Pvt. Ltd. (Appellant) had executed a subcontract for Delhi Metro Rail Corporation (DMRC) under an agreement with Senbo Engineering Ltd. (Respondent). Upon completion of work, the Appellant sought payment, which was not made. Consequently, a civil suit was filed, leading to a decree in favor of the Appellant. Despite initiating execution proceedings, no payment was realized. The Appellant then filed an application under Section 9 of the Code before the National Company Law Tribunal (NCLT), which was dismissed on the ground that a decree holder is distinct from an Operational Creditor under the Code.
Arguments Advanced
The Appellant contended that merely securing a decree does not alter the fundamental nature of the operational debt. It argued that obtaining a decree is only a step toward realizing the debt and does not change the classification of the creditor. The Appellant further submitted that the NCLT erred in rejecting the Section 9 application based on an incorrect interpretation of the Code. The Appellant also emphasized that even after obtaining a decree, the Respondent failed to satisfy the debt, which necessitated the filing of the application under Section 9 of the Code.
On the other hand, the Respondent asserted that the Appellant had already initiated execution proceedings and had even recovered a portion of the amount. It was argued that pursuing insolvency proceedings while execution proceedings were ongoing was impermissible. The Respondent further contended that a decree holder is separately categorized under the Code and, therefore, should not be treated as an Operational Creditor.
NCLAT’s Observations
The Tribunal analyzed relevant legal precedents, including the judgment in Sri Subhankar Bhowmik v. Union of India and Anr. where the Tripura High Court observed that decree holders are classified separately from financial and operational creditors under the Code. However, the Tribunal distinguished the present case, emphasizing that the existence of a decree does not necessarily alter the character of the debt.
Referring to Mukul Agarwal, Ex-Director Greatech Telecom Technologies Pvt. Ltd. Vs. Royale Resinex Pvt. Ltd. and Ors. [2022 SCC OnLine NCLAT 255], the NCLAT reiterated that the issuance of a decree does not affect the underlying transaction from which the debt arose. The Tribunal quoted from the Supreme Court's decision in Vishal Chelani v. Debashis Nanda, [(2023) 10 SCC 395] which held that homebuyers who had obtained a decree from the UP RERA do not cease to be financial creditors merely because a decree was passed in their favor. The Tribunal observed: "The Adjudicating Authority committed an error in rejecting the application under Section 9 of the Code only on the ground that since the Appellant was a decree holder, he will not fall within the definition of the Operational Creditor."
Further, it noted: "The mere fact that when the Corporate Debtor did not pay the amount, suit for recovery was filed in the year 2016 by the Operational Creditor, which was also Decreed on 08.09.2016, does not in any manner affect the transaction out of which the amount fell due."
The Tribunal emphasized that an Operational Creditor does not lose its status simply by obtaining a decree. It pointed out that Section 9 of the Code does not contain any such restriction, and rejecting an application solely on the ground that the creditor is a decree holder would be contrary to the intent of the Code. The NCLAT also noted that the execution of a decree is distinct from the initiation of insolvency proceedings, as the latter is aimed at the resolution of insolvency rather than mere debt recovery.
Based on these findings, the NCLAT set aside the NCLT’s order and allowed the appeal. The Tribunal clarified that a decree does not change the nature of an operational debt, and an Operational Creditor remains entitled to invoke insolvency proceedings under the Code.
Appearance
For Appellant: Mr. Arjun, Mr. Rajeev Shrivastava and Mr. Shrey Shrivastava, Advocates
For Respondent: -
Cause Title: Venus Buildtech India Pvt. Ltd. V. Senbo Engineering Ltd.
Case No: Company Appeal (AT) (Insolvency) No. 1317 of 2023
Coram: Justice Ashok Bhushan [Chairperson], Arun Baroka [Member (Technical)]
[Read/Download order]
