Constitutional Validity Of S.7 Insolvency & Bankruptcy Code Challenged Before Rajasthan High Court; Notice Issued

A division bench of Justice Manindra Mohan Shrivastava and Justice Madan Gopal Vyas, ordered,

"Issue notice to respondents. Learned counsel appearing for Union of India Mr. Mukesh Rajpurohit, Additional Solicitor General takes notice and is granted three weeks' time to file reply. Let notices be issued to respondent Nos. 4 to 7, returnable within three weeks."

Essentially, as per the petitioner, the respondents filed a joint petition under Section 7 for initiating Corporate Insolvency Resolution Process (CIRP) against the petitioner, claiming themselves to be financial creditors and jointly proving a default of more than one crore rupees before the NCLT, Jaipur Bench. However, the said Respondents individually have claimed a default of much less than One Crores rupees (i.e. either approx. Rs. 31 Lakhs or Rs. 12 Lakhs).

The petitioner argued that a joint application may be filed only by financial creditors as provided under Section 7 of IBC and no such mechanism of joint application is prescribed for operational creditors under Section 9 of IBC.

The plea filed by Vishnu Oil Mill Private Ltd.-petitioner states that as per Section 4 of the IBC, the minimum default for triggering CIRP against a Corporate Debtor was Rs. One Lakh before 24.03.2020. However, owing to the economic disruption caused by the onset of COVID-19 pandemic, the aforesaid requirement of minimum default was increased to One crore rupees on 24.03.2020, added the plea.

Moreover, it was. alleged that despite increase in the threshold of the minimum default to trigger CIRP to one crore, the NCLT, vide impugned order dated 22.12.2021, has issued notices on the application filed by the Respondent Nos. 4 to 7 who are claiming themselves to be financial creditors but not a single of them have demonstrated a default of one crore rupees or more on his/her own.

Notably, the petitioner has challenged the constitutionality of Section 7 of IBC primarily on the two grounds:

(a) The mechanism of joint application is only contemplated for financial creditors and not for operational creditors. Accordingly, if financial creditors are allowed to prove the minimum default jointly, the same would be manifestly arbitrary and discriminatory treatment vis-à-vis a operational creditors who is necessarily required to prove minimum default of one crore individually and not jointly;

(b) The mechanism of joint application envisaged under Section 7 of IBC is required to be read down to the extent that financial creditors may file an application jointly, however, one or more of such financial creditors shall individually be able to prove a default of less than one crore rupees to trigger CIRP against a corporate debtor. Such reading down of the provisions would also subserve and keep intact the objectives of minimum default threshold of one crore prescribed under the IBC, which was especially increased in the wake of economic disruption caused by the COVID-19 pandemic.

Further, the plea states that the mechanism of filing joint application as envisaged in Section 7 of IBC was upheld in Manish Kumar vs Union of India & Anr [LL 2021 SC 25] while dealing with a challenge, inter alia, by real estate allottees, which are necessarily required to file joint application as per Section 7 of IBC. However, the Supreme Court did not have an occasion to deal with the issues raised in this petition, whereby the challenge is on the ground whether the default of One Crore rupees as required under Section 4 of IBC can be proven by multiple financial creditors jointly, added the plea.

The petitioner has prayed for a writ declaring unconstitutional the provisions of Section 7 of the IBC Code. It further prays for a direction expounding that the default of one crore rupees as required under Section 4 of the IBC is required to be proved vis-à-vis one financial creditor and not jointly with other financial creditors.

Accordingly, it is urged that the impugned order dated 22.12.2021 passed by the NCLT be quashed.

Adv. Hemant Kothari appeared on behalf of the petitioner, while ASG Mukesh Rajpurohit appeared on behalf of Union of India-respondents.

Case Title: Vishnu Oil Mill Private Ltd. v. Union of India