The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to consolidate and amend the laws relating to insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. One of the most significant provisions under the IBC is Section 7, which empowers financial creditors to initiate the Corporate Insolvency Resolution Process (CIRP) against a defaulting corporate debtor.

Interpretation by Supreme Court:

Section 7(5) of the Code, which governs corporate governance, has been interpreted by the Supreme Court in landmark cases like Innoventive Industries Ltd. v. ICICI Bank, Swiss Ribbons (P) Ltd. v. Union of India, and E.S. Krishnamurthy v. Bharath Hi-Tecch Builders (P) Ltd. The court held that the NCLT must only satisfy itself that a default has occurred for admitting an application under Section 7. The court also held that the debt could even be disputed but, as long as it is “due” and a “default” has occurred, the NCLT must admit an application under Section 7.

In Vidarbha Industries Power Ltd. v. Axis Bank Ltd 2022., the court interpreted Section 7(5) to be discretionary, and the NCLT may reject an application after examining the expedience of initiation of a Corporate Governance Review Process (CIRP), taking into account all relevant facts and circumstances, including the overall financial health and viability of the company.

The present position is that once the debt and default are established under Section 7, the NCLT must admit the application if it is otherwise complete. However, in exceptional cases as seen in Central Bank of India v. Simplex Infrastructures Ltd 2025, if the company can prove its viability, the application may be kept in abeyance or rejected.[1]

  1. Who Can Initiate CIRP under Section 7?
  • Financial creditor, either alone or together with other financial creditors, may file an application before the Adjudicating Authority (National Company Law Tribunal or NCLT) to trigger CIRP on account of default.
  • Further, the Central Government can notify any other person who shall be empowered to make such an application on behalf of a financial creditor.
  1. Joint Filing Compulsory in Certain Cases

In order to prevent IBC process abuse in mass-litigant situations like real estate projects, the following precautions have been taken:

  • In the case of financial creditors under Section 21(6A)(a) and (b) (such as bondholders or security holders by trustees), at least 100 creditors or 10% of the class, whichever is smaller, collectively must make an application.
  • For allottees of real estate projects, the application has to be made collectively by at least 100 allottees or 10% of the allottees under the same project, whichever is less.

If any such application was pending before the said amendment and had not yet been admitted, it must be amended to be in line with the new threshold levels within 30 days, otherwise it shall be treated as having been withdrawn.

  1. Scope of Default

The explanation to Section 7(1) of the Insolvency and Bankruptcy Code (IBC) clarifies that a “default” doesn’t have to be against the applicant financial creditor only. Even if the corporate debtor has defaulted on a loan taken from any financial creditor, that is enough to start the insolvency process (CIRP). So, even if the applicant is not the one who directly suffered the non-payment, they can still trigger CIRP, as long as there is a financial default by the debtor.

In the case of Innoventive Industries Ltd. v. ICICI Bank Ltd 2017., the Supreme Court, explained the meaning of “default” in detail. It said that:

“Default” means not paying a debt once it becomes due, even if the unpaid amount is only a part of the total or just one installment.

To understand what “default” means, we need to look at other definitions under the IBC:

  • Debt (Section 3(11)) means any liability or obligation to pay money.
  • Claim (Section 3(6)) means the right to receive payment—even if the debtor disputes it.

So, in simple terms:
If a company fails to pay back any part of a financial debt owed to any financial creditor, even if the payment is disputed, it counts as a default and CIRP can be started.[2]

  1. Adjudication Timeline and Criteria

As Per Section 7(4) and (5), the NCLT must:

  • Decide on the existence of default within 14 days from the date of filing of the application.
  • If it is contented that there has been a default, the application is proper and no disciplinary proceeding is pending against the proposed IRP, it shall approve the application.
  • If it is not contented or if the application is improper or there are pending proceedings against the IRP, it can refuse the application.

But prior to rejection, the applicant will be provided with 7 days’ time to cure the defect on serving notice.

According to Section 7(4) also mandates that if the NCLT is unable to decide within the 14-day period, it must record reasons in writing for the delay.

  1. Commencement and Communication of CIRP

On being admitted under Section 7(5)(a), the CIRP takes effect from the date of admission.

The NCLT is also mandated to communicate its order:

  • To both corporate debtor and financial creditor in the event of admission;
  • to the financial creditor in the event of rejection;

The above communication is required to be communicated within the timeframe of 7 days.

Conclusion

Section 7 of IBC empowers the financial creditors with a properly designed legal framework to initiate insolvency proceedings against defaulting corporate debtors. Along with safeguard for real estate allottees and creditors, the law is tilted in support of the rights of the creditors along with making sure that its abuse is not done. Procedural integrity, timeliness of resolution, and judicial oversight are the most important aspects of this mechanism, which ensures that the aim of a sound and effective insolvency regime is fulfilled.[3]

[1] https://www.scconline.com/blog/post/2023/06/23/decoding-section-7-of-ib-code-for-admitting-an-application-for-corporate-insolvency-resolution-process/

[2] https://ibclawreporter.in/wp-content/uploads/2020/04/1.-Innoventive-Industries-Ltd.-v.-ICICI-Bank-Anr..pdf

[3] https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/