Scope of Scrutiny Under Section 7 of the Insolvency and Bankruptcy Code, 2016

INTRODUCTION

The recent Insolvency and Bankruptcy Code (Amendment) Bill, 2025 (“Amendment Bill”), introduced before the Lok Sabha by the Finance Minister, Nirmala Sitharaman, has sparked considerable debate regarding the scope of powers to be exercised by the Adjudicating Authority while deciding applications filed by financial creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Section 7(5) of the IBC, in its present form, provides as follows:

“(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; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.”

A plain reading of the above provision indicates that the legislature has consciously employed the expression “may” while conferring power upon the Adjudicating Authority to admit or reject a Section 7 application. The use of the term “may”, prima facie suggests the existence of discretion in the Adjudicating Authority even upon satisfaction of the statutory conditions. There have been instances where apart from the conditions stated out in the above-mentioned section, the Adjudicating Authority have given reasons for rejecting for an application filed under Section 7 application.

However, through the Amendment Bill, a seemingly minor yet legally consequential change is proposed to Section 7(5) of the IBC by substituting the word “may” with “shall”. This substitution signifies a decisive legislative shift from discretion to mandate. In effect, once a financial creditor establishes the existence of a legally enforceable financial debt and demonstrates that a default has occurred, the Adjudicating Authority would be bound to admit the application, provided the statutory requirements are fulfilled. The proposed amendment, therefore, suggests that proof of debt and default alone would suffice for admission and commencement of the Corporate Insolvency Resolution Process (“CIRP”), thereby substantially curtailing any residual discretion previously exercised at the admission stage.

However, this proposed substitution raises important questions. Has the legislative shift from “may” to “shall” been introduced with the intent of curtailing the discretionary space available to the Adjudicating Authority, particularly in light of concerns regarding judicial overreach at the admission stage? Further, has the judicial approach over a period of time contributed to uncertainty in the admission of Section 7 applications, thereby necessitating legislative intervention? More importantly, while the amendment purports to bring clarity and uniformity, it remains to be examined whether the proposed change will in fact, resolve the perceived inconsistencies or inadvertently give rise to new legal and practical complications.

JUDICIAL INTERPRETATION OF SECTION 7(5): DISCRETION OR MANDATE?

There have been noticeable inconsistencies in the manner in which the Adjudicating Authority has exercised its judicial discretion while considering the admission of applications under Section 7 of the IBC.

In Innoventive Industries Ltd. v. ICICI Bank, the Hon’ble Supreme Court authoritatively clarified the scope of enquiry to be undertaken at the admission stage. The Court held that when a financial creditor initiates proceedings against a corporate debtor under Section 7(5) of IBC, the Adjudicating Authority is required to examine, within a limited framework, whether a default has occurred. Such determination is to be made on the basis of records of the information utility or other evidence furnished by the financial creditor in support of the application. The Supreme Court further observed that once the Adjudicating Authority is satisfied that a default has occurred and that the application is complete in terms of the statutory requirements, the application ought to be admitted, unless it suffers from defects that remain unrectified within the prescribed period. The decision, therefore, emphasized that the enquiry at the admission stage is intended to be summary in nature and confined to the existence of debt and default, rather than a detailed adjudication on disputed questions.

Interestingly, the Hon’ble Supreme Court in Surendra Trading Company v. Juggilal Kamalapat Jute Mills Company Limited adopted an interpretative approach that underscored the discretionary nature of the powers exercised by the Adjudicating Authority under Section 7 of the IBC. The Court observed that the use of the expression “may” in Section 7(5)(a) indicates that the power of the Adjudicating Authority to admit an application for initiation of the Corporate Insolvency Resolution Process (“CIRP”) is not strictly mandatory. The Court further analysed the statutory scheme and noted that the timeline of fourteen days prescribed for the Adjudicating Authority to ascertain the existence of default is directory in nature and not mandatory. This interpretation was also reinforced when the Court compared the framework under Section 7 with the provisions contained in Section 10(4) of the IBC. Consequently, the decision highlighted that certain procedural aspects under the IBC, including the timelines governing admission, are intended to guide the process rather than operate as rigid mandates.

