MCA’s proposal to amend Section 7 of IBC aligns with the lawmakers’ intent!

1. Introduction

On Wednesday, 18-01-2023, the MCA released a consultation paper outlining proposed changes to the Insolvency and Bankruptcy Code, 2016. Various changes have been proposed to improve transparency, reduce delays, and ensure efficient decision-making in insolvency proceedings.

2. Current Position w.r.t. discretionary power of AA on the admission of CIRP plea

A financial creditor can initiate action himself or jointly with other financial creditors, or any other person on behalf of the financial creditor against a corporate debtor when a default occurs. The default can be in respect of the applicant himself or any other financial creditor of the corporate debtor.

If Adjudicating Authority (AA) is satisfied that – (a) default has occurred (b) application under section 7(2) is complete and (c) there is no disciplinary proceeding pending against the proposed resolution professional, it may, by order, admit application [Section 7(5)].

The intent of the law is to ensure that the Adjudicating Authority only has the power to determine if a default has occurred, and is not required to consider any other factors or circumstances related to the borrower’s inability to repay their debt.

Supreme Court had held in Innoventive Industries Ltd v. ICICI Bank Ltd. [2017] 84 taxmann.com 320/143 SCL 625, that –

“an acknowledgement of debt and default will render an application under Section 7 of the Code, defect-free, and that it ought to be admitted by the NCLT.”

3. Supreme Court’s ruling in Vidarbha Industries Power Limited v. Axis Bank Limited

The Supreme Court in the case of Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [2022] 140 taxmann.com 252, has held that the application for initiation of insolvency proceedings against the corporate debtor, under section 7(5) of the Insolvency and Bankruptcy Code (“the Code”), is discretionary in nature, even though debt and default has been established, the National Company Law Tribunal (“NCLT”) may reject an application under section 7(5), even if the corporate debtor is in default.

4. Proposed changes to Section 7

One of the major changes proposed by the MCA is that Adjudicating Authority ‘must’ admit an application filed under section 7 if a default is established and other procedural requirements were fulfilled.

Section 7 of the Code provides for an application by a financial creditor for the commencement of the CIRP in respect of a CD. Under section 7(5), where the Adjudicating Authority (AA) is satisfied that the Corporate Debtor (CD) has committed a default and other procedural requirements are fulfilled, it is required to admit the application and initiate the CIRP.

Therefore, AA’s power in this regard is limited to the determination of default, and the provision does not require the AA to consider other factors or circumstances regarding the inability of the Corporate Debtor to repay its debts.

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