Laying to Rest the Ghost of Poor Legislative Drafting: Section 7 of the Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy (Amendment) Bill, 2025 was introduced in the Lok Sabha in August last year, and a Select Committee Report endorsing the Bill was published in December. It is expected to be passed soon, amending the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Among other things, the Bill seeks to amend Section 7 of the IBC. Section 7 provides for an application by a financial creditor for the initiation of the corporate insolvency resolution process (‘CIRP’) of a corporate debtor. Until the judgment of the Supreme Court in Vidarbha Industries v. Axis Bank (2022), the only factors the National Company Law Tribunal (‘NCLT’) took into account when admitting a debtor into insolvency was (a) the existence of financial debt, (b) a default in repaying the debt when it became due, and (c) the absence of disciplinary proceedings pending against the proposed resolution professional.

However, Vidarbha Industries changed the paradigm inasmuch as it implicitly called out poor legislative drafting. The judgment allowed the NCLT to take into account other subjective factors, such as the financial health of the company and whether the debtor has receivables capable of satisfying the debt, to determine whether CIRP initiation was merited. The introduction of this discretion led to inconsistency as coordinate benches of the NCLT started applying their discretion in different ways for objectively similarly situated debtors. The amendment tightens the language of Section 7 and neutralises the effect of the judgment, stripping away the discretion newly vested in the NCLT.

Sections 7 and 9 of the IBC

Section 7 of the IBC deals with applications made by financial creditors in respect of defaults in payment of financial debt. Whereas, Section 9 of the IBC deals with applications made by operational creditors in respect of defaults in payment of operational debts. The process of initiating CIRP is fairly similar for both operational and financial creditors when the given criteria are satisfied: 

The relevant portion of Section 7 reads:

7. Initiation of corporate insolvency resolution process by financial creditor.

[…]

(5) Where the Adjudicating Authority is satisfied that –

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; 

Juxtaposed to this, the relevant portion of Section 9 reads:

9. Application for initiation of corporate insolvency resolution process by operational creditor. –

[…]

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order– 

(i) admit the application and communicate such decision to the operational creditor and the corporate debtor if, - 

(a) the application made under sub-section (2) is complete; 

(b) there is no payment of the unpaid operational debt; 

(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor; 

(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and 

(e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any

A bare reading of the provisions would suggest that the use of ‘may’ in Section 7 was intended to vest some discretion with the NCLT to admit applications for CIRP initiation by a financial creditor, whereas the use of the word ‘shall’ in Section 9 mandates the NCLT to admit applications for CIRP initiation once the criteria in Section 9(5)(i) are fulfilled.