The similar approach was also followed by the Hon’ble Supreme Court in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund. In this case, the Court observed that even where a financial creditor is able to demonstrate the existence of a financial debt and a corresponding default in terms of the process contemplated under Section 7(5) of the IBC, the Adjudicating Authority is not expected to act in a purely mechanical manner while admitting the application. The Court emphasized that the surrounding circumstances, including the financial position of the corporate debtor and the nature of the dispute between the parties, may also be relevant considerations before determining whether the application ought to be admitted. The Supreme Court cautioned that if, in every case where debt and default are established, the Adjudicating Authority were to mechanically admit the application, a corporate debtor that is otherwise a viable and functioning entity could be unnecessarily pushed into CIRP. The Court further noted that the existence of parallel or connected proceedings between the parties may also be a relevant factor for consideration, and that the mere filing of an application under Section 7 should not automatically trigger insolvency proceedings against the corporate debtor.

Subsequently, the Hon’ble Supreme Court in E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd. considered whether the Adjudicating Authority could direct a group of homebuyers, who were financial creditors, to enter into a settlement with the corporate debtor despite the satisfaction of all the statutory requirements under Section 7(5) of the IBC. The Supreme Court held that the Adjudicating Authority had acted beyond the scope of its jurisdiction and in clear violation of the mandate contained in Section 7(5) of the IBC. The Court clarified that at the stage of admission, the Adjudicating Authority is required only to ascertain whether a default has occurred and whether the application is otherwise complete in terms of the statutory requirements. The Court further observed that while the Adjudicating Authority may encourage parties to explore the possibility of settlement, it cannot compel the financial creditors to settle their dispute with the corporate debtor. In other words, the Adjudicating Authority, while exercising its jurisdiction under the IBC, cannot assume the role of a court of equity to impose a settlement where the statutory conditions for admission of the application are otherwise satisfied.

In Vidarbha Industries Power Limited v. Axis Bank Limited, the Hon’ble Supreme Court undertook a detailed examination of whether Section 7(5) of the IBC confers discretionary powers upon the Adjudicating Authority or mandates admission of an application upon satisfaction of the statutory conditions. The Court specifically considered whether the expression “may” used in Section 7(5)(a) could be interpreted as “shall” in the context of admitting an application for initiation of the CIRP. The Supreme Court held that the Adjudicating Authority had erred in assuming that once the existence of a financial debt and a corresponding default were established, admission of the application under Section 7 automatically followed. According to the Court, the existence of debt and default merely entitles a financial creditor to initiate proceedings under Section 7; however, it does not inexorably compel the Adjudicating Authority to admit the application in every case. The Court further observed that the Adjudicating Authority may consider relevant surrounding circumstances before admitting the application. In the facts of the case, the Court noted several factors which warranted consideration, including the feasibility and consequences of initiating CIRP against an electricity generating company operating under a statutory regulatory framework, the pendency of proceedings before the Appellate Tribunal for Electricity ("APTEL"), and the overall financial health and viability of the corporate debtor under its existing management.

The Court undertook a detailed examination of the language and legislative intent underlying Section 7(5)(a) of the IBC. The Court observed that the use of the expression “may admit” indicates that the provision is discretionary in nature, in contrast to the term “shall”, which ordinarily denotes a mandatory obligation. While acknowledging that statutory interpretation must consider the overall scheme and purpose of the legislation, the Court emphasized that the IBC is designed to address insolvency and bankruptcy and is not intended to penalize solvent companies that may be experiencing temporary financial distress. Accordingly, the Court held that Section 7(5)(a) confers discretion upon the Adjudicating Authority to admit or reject an application filed by a financial creditor, even after the existence of financial debt and default is established. However, such discretion is not unfettered and must be exercised judiciously and not in an arbitrary or capricious manner. The Court further clarified that while, in ordinary circumstances, the Adjudicating Authority would admit an application upon being satisfied of the existence of debt and default, it may decline admission where compelling circumstances justify such a course. In exercising this discretion, the Adjudicating Authority must also consider the grounds raised by the corporate debtor against admission on their own merits.

