The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to consolidate and amend laws relating to the reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. Among the various mechanisms it provides, Section 7 of Insolvency and Bankruptcy Code is pivotal as it enables financial creditors to initiate the Corporate Insolvency Resolution Process (CIRP) against a defaulting corporate debtor.
This article provides a comprehensive analysis of Section 7, including the legal framework, procedural requirements and recent amendments, in a simplified yet formal manner.
Understanding Section 7 of Insolvency and Bankruptcy Code: Core Provision
Section 7 of the IBC lays down the right of a financial creditor to initiate insolvency proceedings. This section allows:
An individual financial creditor, or
A group of financial creditors, or
Any other person acting on behalf of a financial creditor (as may be notified),
to file an application before the Adjudicating Authority (National Company Law Tribunal - NCLT) for initiating CIRP when a default occurs. The application must be made in the prescribed format and accompanied by the required fees and documents.
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Key Elements of Section 7 of Insolvency and Bankruptcy Code
This section outlines the core principles and conditions under which financial creditors can initiate insolvency proceedings including eligibility, thresholds for joint applications and the scope of default considered under the law.
1. Who Can File?
A financial creditor is defined under Section 5(7) of the IBC as any person to whom a financial debt is owed, including an assignee of such a debt.
Section 7 allows:
A single financial creditor,
Multiple financial creditors acting jointly,
A person notified by the Central Government on behalf of financial creditors,
to file for insolvency if there is a default in repayment.
2. Minimum Threshold for Real Estate and Class Creditors
Following the 2020 Amendment, specific thresholds were introduced to prevent frivolous or vexatious filings by individual creditors:
For creditors in the same class (such as bondholders or homebuyers), a minimum of 100 creditors or 10% of the total number of creditors in that class, whichever is less, must apply jointly.
Similarly, in the case of allottees under a real estate project, at least 100 allottees or 10% of the total allottees in the same project, whichever is less, are required to file jointly.
Failure to meet these thresholds may lead to rejection of the application.
Procedural Requirements
To effectively initiate a corporate insolvency resolution process, financial creditors must follow a specific set of procedural steps, including documentation, application format, timelines, and communication protocols outlined under Section 7 of the IBC.
Application Format and Documents (Section 7(2) and 7(3))
The application must include:
Evidence of default (from an information utility or other reliable documentation),
The name of the proposed Interim Resolution Professional (IRP),
Any other prescribed information by the Insolvency and Bankruptcy Board of India (IBBI).
Timelines for Admission (Section 7(4))
Once the application is submitted:
The Adjudicating Authority must ascertain the existence of default within 14 days from the date of receipt.
If the NCLT fails to act within this period, it must record reasons in writing for the delay.
Admission or Rejection of Application (Section 7(5))
The NCLT may:
Admit the application if default is established, documents are complete, and there is no ongoing disciplinary proceeding against the proposed IRP.
Reject the application if any of the above conditions are not met.
Importantly, the applicant must be given seven days to rectify any defects before the application is rejected.
Commencement and Communication (Sections 7(6) and 7(7))
The CIRP commences from the date of admission of the application.
The NCLT must communicate its order to the financial creditor and the corporate debtor within seven days of admission or rejection.
Explanation of ‘Default’
A significant feature of Section 7 is its broad definition of default. A creditor may initiate CIRP even if the default pertains to another financial creditor, not just the applicant. This inclusive approach ensures that the insolvency process can be triggered even if multiple creditors are affected but only one initiates action.
Judicial Interpretations and Case Law
Several judgments have clarified Section 7 of Insolvency and Bankruptcy Code:
1. Innoventive Industries Ltd. v. ICICI Bank & Anr. (2018)
Facts: Innoventive defaulted on loan repayments to ICICI Bank. ICICI filed for initiation of CIRP under Section 7 of the IBC. Innoventive argued that state law (Maharashtra Relief Undertaking Act) protected it.
Issue: Whether the IBC would override state laws that provide temporary relief to corporate debtors.
Judgment: The Supreme Court ruled that once default is established, the Adjudicating Authority must admit the application. It affirmed that the IBC, being a central legislation, overrides any conflicting state laws under Article 254 of the Constitution.
2. Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019)
Facts: Real estate developers challenged the 2020 IBC amendment requiring a threshold of 100 or 10% of allottees to jointly initiate CIRP against a real estate project.
Issue: Whether the amendment violated the rights of individual homebuyers and was discriminatory under the Constitution.
Judgment: The Supreme Court upheld the amendment’s validity, ruling that the threshold was a reasonable safeguard against misuse and frivolous filings. It confirmed that the provision was neither arbitrary nor violative of Article 14.
Significance of Section 7 of Insolvency and Bankruptcy Code
Section 7 has been instrumental in enabling financial creditors to recover dues through an effective resolution process. It provides:
A legal remedy for lenders against defaulting borrowers,
A structured process for resolution or liquidation,
A time-bound mechanism, enhancing creditor confidence and financial discipline.
Recent Developments
With the IBC evolving rapidly, changes continue to strengthen Section 7:
Mandatory pre-filing consultations or mediation mechanisms are being considered to filter out frivolous applications.
Digitization of application procedures is underway to streamline filings with NCLT.
Enhanced due diligence is encouraged to verify the financial health of the corporate debtor before initiating CIRP.
To Sum up
Section 7 of Insolvency and Bankruptcy Code, 2016 is a critical tool for financial creditors, offering a formal route to recover dues through the initiation of the corporate insolvency resolution process. It balances creditor rights with protections against abuse, especially in the real estate sector. Understanding this provision is vital for financial institutions, investors, and legal practitioners alike, as it sets the tone for insolvency resolution in India.
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Section 7 of Insolvency and Bankruptcy Code: FAQs
Q1. What is Section 7 of the Insolvency and Bankruptcy Code, 2016?
Section 7 allows financial creditors to initiate a corporate insolvency resolution process (CIRP) against a defaulting corporate debtor through the NCLT.
Q2. Who can file an application under Section 7?
A single financial creditor, multiple financial creditors acting jointly, or a notified person on their behalf can file the application.
Q3. What is the minimum threshold for real estate allottees under Section 7?
At least 100 allottees or 10% of the total allottees in the same project, whichever is lower, must file jointly.
Q4. What documents are required for a Section 7 application?
Evidence of default, details of the proposed resolution professional, and other prescribed information must be submitted.
Q5. What happens after the application is admitted?
Once admitted by the NCLT, the corporate insolvency resolution process begins, and a moratorium is imposed on the debtor’s operations.
