Mandatory Admission of Section 7 Application: A Step in the Wrong Direction?

(Tejbeer Singh and Ryan Bang are fourth-year students at National Law Institute University, Bhopal)

Introduction

The Parliament has recently proposed an amendment to the Insolvency and Bankruptcy Code, 2016 (IBC) through its Insolvency and Bankruptcy (Amendment) Bill, 2025. Clause 4 of the Bill aims to make sure that all the applications filed by financial creditors to start the Corporate Insolvency Resolution Process (CIRP) must be mandatorily admitted. This was done by substituting ‘may’ in Section 7(5)(a) of the IBC with the word ‘shall’. This amendment is in line with the long-standing view of the SC expressed in M/S Innoventive Industrie Ltd. v. ICICI Bank & Anr. (Innoventive Industries), Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (Vidarbha Industries) and M. Suresh Kumar Reddy v. Canara Bank & Ors. (M. Suresh Kumar Reddy).

However, this blog aims to highlight that the amendment overlooks the impact of such substitution in two circumstances, the first one being where the financial contract between the corporate debtor and the Financial Creditor is captured by an arbitration clause, and the second one being where the debt has been disputed and is subject to pending arbitration proceedings. 

The blog would first highlight that the judgments that form the basis of this amendment should be read in light of their specific facts. Secondly, the blog would highlight the principle regarding deference to arbitration in cases where insolvency is sought to be initiated by creditors in jurisdictions like Singapore and the UK. Lastly, the blog would conclude regarding the correct way forward that could have been taken by the Legislature regarding this amendment.

Misinterpretation of the Supreme Court’s Stance

In the Innoventive Industries case, the SC stated that the Adjudicating Authority (hereinafter ‘AA’) is obligated to admit an application under Section 7 of the IBC if it is satisfied that a default has occurred. On the other hand, in the Vidarbha Industries case, the SC opined that an application should be admitted unless there are good reasons not to admit the petition. Providing clarification on these conflicting viewpoints, the SC ruled in the M. Suresh Kumar Reddy case that the decision in the Vidarbha Industries case is based on the facts and circumstances of the case, and the Debt-Default Standard had to be applied.

What the Legislature failed to take into consideration, while bringing these amendments, was that both Innoventive Industries and M. Suresh Kumar Reddy are tied closely to their facts. In Innoventive Industries, there was no credible doubt about the corporate debtor’s insolvency or the existence of default. The debtor’s arguments were not based on financial viability or genuine pending claims, but on statutory defenses that had already been rejected. Similarly, in M. Suresh Kumar Reddy, the Court declined to extend Vidarbha Industries because the debtor’s reliance on pending litigation was tenuous. The company was unable to show that the outcome of that litigation could realistically change its financial position or avert insolvency. On these facts, mandatory admission appeared justified.

The problem arises when these fact-driven rulings are generalized into a rule of law. If Innoventive Industries and M. Suresh Kumar Reddy are taken to mean that the Adjudicating Authority never has discretion, the effect is to reduce Section 7(5) to a mechanical tick-box exercise and transform IBC into a blunt recovery mechanism, contrary to its design as a resolution-oriented framework.

Far from being an aberration, Vidarbha Industries offers a principled interpretation that safeguards against misuse of the IBC as a mere debt recovery shortcut. It allows tribunals to distinguish between genuinely insolvent companies and those facing temporary or technical defaults, thereby aligning the practice of insolvency law with its broader purpose of resolution and value maximization.

The need for deferring to arbitration agreements: A need to look at learnings from UK and Singapore

The Privy Council of the UK in Sian Participation Corp (In Liquidation) v. Halimeda International Ltd (Sian v. Halimeda) clearly opined that where a debt is disputed on genuine and substantial grounds, the insolvency application has to be stayed in favour of the arbitration proceedings that pertain to such disputed debt. The Privy Council made sure that the legislative goals behind the Arbitration and Insolvency legislations are not compromised, and both can be given effect to. The approach ensured that while the winding-up applications are not to be used as a recovery mechanism by bypassing the arbitration agreements in case of disputed debts, at the same time, it also ensured that legitimate winding-up applications are not delayed by using dilatory tactics by the unscrupulous litigants by disputing the debts by taking flimsy grounds.

