The Rajasthan High Court (“High Court”) in its judgment dated July 25, 2022, in the case of Vishnu Oil Mill Private Limited v. Union of India, discussed the applicability of the threshold of minimum default of Rs. 1 crore (“Minimum Default”) in case of a joint application by multiple financial creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
An application under Section 7 of the IBC was filed against Vishnu Oil Mill Private Limited (“Petitioner”), by private financial creditors whose individual debts did not meet the Minimum Default, but the aggregate of their debts met the Minimum Default. The aforesaid application was admitted by the National Company Law Tribunal, Jaipur (“NCLT”). The Petitioner filed a writ petition to assail the validity of Section 7 of the IBC as well as the order passed by the NCLT against the Petitioner.
In case of a joint application under Section 7 of the IBC, whether the Minimum Default should be applied vis-à-vis every individual financial creditor?
It was argued on behalf of the Petitioner that, while increasing the threshold for initiation of a corporate insolvency resolution process ("CIRP") 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 each financial creditor should not be less than the Minimum Default. Further, it was argued that a purposive interpretation should be given to Section 7 of the IBC, such that in case of a joint application filed by multiple financial creditors, the liability towards each individual financial creditor should meet the Minimum Default.
On behalf of the Respondents it was argued that the language of Section 7 of the IBC is unambiguous in as much as the remedy to trigger a CIRP has been provided to financial creditors in their individual capacity as well as jointly with the total minimum threshold being fixed at Rs. 1 crore.
High Court’s Findings:
The High Court observed that there is no ambiguity in Section 7 of the IBC, which would require any interpretation other than a literal interpretation. Further, it was observed that the impugned provision was formulated in such a manner so as to provide a means of efficacious redressal to smaller financial creditors by enabling them to join hands to meet the Minimum Default. The High Court also observed that, in case of MSMEs, there may not be any financial creditor whose individual debt meets the Minimum Default.
Accordingly, it was held that, in case of a joint application under Section 7 of the IBC, the Minimum Default should be applied on an aggregate basis and not vis-à-vis every individual financial creditor.
Please find a copy of the judgment, here.
This update has been contributed by Aastha (Partner) and Tweesha Gosar (Associate).
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