Hamdard Institute Of Legal Studies And Research (HILSR)
School of Law
Law of Insolvency and Bankruptcy
[Link] -1002
(ASSIGNMENT)
TOPIC:
SECTION 7 OF IBC-ADMITTING AN APPLICATION FOR
CORPORATE INSOLVENCY RESOLUTION PROCESS
INTRODUCTION
The Insolvency and Bankruptcy Code, 2016 (hereafter referred to as the IBC) has emerged as a
cornerstone legislation in India, profoundly impacting the corporate landscape and reinforcing
the legal identity of companies. Under this framework, financial creditors can trigger the
Corporate Insolvency Resolution Process (CIRP) by filing an application before the National
Company Law Tribunal (NCLT) in cases where there's a default of INR 10 million or more.
The NCLT serves as the primary adjudicating authority in insolvency proceedings, overseeing
cases involving companies and Limited Liability Partnerships (LLPs), which are collectively
termed corporate debtors. Traditionally, the principle has been that a financial creditor's
application under the Code must be admitted if the NCLT is convinced that a default in debt
payment has indeed occurred.
However, a significant development arose from the Supreme Court's ruling in the case of
Vidarbha Industries Power Limited v. Axis Bank Limited. In this judgment, the Court
determined that the NCLT possesses the discretion to reject a financial creditor’s application,
even if there's evidence of a default in debt payment.
Section 7(5) of the IBC delineates the authority of the NCLT regarding the acceptance or
rejection of insolvency applications filed by financial creditors. The crux of the issue lies in
whether this power is mandatory or discretionary, a question that has been subject to conflicting
interpretations in various legal precedents.
SECTION 7 OF INSOLVENCY AND BACKRUPTCY CODE
Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), empowers financial creditors to
kickstart the Corporate Insolvency Resolution Process (CIRP) by lodging an application before
the National Company Law Tribunal (NCLT). This application must be accompanied by
pertinent evidence of default and outstanding dues against the corporate debtor.
Key Ingredients:
Default: The linchpin for commencing the CIRP against a corporate debtor is default. As
per Section 3(12) of the Code, default entails the non-payment of debt when it's due and
payable, either in whole or in part. The threshold for default, as determined by the
adjudicating authority, triggers the eligibility for filing under Section 7.
Notably, in the Bank of India v. Tirupati Infra projects Ltd. case, it was established that the
adjudicating authority need only ascertain the occurrence of default, not its exact amount.
Complete Application: Section 7(2) mandates the submission of a comprehensive
application adhering to Form 1 of the Code. Any lapses in completeness may lead to
rejection by the adjudicating authority.
Notice Requirement: While the Code doesn't explicitly require notification to the
debtor, the case of M/s Innoventive Industries Ltd. v. ICICI Bank and Anr. highlighted
the adjudicating authority's duty to notify the other party before admitting a case.
Grounds for Rejection: The adjudicating authority retains the discretion to reject an
application under Section 7 for various reasons, including absence of default, incomplete
application, or pending disciplinary proceedings against the proposed resolution
professional.
THE SCOPE OF ADJUDICATING AUTHORITY:
The existing debates revolves around the power of the adjudicating authority to admit a corporate
debtor into CIRP being discretionary, or simply mechanical on fulfilment of the ingredients of
Section 7(5) . This issue concerning the nature of section 7(5)(a) of the the Code has been
addressed by the Supreme Court of India in its decision in Vidharbha Industries Power Ltd v.
Axis Bank Ltd. (12 July 2022), wherein the Court has categorically dealt with the question
concerning the power of the NCLT to exercise its discretion while admitting an application
under the provision for initiation of CIRP.
Ruling in Vidharbha Industries Power Ltd v. Axis Bank Ltd
In the Judgment, Vidarbha Industries was awarded a contract for implementation of a power
project. Due to increase in fuel costs and running of the power plant, Vidarbha Industries filed an
application before the Maharashtra Electricity Regulatory Commission (MERC) for
determination of tariff rate which was disallowed. An appeal was filed before the Appellate
Tribunal for Electricity (APTEL) which awarded a sum of INR 17.3 billion to Vidarbha
Industries (APTEL Award). This APTEL Award was appealed before the Supreme Court
(MERC Appeal) due to which Vidarbha Industries was unable to realize the sum awarded in the
APTEL Award.
Meanwhile, a financial creditor filed an application for initiation of CIRP against the corporate
debtor i.e., Vidarbha Industries (CIRP Application). Vidarbha Industries contented that the CIRP
Application must not be admitted if the MERC appeal is pending. The NCLT admitted the CIRP
Application since the conditions for admission were satisfied (NCLT Order). On appeal, the
NCLAT concurred with the NCLT Order. Subsequently, Vidarbha Industries filed an appeal
before the Supreme Court.
