Insolvency (Amendment) Bill 2025: From Filter to Free-Pass for FC-Initiated CIRPs

[Soham and Nachiketa are students at Rajiv Gandhi National University of Law.]

In a bid towards remedying the umpteen procedural delays infesting the corporate insolvency resolution processes (CIRP) since the enactment of Insolvency and Bankruptcy Code 2016 (IBC), the the Finance Minister tabled the Insolvency (Amendment) Bill 2025 (Bill) on 12 August 2025. 

Among amendments such as the addition of a separate chapter for group insolvencies, and the attempt to clarify position of India towards cross-border insolvencies, one of the amendments also pertains to Section 7 of the IBC; essentially, to the initiation of a CIRP by a financial creditor (FC).

The Bill proposes the replacement of the word “may” with “shall” in Section 7(5)(a) of the IBC, thereby making the admission of a FC’s application for a CIRP against a corporate debtor (CD) mandatory, once statutory conditions, such as the existence of a default by the CD and absence of disciplinary proceedings against the proposed resolution professional (RP), are fulfilled. 

In this context, the authors proceed with their arguments against the Bill for being against the objective of the IBC, that is revival of a financially distressed company rather than to recover debts from defaulting companies. The authors delve into the mechanical tick-box approach provided for in the Bill for the admission of a CIRP by an FC, and how such would heighten the importance of filters in the form of tests at the admission stage that could distinguish genuine insolvencies, from temporary illiquidity, technical, or curable defaults by the CD.

The Unsettled Position: Conflicting Judicial Decisions on Section 7 of IBC

The unamended Section 7(5)(a) of the IBC stipulates that upon the adjudicating authority (AA) being satisfied that, firstly, default on a debt has occurred; secondly, that the threshold for filing such an application had been met, and thirdly, that the application under Section 7(2) was complete, and fourthly, that there were no disciplinary proceedings against the proposed interim RP, then it “may” admit the CD into CIRP. 

There arose two lines of thought as to whether the AA has any discretion while admitting a CIRP under Section 7(5) of the IBC. 

A division bench of the Supreme Court of India (SC) in Innoventive Industries Limited v. ICICI Bank affirmed a mechanical formalistic approach holding that the spirit of IBC entailed that upon the AA being satisfied that a default had occurred, it was bound to initiate CIRP. The SC also underscored that even a disputed debt must be admitted under Section 7 of the IBC if it was due and a default had occurred.

Contrary to the aforesaid ruling, another division bench of the SC, in Vidarbha Industries Power Limited v. Axis Bank Limited (Vidarbha), held that the AA must provide the opportunity to the CD against admission and that the AA would have discretion under Section 7(5)(a) of the IBC as to the admission of the application by the FC. Essentially, the mechanical admission of claims and initiation of CIRP by the AA upon establishment of debt and default was tweaked to become discretionary. The rationale adopted by the SC was to ensure that the FCs do not misuse the avenue of CIRPs as an arm-twisting mechanism to admit a financially viable and solvent CD into insolvency on account of technical defaults.

The current judicial position, irrespective of the conflicting decisions, tilts towards the Vidarbha ruling, with instances where the NCLTs (here and here) have relied on it to keep Section 7 proceedings in abeyance if the CD shows signs of good financial health.

New Bill: Return To Mechanical Approach

Under the Bill, the replacement of the word “may” with “shall” in Section 7 will again make the admission of claims mandatory if the statutory requirements of default on a due debt are fulfilled, eliminating the scope of discretion with the AA. In essence, the AA has to blindly allow the applications made on technical or curable defaults and initiate the CIRP irrespective of the financial health of the CD. 

Technical default can be understood with the help of an illustration: Company A holds preference shares in Company B. These preference shares were to be converted into equity upon Company B undertaking a qualified IPO. However, a dispute arose as to the valuation at which such conversion should take place. While this dispute was pending, the redemption date of the preference shares arrived. Consequently, the shares became redeemable, and within 15 days, a redemption obligation crystallized, technically creating a “due debt.”

Under the provisions of the Bill, this technical default could trigger futile or malicious applications under Section 7 of the IBC purely due to the mechanical approach and dragging a solvent and financially healthy company like Company B into CIRP solely on account of an incidental redemption-related claim, despite the ongoing bona fide valuation dispute.