Following the judgment in Vidarbha Industries, Axis Bank Limited filed a review petition before the Hon’ble Supreme Court contending that the decision had overlooked the earlier ruling in E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd. and was inconsistent with the objectives and framework of the IBC. The review petitioner argued that the interpretation adopted in Vidarbha Industries could dilute the effectiveness of the insolvency regime. While considering the review in Vidarbha Industries, the Supreme Court clarified that the concerns raised by the review petitioner were largely misconceived. The Court observed that the findings in Vidarbha Industries, particularly those contained in paragraph 90 and related observations, were rendered in the specific factual context of that case and were not intended to be read as laying down a general statutory principle contrary to earlier precedents such as Innoventive Industries and E.S. Krishnamurthy.

The Court further reiterated and settled the position in M. Suresh Kumar Reddy v. Canara Bank, thereby clarifying that the observations in Vidarbha Industries were confined to the peculiar facts of that matter and should not be interpreted as fundamentally altering the framework governing admission of applications under Section 7 of the IBC.

The Hon’ble Adjudicating Authority in the case of Atul Jain v. Tripathi Hospital (P) Ltd., reiterated that for a Section 7 application to be admitted, the Adjudicating Authority is only required to be satisfied whether the corporate debtor has defaulted; whether the application filed by the financial creditor is complete and whether any disciplinary proceedings are pending against the insolvency resolution professional proposed by the financial creditor.

In the case of Vikram Bhawanishankar Sharma v. Union Bank of India (2025 SCC OnLine NCLAT 1460), the Hon’ble Adjudicating Authority dealt with an interesting scenario wherein a group of lender consortium-initiated insolvency against the corporate debtor, which was a special purpose vehicle (“SPV”) named Supreme Manor Wada Bhiwandi Infrastructure Pvt. Ltd and promoted by Supreme Infrastructure India Ltd. The SPV was awarded a road project by the Government of Maharashtra on a Build Operate and Transfer (“BoT”) basis and accordingly executed a concession agreement for implementation of the said project. The corporate debtor to fund its project had also availed a loan facility from a lender consortium for the same. Thereafter, due to default in repayment of the credit facilities by the corporate debtor, CIRP was initiated against it. When the corporate debtor, through its suspended director appealed before the Hon’ble NCLAT contending that as per the concession agreement and substitution agreement executed with the Government of Maharashtra, the liability to make termination payments stood with the Government of Maharashtra upon termination of the concession agreement, and that arbitral proceedings had been initiated where claims exceeding Rs.456 crore were pending and placed reliance on the case of Vidarbha Industries, stating that as dues amounting to Rs.174 crore were offered as settlement offer by the Government of Maharashtra, the Section 7 petition against the corporate debtor was not to be accepted.

The Hon’ble Adjudicating Authority upheld the findings of the NCLT and observed that the disbursement of financial facilities and the default in repayment were clearly established through contemporaneous records. The Tribunal rejected the corporate debtor’s contention that the liability had shifted to the Government of Maharashtra under the concession agreement, holding that such contractual arrangements did not absolve the debtor of its obligations to its lenders. The alleged settlement offer was also found to be unsubstantiated and, in any event, insufficient when compared to the total outstanding debt. The Adjudicating Authority also distinguished the observations passed in Vidarbha Industries, stating that the decision was rendered in a context where a crystallised award existed in favour of the debtor, whereas in the present case, arbitral proceedings were still pending. In the end, the Adjudicating Authority reaffirmed the principles laid down in Innoventive Industries and E.S. Krishnamurthy and reiterated that once the existence of financial debt and default is established, the Adjudicating Authority cannot refuse admission of a Section 7 application.