The question before the Supreme Court was whether the NCLT must mandatorily admit an
application filed by a financial creditor if it is satisfied that debt and default exist
The Supreme Court observed that Section 7(5)(a) of the IBC grants discretion to the
Adjudicating Authority to admit an application if financial debt and default are established,
unless there are compelling reasons not to. The Court emphasized that discretion should be
exercised judiciously, especially when a corporate debtor challenges CIRP initiation based on an
existing award exceeding the debt amount. The Court highlighted that the IBC aims to aid truly
bankrupt companies, not those temporarily unable to meet financial obligations..The Authority
has the discretion under Section 7(5)(a) of the Insolvency and Bankruptcy Code (IBC) to defer
the admission of a CIRP application in such cases, unless there is a compelling reason to
proceed. However, if the award or decree is unlikely to be realized, the Authority may choose to
admit the CIRP application. The court emphasized that the IBC is not intended to penalize
solvent companies that are only temporarily unable to meet their financial obligations. It
highlighted that the initiation and completion of the CIRP are intended for companies that are
truly bankrupt or insolvent, not those that are fundamentally solvent.
Section- 7(5)(a)- Mandatory or Directory?
The court referenced the Swiss Ribbons Pvt. Ltd. v. Union of India case to emphasize IBC aims
for a swift and timely resolution of insolvency issues. It criticized the National Company Law
Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) for their
approach that the existence of a debt default automatically mandates the admission of a Section 7
application for initiating the CIRP. However, the court pointed out that this interpretation is too
narrow, as it neglects other relevant factors that could influence the admission of such an
application. The core issue debated was whether the term 'may' in section 7(5)(a) of the IBC
implies a mandatory ('shall') admission of the application upon establishing a default, thus
raising questions about the scope of discretion available to the adjudicating authority.
The intent of this provision was taken in a separate direction when the court analysed gave a new
meaning and interpretation to the word “may”.It observed that the legislature has used the word
'may'in Section 7(5)(a) whereas 'shall' in an identical provision of Section 9(5)(a), shows that
legislature intended Section 9(5) to be mandatory whereas Section 7(5)(a) to be discretionary.
The legislature has consciously differentiated between the Financial Creditors and Operational
Creditors as there is innate difference between the two creditors. The impact of non-payment of
admitted dues could be far more serious on the Operational Creditor than on a financial creditor.
Accordingly, the provisions of IBC relating to commencement of CIRP at the behest of
Operational Creditor, whose dues are undisputed, are rigid and inflexible, whereas in case of
financial debt, there is a little more flexibility.
The role of the adjudicating authority under section 7(5) was dealt with in the cases
of Innoventive Industries and ES Krishnamurthy v Bharath Hi Tech Builders Pvt.
Ltd. whereby the Supreme Court of India specified the limits of jurisdiction of the NCLT in
admitting an insolvency application under section 7(5). It was stated that if the financial creditor
can prove that the corporate debtor has a “debt” and that they have “defaulted”, the NCLT shall
admit the application filed by the creditor without entering into the merits of the caseThis
interpretation has been critizied on the ground that The Vidarbha judgment was a departure from
the jurisprudence established by the Supreme Court in its recent decisions in Innoventive
Industries Limited v ICICI Bank (Innoventive), Swiss Ribbons Private Limited v Union of India
(Swiss Ribbons) and E.S. Krishnamurthy & Ors. v Bharath Hi-Tech Builders Pvt. Ltd. (ES
Krishnamurthy).
The intent of this provision was taken in a separate direction when the Supreme Court in
Vidarbha Industries Power Ltd gave a new meaning and interpretation to the word “may”. This
was indeed a major diversion from the settled law in the case of Innoventive Industries, which
has been followed and cited throughout the years. The bench in this judgement gave
discretionary power to the NCLT, which may admit or reject the application after considering the
merits of the case
The Determination of financial Liability and other factors
The Vidarbha judgment has introduced ambiguity regarding the criteria for admitting
applications under Section 7 of the Insolvency and Bankruptcy Code. Contrasting decisions, such
as in Bank of Maharashtra v. Newtech Promoters and Developers Private Limited and
Induslnd Bank Limited v. Hacienda Projects Private Limited, underscore the evolving
landscape where financial health increasingly influences admission decisions
The former case saw the NCLT, New Delhi, dismissing a financial creditor's application under
Section 7 of the Code despite establishing debt and default. The NCLT cited potential harm to
homebuyers' interests due to ongoing housing projects. Conversely, in Induslnd Bank Limited v.
Hacienda Projects Private Limited, the NCLT, New Delhi, rejected similar arguments from the
corporate debtor, emphasizing that financial health is crucial and completion of one project
doesn't denote overall viability. This indicates a shift where financial health becomes a criterion
for dismissal. Notably, in State Bank of India v. Krishidhan Seeds Pvt. Ltd, the NCLT, Indore,
exercised discretion under Section 7 to temporarily suspend proceedings based on the corporate
debtor's demonstrated financial activity.