The Supreme Court in Indus Biotech Private Limited v. Kotak India Venture Fund precisely recognized this danger. Further, there is a high possibility of misuse of the amended Section 7, as in the Bill, by institution of claims on the basis of technical, or curable defaults against financially viable companies, triggering an in rem process, suspending the Board, shifting the control to the IRP, and ousting the promoters from regaining control of the CD under Section 29A of the IBC. 

To add on to the miseries of the CD, due to the insurmountable supermajority required under Section 12A of the IBC requiring 90% of voting shares of the committee of creditors to apply for withdrawal of the CIRP makes withdrawal practically impossible. 

These elements together show why mandatory admission on any established default without looking into the viability of the company is value-destructive.

Pre-Initiation Filters under Section 7 of IBC: Taking Cues from the UK Insolvency Regime

A key difference between CIRP by an FC as opposed to an operational creditor (OC) is that for an OC, there is no discretion left upon the AA, firstly, due to the use of the word “shall” under Section 9(5)(i), and secondly, because to file a CIRP against the CD by an OC under Section 8 of IBC, OCs must provide the proof of an un-replied or unpaid demand notice supplied to the CD.

Contrarily, with regards to CIRPs by FCs, the use of “may” in Section 7 underscores that admission is discretionary, enabling the AA to filter out defaults that are technical or mala fide, especially where the debtor is otherwise solvent and capable of repayment. 

The absence of a provision akin to Section 8 in CIRPs initiated by FCs is explained by the Bankruptcy Law Reforms Committee Report, which proceeds on the premise that an FC would have already attempted, but failed, to negotiate a settlement with the debtor before invoking Section 7 of the IBC. 

This assumption is problematic in the light of the new Bill which does not contain any safeguards against malicious or futile applications of CIRP in respect of a technical defaults to an FC while it has the necessary provisions with respect to OCs under Section 8 of IBC. It must be noted that the amendment takes away the only guardrail which distinguished the IBC from a debt recovery statute. 

The authors refer to the UK Insolvency Act 1986, wherein Section 123 provides for a test of insolvency to institute administration, or liquidation proceedings similar to how it was practiced in the erstwhile Sick Industrial Companies Act 1985 (SICA). Under SICA, the Board for Industrial and Financial Reconstruction assessed the financial viability of the industry deemed to be “sick” and only then do they commence the reconstruction of it, which is wholly absent from the IBC. 

Section 123 of the UK Insolvency Act provides primarily for two tests: cash-flow test, as well as a balance sheet test to ascertain the viability of the company. The cash-flow test, under Section 123(1), determines whether company can pay its debts upon being served a demand notice as they fall due in the near future, rather than whether they have defaulted already, since such a default can be due a technicality.

As was held in Eurosail, the balance sheet test under Section 123(2) determines the viability of a company by assessing if the liabilities weigh more than the assets. The UK Supreme Court in Eurosail had clarified, that to determine whether a company should in-fact go for administration or liquidation, is a judgement-laden inquiry, rather than an arithmetic exercise. The legal system in the UK does consciously distinguish temporary illiquidity from genuine insolvency. A rigid “any default equals insolvency trigger” risks destabilization and devaluation of a perfectly viable entity from a CIRP. 

India could take cues from such approaches, refine and adopt these tests to assess the viability of an entity, and determine whether the default was due to temporary illiquidity or a genuine insolvency by affirming judicial precedents wherein the court has undertaken abeyance in the way of a short, pre-admission settlement window for de minimis or technical defaults, a measure that would preserve speed while also filtering out tactical, malicious, and frivolous CIRP applications by FCs. 

Conclusion

Justice Nariman’s dicta in Swiss Ribbons Private Limited v. Union of India described the IBC as “not a mere recovery legislation” but a “beneficial legislation” aimed at the revival of insolvent companies, a perspective that has been instrumental in shaping the code’s interpretation.

If the Bill becomes effective as law, unscrupulous FCs would be motivated to file for CIRPs against solvent, viable companies on a curable, de minimis default, accompanied with mass panic among all shareholders, and the fear of a CD to suffer from illiquidity, when it was still solvent.

Arguably, IBC gets very few opportunities to realize its true objectives, that of revival of financially distressed entities and their continuity as a going concern. In order to prevent the IBC from turning into a debt-recovery tool, it is essential to re-evaluate the Bill in light of the principles upon which the IBC is premised.