Whether a Decree or an Arbitral Award or a Settlement Deed can form the Basis of a Financial or Operational Debt under IB Code – Part II

In the previous column, we had covered how the position of law was inconsistent with respect to a decree as a foundation for a financial debt. The same is now finally put to rest by the ruling of the Supreme Court in Dena Bank v. C. Shivakumar Reddy[1].

 

While a decree can now be the basis of a financial debt, we will proceed with the position of law with respect to an arbitral award or a decree forming the basis for an operational debt.

 

The position here seems aligned with what the Supreme Court had held in the above-discussed ruling in Dena Bank[2]. In Usha Holdings LLC v. Francorp Advisors (P) Ltd.[3], an issue arose if a debt is based on a decree which was passed by a foreign court. In such circumstances, while it was held that an adjudicating authority cannot decide the legality and viability of such a decree, the NCLAT further held that the same does not mean that the need for establishing a relation between operational creditor and the corporate debtor is waived off. The NCLAT required that such decree must pertain to or relate to supply of goods or services, and the failure to establish such link led to the rejection of the application under Section 9, IB Code.[4]

 

The NCLAT then presented even a clearer picture on this issue in Ashok Agarwal v. Amitex Polymers (P) Ltd.,[5] when the issue of whether a consent decree falls under the definition of operational debt was raised. The NCLAT herein relied upon the definition of a creditor as stated in Section 3(10) to conclude that a “decree-holder” cannot be excluded from the definition of an “operational creditor” under Section 5(20) of the IB Code. Resultantly, the order of the adjudicating authority was set aside and the claim of the appellant — operational creditor based on the consent decree was found to be an operational debt.

 

By doing so, the NCLAT ended up distinguishing its own ruling in Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd. [6], wherein in a case under Section 7, it was held that a decree-holder does not fall under the definition of a financial creditor. The NCLAT in Digamber Bhondwe case[7] had held:

  1. 22. [W]e further reject the submission that because in Section 3(10) of I&B Code in definition of “creditor” the “decree-holder” is included it shows that decree gives cause to initiate application under Section 7 of I&B Code. Section 3 is in Part I of I&B Code. Part II of I&B Code deals with “insolvency resolution and liquidation for corporate person”, and has its own set of definitions in Section 5. Section 3(10) definition of “creditor” includes “financial creditor”, “operational creditor” “decree-holder”, etc. But Section 7 or Section 9 dealing with “financial creditor” and “operational creditor” do not include “decree-holder” to initiate corporate insolvency resolution process (CIRP) in Part II.

 

The opinion in Ashok Agarwal[8] seems to be supported by Form V of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which expressly directs, under the heading “particulars of operational debt (documents, records and evidence of default)”, the operational creditor to disclose before the adjudicating authority the particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any.

 

Part-V

Particulars of Operational Debt (Documents, Records and Evidence of Default)

1.

Particulars of security held, if any, the date of its creation, its estimated value as per the creditor

Attach a copy of a certificate of registration of charge issued by the Registrar of Companies (if the corporate debtor is a company)

 

2.

Details of reservation/retention of title arrangements (if any) in respect of goods to which the operational debt refers  

3.

Particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any (attach a copy of the order)  

4.

Record of default with the information utility, if any (attach a copy of such record)  

5.

Details of succession certificate, or probate of a will, or letter of administration, or court decree (as may be applicable), under the Succession Act, 1925 (10 of 1925) (attach a copy)  

6.

Provision of law, contract or other document under which operational debt has become due  

7.

A statement of bank account where deposits are made or credits received normally by the operational creditor in respect of the debt of the corporate debtor (attach a copy)  

8.

List of other documents attached to this application in order to prove the existence of operational debt and the amount in default  

Therefore, a legal provision itself stipulates that an order of a court/tribunal/arbitral panel with regard to a default committed by a debtor could show the particulars of an “operational debt”.

 

In G. Shivramkrishna v. Isgec Covema Ltd.,[9] the NCLAT specifically calculated the limitation to file an application under Section 9 of the IB Code by taking into account the relevant dates of the arbitral award.[10] The arbitral award was passed on 30-5-2013, and the application for setting aside the award under Section 34 of the Arbitration law was dismissed on 27-1-2016 and the time to file the appeal under Section 37 lapsed on 27-4-2016. The application under Section 9 was filed on 3-4-2019. The NCLAT taking this relevant dates concluded that the application was within limitation. The argument that an application under Section 9 could not be filed for the purposes of execution of the arbitral award was rejected to hold :

by passing award by the learned sole arbitrator, the amount has been crystalised and by default in payment and by not honouring the award, the amount became due and payable. Respondent 1 had rightly invoked jurisdiction of the adjudicating authority under Section 9 of the IBC after issuance of demand notice as prescribed under Section 8 of IBC…”

 

The fundamentals, however, must remain that the decree or the award must be on account of an operational debt i.e. on account of providing a good or a service. In G. Shivramkrishna[11], the underlying debt pertained to a work order.

 

The only practical issue with basing the claim for an operational debt on an arbitral award or a decree is the fact that any challenge to an arbitral award (be it under Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996) or any appeal against a decree may end up showing that there is a pre-existing dispute between the parties.[12] Otherwise, it is submitted that there is no general bar on relying on an arbitral award or decree to establish an operational debt. The Supreme Court in its ruling in K. Kishan v. Vijay Nirman Co. (P) Ltd.[13] had clarified that in cases where the creditor could show that a petition under Section 34 challenging an arbitral award is barred by limitation, in only such circumstances, the insolvency process may then be put into operation. As seen in the facts and circumstances in G. Shivramkrishna,[14] the same could still be achievable.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice”.

[1] (2021) 10 SCC 330.

[2] (2021) 10 SCC 330.

[3] 2018 SCC OnLine NCLAT 792.

[4] 2018 SCC OnLine NCLAT 792, paras 12 and 13.

[5] 2021 SCC OnLine NCLAT 49.

[6] 2020 SCC OnLine NCLAT 399.

[7] 2020 SCC OnLine NCLAT 399.

[8] 2021 SCC OnLine NCLAT 49.

[9] 2020 SCC OnLine NCLAT 909.

[10] In this case, the limitation was calculated in the following manner:

  1. [E]ven the award was passed on 30-5-2013….

*                                   *                                   *

  1. the learned XXIV Additional Chief Judge, City Court, Hyderabad, dismissed the petition [under Section 34 of the Arbitration and Conciliation Act, 1996] on 27-1-2016 and the statutory period for filing appeal under Section 37 of Arbitration and Conciliation Act is 90 days in case of decree. The appeal under Section 37 of the Arbitration and Conciliation Act excludes the limitation from 27-4-2016 i.e. 90 days from 27-1-2016 as per Article 116 of the Limitation Act and if three years is taken from 27-1-2016, following the judgment of the Supreme Court in the above decision (B.K. Educational … supra) and as per Article 137 of the Limitation Act, three years’ period would expire on 27-4-2019. Whilst, the application under Section 9 of the IBC filed on 3-4-2019. Accordingly, it is well within the period of limitation. (Additions supplied)

[11] 2020 SCC OnLine NCLAT 909.

[12] See for instance Jai Balaji Industries v. D.K. Mohanty, Civil Appeal No. 5899 of 2021, decided on 1-10-2021(SC). Where pending appeal under Section 37 of the Arbitration and Conciliation Act, 1996 was held to show pre-existing dispute.

[13] (2018) 17 SCC 662, para 19.

[14] 2020 SCC OnLine NCLAT 909.

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.