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.
The Vidarbha Industries 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.
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.
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 BLRC Report and policy considerations
Prior to the enactment of the IBC, India had no unified law or single adjudicatory forum governing insolvency and bankruptcy. Instead, the regime was fragmented across multiple statutes and forums, each operating within its own limited domain. The process was heavily discretion-based and marked by significant delays. The country’s sector-specific and overlapping laws contributed to some of the poorest recovery ratios for creditors globally. Piecemeal liquidation of assets resulted in erosion of value and loss of institutional knowledge.
The IBC was enacted to address these structural deficiencies by introducing a consolidated and time-bound framework for insolvency resolution. By enabling resolution within a strict timeline and prioritising the preservation of companies as going concerns, the IBC sought to maximise value for stakeholders. The IBC incentivised early detection of stress in a business by making a ‘default’ the threshold for initiation of legal restructuring.
The Bankruptcy Law Reforms Committee Report of November 2015 (‘BLRC Report’), which proposed the IBC, was clear that any creditor should be able to initiate CIRP once a default in respect of a debt was established, as there was no other standardised way to establish insolvency. The IBC presumes that a creditor files an application only after failing to resolve conflicts through negotiation. On that basis, the NCLT’s role was limited to verifying that the default had occurred. However, this intent seems not to have been passed on to the draft of the IBC proposed by the BLRC in Volume 2 of its report, as the ‘may’ formulation in Section 7(5) was adopted juxtaposed to the ‘shall’ formulation in Section 9(5). The Joint Parliamentary Committee Report that vetted the draft of the IBC also did not seem to correct this apparent error, and it was carried into the IBC.
The Vidarbha Industries judgment
In Vidarbha Industries, the Supreme Court considered the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary in nature. It held that Section 7(5)(a) allows the NCLT to reject an application even if the financial creditor establishes ‘debt’ and ‘default’ on the part of the corporate debtor. The existence of debt and default merely gives the financial creditor a right to initiate the CIRP and, if ‘reasons’ are provided and justified, the NCLT has the discretion to reject such Application. The NCLT is required to apply its mind to relevant factors, such as whether a decretal amount greater than the financial debt in respect of which CIRP was sought to be initiated was yet to be realised. The Supreme Court held that the feasibility of initiation of CIRP and the overall financial health and viability of the debtor have to be taken into account.
The Court also ruled that the legislature, in its wisdom, has used ‘may’ in Section 7(5)(a) of the IBC regarding a financial creditor’s application for CIRP against a debtor. However, it used ‘shall’ in the almost identical provision of Section 9(5) of the IBC, concerning an operational creditor’s CIRP initiation. This difference in wording between the two provisions suggests that ‘may’ and ‘shall’ convey distinct meanings. The legislature clearly intended Section 9(5)(a) to be mandatory while Section 7(5)(a) was discretionary.
The proposed 2025 amendment represents a step in the right direction, as it seeks to correct this drafting defect and restore clarity to the admission framework under the IBC.
The Supreme Court’s judgment in Vidarbha Industries can be said to be a lazy take. While it mentions the BLRC report in passing, it fails to critically examine the report in order to glean the legislative intent. Further, the judgment also fails to examine the Court’s own previous decisions that expounded on the legislative intent and scheme of the IBC—such as Innoventive Industries Limited v. ICICI Bank Limited (2017), and Swiss Ribbons v. Union of India (2019). In these judgments, the Supreme Court propounded a hands-off approach and deference to the commercial wisdom of creditors, thereby reducing discretion vested in courts and tribunals to resolve stressed businesses.
However, the Court’s job is not to fix outward errors but only to fill gaps—as the Supreme Court did hold. Literal interpretation of a statute is the foundational approach to statutory interpretation, and purposive interpretation can only be resorted to when the plain words of the statute are ambiguous. In this respect, Vidarbha Industries held the legislature accountable for avoidable oversight and poor drafting that led to this result.
Conclusion
At first blush, Vidarbha Industries may appear to take us back to the pre-IBC era of uncertainty and discretion. However, it is equally important to recognise that accountability within the insolvency framework must extend to all institutional actors, including the legislature. Vidarbha Industries effectively holds up a mirror to legislative drafting and exposes the consequences of ambiguity in statutory language.
The proposed 2025 amendment represents a step in the right direction, as it seeks to correct this drafting defect and restore clarity to the admission framework under the IBC. Specifically, the amendment replaces the ‘may’ formulation in Section 7 with ‘shall’, thereby removing any residual discretion at the admission stage and reaffirming the default-based trigger envisioned under the IBC. In that sense, the legislature is laying to rest the ghost of poor drafting, at least for Section 7 of the IBC.
Until next time.
Catch ‘Relief Pending’, a monthly column on the state of adjudication in commercial and private law with Anirudh Gotety, on the last weekend of each month.
Subscribe for our latest newsletters and updates from The Leaflet.