2022 (8) TMI 1060 - HC - Insolvency and Bankruptcy

Validity of Section 7 of the Insolvency and Bankruptcy Code, 2016 - Initiation of CIRP by Financial Creditors - threshold limit for triggering Corporate Insolvency Resolution Process qua the private financial creditors - Section 10A of IBC - HELD THAT - Validity of Section 7 of the IBC was examined by Hon'ble the Supreme Court in the case of Swiss Ribbons Pvt. Ltd. 2019 (1) TMI 1508 - SUPREME COURT 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. On a plain reading of Section 7, it becomes clear that there is no ambiguity in the provision which requires any interpretation other than what is conveyed in its literary sense. 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. 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. 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 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. There are no merit in this writ petition - petition dismissed.

Summary

Issues:
Validity of Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) and the order dated 22.12.2021 passed by the National Company Law Tribunal, Jaipur Bench.

Analysis:

Validity of Section 7 of IBC:
The petitioner challenged the validity of Section 7 of the IBC, specifically questioning the permissibility of a group of financial creditors jointly initiating Corporate Insolvency Resolution Process (CIRP) without meeting the individual default threshold of Rs.1 crore. Despite the Supreme Court upholding the validity of Section 7 in a previous case, the petitioner contended that the threshold limit increase from Rs.1 lakh to Rs.1 crore was not intended for joint applications. However, the court found no ambiguity in Section 7, emphasizing that the provision allows for individual or joint applications by financial creditors. The court highlighted that the amendment aimed to provide a swift remedy for smaller financial creditors, especially in cases involving MSMEs where individual debts may not reach Rs.1 crore.

Interpretation of Section 7:
The court analyzed the language of Section 7 and the related amendments, noting the clear stipulation that financial creditors can file CIRP applications individually or jointly. The threshold default limit was significantly raised to Rs.1 crore, as per a Gazette Notification. The court emphasized that the provision was structured to enable a group of financial creditors to collectively meet the Rs.1 crore limit, facilitating a more efficient resolution process. The court concluded that the statute and its amendments left no room for an interpretation that would require each individual financial creditor to have a debt of Rs.1 crore, affirming that joint applications were permissible under Section 7.

Decision and Dismissal of Writ Petition:
After considering the arguments presented and the legislative intent behind Section 7, the court dismissed the writ petition. The court affirmed that the group of financial creditors can combine their debts to reach the Rs.1 crore threshold for initiating CIRP under the IBC. The petitioner was granted the liberty to pursue further legal remedies against the NCLT's order dated 22.12.2021. The writ petition was dismissed with the above observations, upholding the validity and interpretation of Section 7 of the IBC.

This detailed analysis covers the issues raised in the legal judgment, providing a comprehensive overview of the court's interpretation and decision regarding the validity and application of Section 7 of the Insolvency and Bankruptcy Code, 2016.