The Leaflet: Laying to Rest the Ghost of Poor Legislative Drafting — Section 7 of the Insolvency and Bankruptcy Code

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.