Rajasthan High Court Dismisses Plea Challenging Constitutional Validity Of Section 7 Of Insolvency & Bankruptcy Code, 2016

The petitioner has also approached the court on being aggrieved by the order passed by the National Company Law Tribunal, Jaipur Bench.

Justice Sandeep Mehta and Justice Kuldeep Mathur, while dismissing the petition, observed,

"Having considered the entirety of the facts and circumstances as available on record and after appreciating the arguments advanced at bar, we are of the firm view that the statute i.e., Section 7 of the IBC as amended vide Gazette Notification dated 05.06.2020, admits no other interpretation except that a group of financial creditors can converge and join hands to touch the financial limit of Rs.1 crore stipulated under Section 7 so as to initiate a CIRP under the IBC."

The court, however, granted liberty to the petitioner to avail appropriate lawful remedy against the order passed by the NCLT.

The court opined that that there is no ambiguity in Section 7 which requires any interpretation other than what is conveyed in its literary sense. The court noted that the section clearly stipulates that the application for triggering CIRP may be initiated by a financial creditor either individually or jointly with other financial creditors. Previously the threshold default limit for filing the CIRP application was only Rs.1 lakh and it has been drastically increased to Rs.1 crore vide Gazette Notification dated 24.03.2020, added the court.

The court observed that in cases of MSMEs, there may not exist financial creditors whose individual debt is Rs.1 crore or above. If the threshold limit was to be fixed at Rs.1 crore qua each individual financial creditor, then there was no reason whatsoever for allowing joint applications by financial creditors, added the court. The court also noted that the statute and the amendment made therein makes it clear that the same was formulated in such a manner so as to provide a means of efficacious redressal to the smaller financial creditors and to give them an opportunity of availing the speedy remedy under the IBC rather than being relegated to other onerous proceedings for securing their money.

It was stated by the court that it can easily be envisaged that in cases of MSMEs, there may not exist financial creditors whose individual debt is Rs.1 crore or above. The court also stated that if the threshold limit was to be fixed at Rs.1 crore qua each individual financial creditor, then there was no reason whatsoever for allowing joint applications by financial creditors. The statute and the amendment made therein makes it clear that the same was formulated in such a manner so as to provide a means of efficacious redressal to the smaller financial creditors and to give them an opportunity of availing the speedy remedy under the IBC rather than being relegated to other onerous proceedings for securing their money, added the court.

Further, the division bench also stated,

"At the outset, we may state here that validity of Section 7 of the IBC was examined by Hon'ble the Supreme Court in the case of Swiss Ribbons Pvt. Ltd. (supra) and the same was found to be compliant to the Constitution of India and the challenge to the validity of the statute was repelled by Hon'ble the Supreme Court in unequivocal terms. Despite that, the petitioner has ventured into questioning the validity of Section 7 of the IBC claiming that the challenge so laid is on a totally different proposition i.e., permissibility of a group of financial creditors jointly triggering CIRP without adhering to the requirement of default threshold of Rs.1 crore in individual capacity."

Adv. Hemant Kothari, counsel representing the petitioner, contended that previously, the threshold limit for triggering Corporate Insolvency Resolution Process qua the private financial creditors was Rs.1 lakh only. However, because of the serious financial distress brought around by the Covid-19 pandemic, the Government of India increased the minimum amount of default to Rs. 1 crore from the existing threshold of Rs. 1 lakh, he added. He contended that while increasing the threshold limit for initiation of CIRP by a financial creditor either by himself or jointly with other financial creditors from Rs.1 lakh to Rs.1 crore, the clear intent of the legislature was that a joint application could be entertained but the individual liability towards every financial creditor should not be less than Rs.1 crore.

He urged that the private respondents do not claim individual debt or default of Rs.1 crore against the petitioner but despite that, by unjustly invoking the clause of joint application by financial creditors under Section 7 of the IBC, CIRP has been initiated against the petitioner which is an MSME. As per him, the provision needs to be read in a purposive manner so as to lay down a principle that where financial creditors file a joint application under Section 7 of the IBC, the minimum default of Rs.1 crore should be qua every individual creditor and the CIRP cannot be triggered on the basis of joint liability towards multiple financial creditors.

He also argued that the Supreme Court examined and upheld the validity of Section 7 but there was no occasion for the Supreme Court to comment upon the aspect of threshold liability of the corporate debtor towards multiple applicants.

The respondents' counsels urged that the language of Section 7 of the IBC is unambiguous. It was added that the remedy to trigger CIRP has been provided to financial creditors in their individual capacity and also through a joint application with the total minimum threshold for initiation of CIRP being fixed at Rs.1 crore. They urged that if an interpretation is made that the threshold of Rs.1 crore would be for every individual financial creditor, the letter and spirit of Section 7 would be diluted and such an interpretation cannot be envisaged by any stretch of imagination.

Adv. Hemant Kothari and Adv. Praveen Vyas appeared for the petitioner while ASG Mukesh Rajpurohit, Adv. Anuroop Singhi, Adv. Prasthant Tatia on behalf of Adv. Sheetal Kumbhat and Adv. Mahesh Thanvi appeared for the respondents.

Case Title: Vishnu Oil Mill Private Ltd. v. Union Of India & Ors.

Citation: 2022 LiveLaw (Raj) 217