Recently, the Hon’ble Supreme Court in the case of Power Trust (Promotor of Hiranmaye Energy Ltd.) v. Bhuvan Madan (Interim Resolution Professional of Hiranmaye Energy Ltd.), dealt with the issue whether the Adjudicating Authority ought not to have admitted the Section 7 application mechanically without assessing the viability of the Corporate Debtor as an ongoing concern and its ability to repay the debts, in view of Vidarbha and further the whether the corporate debtor’s ability to pay the debt is to be considered while considering the application. The Court unequivocally reaffirmed that the scope of inquiry under Section 7 is limited to a summary determination of the existence of a financial debt and the occurrence of default. It held that the Adjudicating Authority does not possess the jurisdiction to examine considerations such as the commercial viability of the corporate debtor, equitable factors, or its ability to repay the debt while deciding admission. The Supreme Court further reiterated, in line with M. Suresh Kumar Reddy, that the observations in Vidarbha Industries were confined to the peculiar facts of that case and cannot be read as diluting the settled position that admission under Section 7 follows upon proof of debt and default.

CONCLUSION: LEGISLATIVE CLARIFICATION OR OVERCORRECTION?

The judicial trajectory surrounding Section 7(5) of the IBC reveals a gradual oscillation between a strict, objective standard of “debt and default” and a more contextual, discretion-based approach. While early decisions, such as Innoventive Industries, emphasized a limited and summary inquiry at the admission stage, subsequent rulings, most notably Vidarbha Industries Power Limited, introduced a degree of discretion by permitting the Adjudicating Authority to consider surrounding circumstances, including the financial viability of the corporate debtor.

However, this expansion of discretion was short-lived. Later decisions, including M. Suresh Kumar Reddy and Power Trust, have unequivocally clarified that the observations in Vidarbha Industries were confined to its peculiar facts and do not dilute the settled position that admission under Section 7 ordinarily follows upon proof of financial debt and default. The recent jurisprudence thus reflects a conscious judicial effort to restore certainty and prevent dilution of the insolvency framework.

Considering the above-mentioned judgements and in the backdrop of the proposed changes as suggested through the Amendment Bill, the bigger question that arises is whether the Amendment Bill if brought into force, shall create more issues or help in concluding the settling the debate.

In this backdrop, the proposed substitution of “may” with “shall” under Section 7(5) of the Amendment Bill appears to be a legislative response aimed at conclusively settling the debate. By transforming the provision from discretionary to mandatory, the Amendment Bill seeks to eliminate any residual ambiguity and ensure a uniform, creditor-driven admission process. From a policy perspective, this aligns with the core objective of the IBC i.e. timely resolution and maximization of value through a predictable and efficient insolvency regime.

Many have also raised eyebrows about the Amendment Bill and have stated that by mandating admission upon proof of debt and default, the legislature risks overcorrecting what was, at best, a limited and fact-specific deviation in Vidarbha Industries. The complete removal of discretion may lead to situations where otherwise viable and solvent companies, facing temporary financial distress or complex regulatory entanglements, are pushed into insolvency without any scope for the Adjudicating Authority to account for exceptional circumstances. In doing so, the amendment may inadvertently tilt the balance too far in favour of creditors, at the cost of the nuanced, case-specific adjudication that complex commercial realities sometimes demand.

However, it is submitted that the proposed Amendment Bill is not only consistent with the legislative intent underlying the IBC, but also reinforces the discipline expected of corporate borrowers in managing financial obligations. By mandating admission upon proof of debt and default, the amendment strengthens the creditor-driven framework of the Code and ensures predictability in its application.

The approach adopted in Vidarbha Industries, which permits consideration of factors such as financial viability or the ability of the corporate debtor to repay, risks diluting the efficiency of the insolvency process. Introducing such considerations at the threshold stage may lead to protracted litigation and undermine the time-bound nature of the CIRP, which lies at the heart of the IBC framework.

It is also significant that the statutory threshold for initiation of insolvency proceedings stands at Rs.1 crore, indicating that Section 7 is typically invoked in cases involving substantial financial distress rather than trivial defaults. In such circumstances, the existence of default itself is often reflective of deeper financial or managerial issues within the corporate debtor, warranting timely intervention under the IBC.

Accordingly, the proposed amendment serves to streamline the role of the Adjudicating Authority by confining it to a limited jurisdictional inquiry, while simultaneously reducing the scope for delay and financial mismanagement. The shift from “may” to “shall” thus represents a necessary and pragmatic reform, and its early implementation would further the objectives of efficiency, certainty, and discipline that underpin the IBC regime.