LITIGATION UPDATE | PRE-LITIGATION MEDIATION MANDATORY IN COMMERCIAL CASES

The Hon`ble Supreme Court recently passed a judgement in Patil Automation Private Limited and Ors vs Rakheja Engineers Private Limited wherein Section 12A of the Commercial Courts Act 2015 (Act) has been declared to be mandatory with effect from 20 August 2022 and the plaint filed in non-adherence of the same has been held to be liable for rejection under Order VII Rule 11 of the Code of Civil Procedure 1908 (CPC).

ISSUE

The seminal question which arises for consideration is whether the statutory pre-litigation mediation contemplated under Section 12A of the Act is mandatory and whether the courts should reject the plaints filed in non-compliance of the same under Order VII Rule 11 of the CPC.

SECTION 12A IS NOT MERELY PROCEDURAL LAW

Section 12A of the Act states that a suit, which does not contemplate any urgent interim relief , shall not be instituted unless the plaintiff exhausts the remedy of pre-institution mediation. The intention behind the said Section is to provide for a fast-track route to de-clogging the trial courts, particularly having regard to the reduction of pecuniary jurisdiction for commercial suits from Rs 1 crore to Rs 3 lakhs.

The Supreme Court after analysing the aforesaid Section 12A, held that exhausting pre-institution mediation by the plaintiff will be beneficial to all parties. It further observed that the design and scope of the Act makes it clear that Parliament intended to give it a mandatory flavour. Accordingly, it held that Section 12A is not a mere procedural provision.

CONSEQUENCE OF NON-ADHERENCE: REJECTION OF PLAINT

The Court held that a plaint filed in non-compliance of Section 12A of the Act, is liable to be rejected under Order VII Rule 11 of the CPC. The Court made this declaration effective from 20 August 2022.

The power under Order VII Rule 11 is available to the court to be exercised suo motu and the plaint may even be rejected without issuing summons. However, the Court has to hear the plaintiff before it invokes its power besides giving reasons under Order VII Rule 12 of the CPC. Undoubtedly, on issuing summons it will be always open to the defendant to make an application as well under Order VII Rule 11 of the CPC.

MHCO Comment : In our experience, it has rarely been observed that the commercial suits are filed without an accompanying application for interim-relief. Therefore, considering that most commercial suits will have an urgency, the requirement of pre-litigation mediation will be rendered irrelevant, for all practical purposes.

This update was released on 22 August 2022.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 

IBC UPDATE | FINANCIAL CREDITORS CAN JOINTLY FILE AN IBC APPLICATION TO REACH THE THRESHOLD LIMIT

The Rajasthan High Court in a recent judgement in the case of Vishnu Oil Mill Pvt. Ltd. Vs. Union of India upheld Section 7 of the Insolvency and Bankruptcy Code 2016 (IBC), that a group of financial creditors can converge and join hands to touch the financial limit of INR 10 Million as stipulated under Section 7 so as to initiate a Corporate Insolvency Resolution Process (CIRP) under the IBC.

Brief Facts

The petitioner in the present case, Vishnu Oil Mill Private Limited (Petitioner) had filed a writ petition to assail the validity of Section 7 of the IBC and also to challenge the Order dated 22 December 2021 passed by the National Company Law Tribunal, Jaipur Bench (NCLT Jaipur) against the petitioner. The counsel representing the petitioner had contended that due to the serious financial distress brought around by the Covid-19 pandemic, the Government of India increased the minimum amount of default to INR 10 million from the existing threshold of INR 100,000. He contended that, while raising the threshold limit for initiating CIRP, the legislature's objective was that a joint application by financial creditors could be heard, but a minimum default of INR 10 million should be qua every individual creditor. The Petitioner stated that the provision needs to be read in a purposive manner so as to lay down such principle. The petitioner further argued that some of the defendants had started insolvency proceedings despite of not having a default of INR 10 million.

The Petitioner further stated that the Supreme Court while determining the validity of Section 7 in the case of Swiss Ribbons Private Ltd. & Anr. Vs. Union of India & Ors , has till date not accounted for the possibility of complying with the threshold limit provided under section 7 of IBC by group of financial creditors for filing application collectively.

On the other hand, the respondents argued that the language of Section 7 of the IBC is unambiguous. They submitted 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 INR 10 million. They argued that the letter and spirit of Section 7 would be weakened if it is determined that the threshold of INR 10 million is qua every individual financial creditor, and that such an interpretation cannot be envisaged by any stretch of imagination.

Issues to be adjudicated:

• Whether Section 7 of the IBC is constitutionally valid?

• Whether a group of financial creditors can jointly trigger CIRP without meeting the individual default threshold of Rs. 1 crore?

Held:

The Rajasthan High Court was of the opinion that a plain reading of Section 7 reveals that there is no ambiguity in the clause that demands any interpretation other than what is expressed 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. It was observed that in the case of MSMEs, financial creditors with individual debts of INR 10 million or more may not exist. The statute and the amendments thereto make it clear that they were drafted in such a way as to provide a means of effective redressal to the smaller financial creditors and to give them the opportunity of availing of the speedy remedy under the IBC rather than being forced to engage in other time-consuming proceedings to recover their money. The High Court held that the Section 7 of the IBC as amended vide Gazette Notification dated 5 June 2020, admits no other interpretation except that a group of financial creditors can converge and join hands to touch the financial limit of INR 10 million stipulated under Section 7 so as to initiate a CIRP under the IBC.

In the view of the above, the Rajasthan Court dismissed the writ petition however, the petitioner was given the liberty to avail appropriate lawful remedy against the order dated 22 December 2021 passed by the NCLT Jaipur.

MHCO Comment : In our view, the Rajasthan High Court has made it crystal clear that a group of financial creditors can join hands to touch the threshold of INR 10 million to initiate CIRP and that there is no other way to interpret the section 7 of IBC.

This update was released on 12 August 2022.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.