The Singapore Court of Appeal in AnAn Group (Singapore) PTE Ltd v. VTB Bank (Public Joint Stock Company) laid down a significant framework on the treatment of disputed debts covered by arbitration agreements. If the debtor can demonstrate, even at a prima facie level, that: (i) a valid arbitration agreement exists, (ii) the dispute falls within its scope, and (iii) the dispute is not a sham or abuse of process, then the winding-up petition must ordinarily be dismissed.

The aforementioned approaches are broadly similar when viewed in a broader context. While the UK courts have emphasized that the dispute be based on genuine and substantial grounds, SGCA has made sure that there is no abuse of the process of the court to deter admission of a winding-up application. The SGHC in BWG v BWF clearly highlighted that inconsistent positions by the debtor regarding the dispute of debt amounts to abuse of process. In Founder Group (Hong Kong) Limited (in liquidation) v. Singapore JHC Co PTE Ltd, the Court of Appeal affirmed that a defense not founded on genuine and substantial grounds was not raised in good faith and amounted to abuse of process. This clearly highlights that broadly both the approaches aim to ensure that only debts that are disputed on genuine and substantial grounds are deferred to arbitration.

The Downsides of the Proposed Amendment: Posing IBC as a recovery mechanism

The proposed substitution of the word “may” with “shall” in Section 7(5)(a) of the IBC appears, at first glance, to introduce certainty and efficiency into insolvency proceedings. However, by compelling the Adjudicating Authority (AA) to mechanically admit all Section 7 applications once default is shown, the amendment risks converting the CIRP into a blunt instrument for debt enforcement. This is inconsistent with the legislative intent, which prioritizes rehabilitation of distressed companies over liquidation. In Swiss Ribbons v. Union of India, the Supreme Court had underscored that the IBC is not intended to be used as a recovery tool. Without judicial discretion, there is no space for the AA to differentiate between cases where insolvency is genuinely warranted and those where temporary or disputed defaults exist.

Where such disputes are pending before an arbitral tribunal, the mandatory admission of insolvency applications completely sidelines the contractual choice of forum and undermines party autonomy. The same approach has been adopted by NCLAT in Century Aluminium Company Limited vs Religare Finvest Limited. The adoption of such a mechanical approach, even in the face of pending arbitration proceedings, amplifies the concerns associated with the amendment and the risks posed by enabling dressing up of claims by the Financial Creditors before the NCLT. The financial creditors could get the Section 7 application admitted on the basis of default accrued merely on the basis of a standalone transaction, despite the connected obligations with such transactions, which might have the effect of nullifying the obligations of the corporate debtor in the first place. This issue becomes more problematic when the Explanation to section 7 of IBC is read, which relaxes the locus for initiation of CIRP even by a Financial Creditor who was not even a party to the transaction between the corporate debtor and the financial creditor to whom the debt is owed. A concerted action based on an informal understanding might trigger admission of a Section 7 application even where the debt is disputed or is subject to a pending arbitration proceeding.

Another issue is that resolution professionals under the IBC only have administrative power as opposed to the quasi-judicial powers. This leads to a perilous circumstance for a whole range of creditors whose debts might be disputed, and the Resolution Professional admits their claim at a notional value of Rs. 1 as was done in the Essar Steel case. Additionally, the financial creditors might also face the wrath of this situation if the debt owed by them is the subject of any dispute at the time of initiation of CIRP.

Conclusion and the Way Forward

The approach adopted by the UK and Singapore clearly suggests that the disputed debts must first be settled by arbitration before they form the basis of admission of a winding-up application. This is more so required in contemporary contracts where most of the financing arrangements have an arbitration clause, and the insolvency law might be used as a recovery mechanism to defeat the initial intent of the parties to settle the dispute, if any, by arbitration. The issues due to a relaxed locus need serious consideration before considering the present amendment. Further, a debt might be disputed in an appended arbitration proceeding, and issues might arise where there is a substantial number of disputed debts or the debtor is in good financial health. It is urged by the authors that the amendment should be reconsidered in light of the underlying arbitration clauses in commercial contracts and the approach adopted by jurisdictions like the UK and Singapore to ensure that the insolvency law is not used as a recovery mechanism to force healthy companies into insolvency.