Why Combined Defaults Cannot Meet ₹1 Crore IBC Threshold

Hello students. One of the trickiest points in insolvency law—and one that catches many in exams—is understanding why you cannot bundle separate defaults together to trigger insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). Let me walk you through the logic that NCLT Mumbai has clarified.

The Core Rule: Separate Debtors, Separate Thresholds

Under Section 4 of the IBC, a creditor can initiate insolvency proceedings against a corporate debtor only if that debtor has defaulted on a minimum of ₹1 crore (or such amount as prescribed). The key word here is "that debtor"—meaning the specific corporate entity against whom you are filing.

You cannot add up defaults owed by one debtor across multiple creditors, or defaults owed across multiple debtors, to cross the ₹1 crore bar. Each default must be evaluated individually and distinctly.

Why This Rule Exists

The IBC is designed to provide a structured, time-bound resolution to insolvency. The ₹1 crore threshold is a gatekeeper mechanism. It prevents frivolous petitions and ensures that only material defaults trigger the formal insolvency machinery. If you could cherry-pick small debts from multiple parties and stack them, the threshold would become meaningless, and the courts would be flooded with petitions over nominal amounts.

Moreover, the IBC's architecture recognizes that each corporate entity is a separate legal person. A default by Entity A has no legal connection to a default by Entity B unless there is a specific guarantee or assignment. Mixing defaults from unrelated debtors would blur liability and fairness.

NCLT Mumbai's Position

The NCLT Mumbai, in its various orders, has been clear: when a creditor claims a default from multiple corporate debtors, or when there are multiple defaults from the same debtor owed to the same creditor, each default stands on its own merits. You cannot aggregate them unless the structure of the debt itself permits it.

For example, if Company X owes you ₹60 lakh and Company Y (an unrelated entity) owes you ₹50 lakh, you cannot combine these to file a ₹1.10 crore insolvency petition against "Company X and Company Y." You must file against each separately, and since neither individually meets the threshold, neither can be pursued under the corporate insolvency resolution process (CIRP).

The Exception: Consolidated or Cross-Default Structures

There is a narrow exception. If the debt documentation itself contains a cross-default or consolidated liability clause, the position may differ. For instance, if Company X and Company Y are jointly and severally liable under a single agreement, or if the credit facility is structured as a consortium loan with cross-collateralisation, then the thresholds may be assessed differently. But this is rare and requires explicit contractual backing.

Practical Implication for Creditors

If you are a creditor holding a claim just below ₹1 crore, the law does not help you. You cannot:

  • Combine your claim with another creditor's claim against the same debtor to meet the threshold
  • Aggregate claims from related but separate corporate debtors
  • Include disputed or contingent amounts to artificially inflate the total

Your remedy lies in pursuing the default through civil courts, Debt Recovery Tribunal (if it is a bank or financial institution), or under other recovery statutes. The IBC is not available to you unless the individual default is ₹1 crore or above.

What This Means for Your Exam

When you see a case scenario where a creditor has multiple claims or where defaults are spread across related entities, always check the default amount against the ₹1 crore threshold separately for each debtor. Do not be tempted to add them up. The question may deliberately include smaller amounts hoping you will combine them—resist that instinct.

Also remember: the threshold is about the amount of default, not the total credit limit or exposure. If a debtor has a ₹5 crore credit facility but has defaulted on only ₹80 lakh, the insolvency petition cannot be admitted under IBC Section 7 (creditor-initiated) because the minimum default is not met.

Common Exam Traps

Trap 1: "Company A owes us ₹40 lakh and Company B owes us ₹65 lakh. Can we file?" Answer: No. These are separate debtors. Each must individually meet the threshold.

Trap 2: "We have multiple invoices against one debtor totalling ₹95 lakh. Can we file?" Answer: No. The individual default amount is what matters. Unpaid invoices can be aggregated if they form a single, connected debt, but verify the exact legal position from current NCLT precedent, as this turns on facts.

Trap 3: "The debtor owes us ₹1.2 crore but in disputed amounts. Can we file?" Answer: Only the undisputed default typically counts. The creditor must substantiate an actual, not merely claimed, default of ₹1 crore.

Key Takeaway

The ₹1 crore IBC insolvency threshold is non-negotiable and non-combinable. It applies to each corporate debtor individually. This rule safeguards the integrity of the process, prevents abuse, and ensures fairness. As a CA student, internalize this principle: one debtor, one default amount, one threshold assessment.

FAQs

Q: If a creditor has five invoices from one debtor, each of ₹25 lakh, totalling ₹1.25 crore, can they file? A: If these invoices form a single, unified default (for example, under one credit facility or purchase order), they may be aggregated. However, if they are separate, unrelated transactions, each is treated independently. Verify the exact position with your faculty or latest NCLT guidance, as courts examine the contractual structure closely.

Q: Can a creditor file against a corporate debtor's director personally if the corporate debtor's default is below ₹1 crore? A: No. The IBC applies to corporate debtors. Directors are not directly subject to CIRP unless they guarantee the debt in their personal capacity, in which case a separate insolvency petition would be required against them as an individual, subject to different rules.

Q: Does the ₹1 crore threshold apply to insolvency initiated by the debtor itself? A: No. A corporate debtor can initiate insolvency proceedings under Section 10 of the IBC irrespective of the default amount. The ₹1 crore threshold applies only to creditor-initiated and operational creditor-initiated petitions.

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Now that you've grasped this principle, put it to work. Use our free day-by-day study planner to organize your IBC topics, and practice case scenarios at caparveensharma.com to test your understanding in real exam conditions. Strong fundamentals in insolvency law will set you apart in your CA exams.