This stems from the Vidarbha judgment, which provides (Para 79) that “the Adjudicating
Authority (NCLT) has been conferred the discretion to admit the Application of the Financial
Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the
admission in abeyance or even reject the Application”.
Despite the Code's time-bound resolution objective, NCLTs have exercised discretion, as seen in
a case where proceedings were temporarily halted based on the debtor's financial activity.
However, such discretion challenges the Code's purpose, indicating a need for clearer guidelines
to ensure consistent application across cases.
Difference between procedure for financial creditor and operational creditor to apply for CIRP
Recognizing the distinction between financial and operational creditors, the Supreme Court
highlighted the Code's differential treatment. Operational creditors, dealing primarily with
unsecured debts, are subject to mandatory admission if procedural requirements are met.
Conversely, financial creditors are granted discretionary admission, reflecting the varying
impacts of non-payment on different creditor classes.
In essence, the interpretation of Section 7(5)(a) and its implications on admission decisions
signify a broader discourse on the balance between procedural rigidity and judicial discretion,
necessitating clearer guidelines for consistent application across cases.
SUPREME COURT CLARIFIES ADMITTANCE NORMS FOR SECTION
7 APPLICATIONS
In a recent ruling in M. Suresh Kumar Reddy case the Supreme Court provided clarity on the
admission norms for Section 7 applications under the Insolvency and Bankruptcy Code (IBC).
The Court reiterated that once the National Company Law Tribunal (NCLT) confirms a default,
it typically must admit a Section 7 application. Here are the key takeaways from the Court's
judgment:
1. Confirmation of Default: The Court emphasized that even partial non-payment of a debt
when due constitutes a default, thereby mandating the admission of a Section 7 application.
Exceptions only arise when the debt isn't due and payable.
2. Precedent Reaffirmed: The Court reaffirmed the precedent set by the Innoventive Industries
and E.S. Krishnamurthy cases, clarifying that the Vidarbha review case didn't overrule them.
This ensures continuity in the legal interpretation regarding application admission.
3. Contextual Consideration: While acknowledging NCLT's discretion post-Vidarbha, the
Court stressed that such discretion should be exercised sparingly, with application rejection
being an exception. It emphasized that Vidarbha's context-specific judgment shouldn't alter the
general norm of admitting applications upon proving debt and default.
4. Case-by-Case Assessment: The Court highlighted that each case must be assessed
independently, distancing its ruling from Vidarbha's specifics. It emphasized the importance of
considering the unique circumstances of each application before making a decision on
admission.
Overall, the Supreme Court's ruling reaffirms the general norm of admitting Section 7
applications upon proving debt and default. It underscores the importance of maintaining
consistency while allowing for contextual considerations and judicial discretion on a case-by-
case basis.
CONCLUSION
In a recent judgment, the NCLAT in Ashok Kumar Tyagi v. UCO Bank has presented a novel
reconciliation of the Vidarbha case and the M. Suresh Kumar Reddy case. In this instance, where
the corporate debtor admitted to both debt and default, a unique scenario unfolded post the
NCLT's Section 7 admission order. The corporate debtor proposed a one-time settlement (OTS)
to the financial creditor, which was later modified by the creditor through a counterproposal.
Although the corporate debtor accepted this counterproposal, no further response was received
from the financial creditor. In a bid to balance the rights of both parties, the NCLAT granted a
60-day stay on the Section 7 admission order, allowing the financial creditor time to finalize its
decision on the counterproposal. If no settlement was reached within this timeframe, the CIRP
would commence, rendering the NCLAT's stay ineffective. This decision reflects the NCLAT's
attempt to strike a fair balance between financial creditors and corporate debtors.
The Vidharba judgment may have conferred additional powers on the NCLT allowing it to
examine other factors including the solvency and financial health of a corporate debtor while
initiating CIRP. The interpretation of the Code provided by the Judgment may be detrimental to
the rights of financial creditors. Even after the occurrence of a default, the insolvency courts may
not admit a corporate debtor to restructure its debt / business under the control of an independent
resolution professional acting within the remit of the Code and the supervision of the creditors.
However, the subjective nature of such judgments underscores the need for more clarity and
objectivity in the legislation. It is suggested that amendments should delineate types of unpaid
debt (e.g., disputed/undisputed, existing/contingent) to provide a framework for the NCLT's
adjudication of Section 7 applications, promoting consistency and fairness. While this decision
represents progress, ultimate clarity may require a larger Bench decision from the Supreme
Court.
In simple terms, while technically an application under Section 7 of the Code should be accepted
if there's a debt that's "due" and a "default" has happened, this black-and-white approach might
not always be fair to everyone involved. Of course, a company that hasn't paid its debts shouldn't
get away with it, but sometimes there are other factors to consider.
For example, if the NCLT believes that the company is still viable and can recover in the near
future, it might be better to wait before starting insolvency proceedings. This would be more in
line with what the Code intends. However, if the application is outright rejected just because the
company seems viable, that wouldn't be fair and could lead to more legal battles
