Admission Under Section 7 Is Mandatory on Proof of Debt and Default: Supreme Court Reaffirms the Narrow Vidarbha Exception
- REEDLAW
- Jan 17
- 6 min read
Updated: Jan 19
REEDLAW Legal News Network reports: In a landmark judgment, the Supreme Court reaffirmed the mandatory nature of admission of a Section 7 application under the Insolvency and Bankruptcy Code, 2016, once the existence of a financial debt and occurrence of default are established. The Court clarified that considerations relating to business viability, parallel recovery proceedings, or the potential impact on stakeholders are legally irrelevant at the admission stage. It further held that the discretion recognised in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. operates only in rare and exceptional circumstances, thereby restoring doctrinal certainty and reinforcing the objective framework governing financial creditor-triggered insolvency proceedings.
The Supreme Court Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan, while adjudicating a batch of two Appeals along with connected Interlocutory Applications, held in a pivotal ruling that once a financial debt and default are established, admission of a Section 7 application becomes mandatory in nature. The Court categorically ruled that considerations such as business viability of the Corporate Debtor, pendency of recovery proceedings, or perceived stakeholder impact cannot dilute the statutory obligation of admission. It further clarified that the Vidarbha exception is not a general discretionary principle but is confined to rare and exceptional factual situations, thereby preventing its routine invocation to defeat the legislative intent of time-bound insolvency resolution.
The Supreme Court examined the legality of the judgment by which the Appellate Tribunal had set aside the order of the Adjudicating Authority and directed admission of a Section 7 application, thereby commencing the Corporate Insolvency Resolution Process against the Corporate Debtor. The dispute arose from financial facilities availed by the Corporate Debtor for the development of a real estate project, which were subsequently assigned to the Financial Creditor. Upon persistent default in repayment and failure of restructuring and settlement arrangements, the Financial Creditor had initiated recovery proceedings and thereafter invoked the insolvency jurisdiction under the Code. The Adjudicating Authority had rejected the application on the premise that the Code was being used as a recovery tool and that initiation of CIRP would prejudice homebuyers, whereas the Appellate Tribunal reversed this approach by holding that once debt and default were established, admission under Section 7 was mandatory and extraneous considerations such as project viability or stakeholder prejudice were irrelevant at the threshold stage.
The Supreme Court reaffirmed that the foundational trigger for initiation of CIRP under Section 7 was the existence of a financial debt and the occurrence of default. Placing reliance on Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, E.S. Krishnamurthy and Others v. Bharath Hi Tech Builders Private Limited, REEDLAW 2021 SC 12544, Swiss Ribbons Private Limited and Another v. Union of India and Others, REEDLAW 2019 SC 01504, and Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Venture Limited) and Others, REEDLAW 2021 SC 03573, the Court held that once these jurisdictional facts were demonstrated and the application was otherwise complete, admission ordinarily followed as a matter of course. The Court clarified that Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 did not dilute this settled position and was confined to rare and exceptional circumstances where overwhelming equities justified deviation. It was observed that the Corporate Debtor admittedly possessed no adjudicated or realisable claim exceeding the amount in default, and reliance on business viability, unsold inventory, project status, or anticipated receivables did not constitute “good reasons” in law to deny or defer admission of CIRP.
The Court found that the existence of financial debt was undisputed and that persistent defaults were conclusively established on record, including breach of the restructuring agreement and failure to pay instalments within the stipulated cure period. The restructuring arrangement had failed solely due to non-payment by the Corporate Debtor, thereby triggering express events of default under its terms. Any alleged non-cooperation by the Financial Creditor was held to have occurred after the default and was incapable of absolving the Corporate Debtor of its admitted payment obligations. The Corporate Debtor’s attempt to attribute default to commercial difficulties or to the conduct of the Financial Creditor was therefore rejected as legally unsustainable.
The argument that the insolvency proceedings were a misuse of the Code as a recovery mechanism was also rejected. Relying on Kotak Mahindra Bank Limited v. A. Balakrishnan and Another, REEDLAW 2022 SC 05561 and Tottempudi Salalith v. State Bank of India and Others, REEDLAW 2023 SC 10579, the Court reiterated that default was the sole trigger for CIRP and that pendency of proceedings under the SARFAESI Act or before the DRT did not bar initiation of insolvency proceedings. In view of Section 238, the Code had an overriding effect, and upon admission, the moratorium under Section 14 would stay all parallel recovery actions. Allegations of mala fide invocation were held to be examinable only within the narrow framework of Section 65 of the Code, which required specific pleadings and proof of abuse of process, neither of which had been established in the present case.
The Court further emphasised that while the Code was not a recovery legislation, it did not exclude recovery altogether and only prohibited malicious or abusive invocation of insolvency proceedings. It reiterated that questions relating to business viability, feasibility of the project, and sustainability of operations fell squarely within the exclusive domain of the Committee of Creditors. Relying on K. Sashidhar v. Indian Overseas Bank and Others, REEDLAW 2019 SC 02502, Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REEDLAW 2019 SC 11505, and The Karad Urban Cooperative Bank Limited v. Swwapnil Bhingardevay and Others, REEDLAW 2020 SC 09501, the Court held that the commercial wisdom of the CoC was non-justiciable and could not be examined at the admission stage under Section 7. Consequently, the contention that the Financial Creditor had acted merely as a recovery seeker was held to be wholly untenable in law.
The Supreme Court upheld the findings that the Corporate Debtor had persistently acknowledged defaults, was in acute financial distress, had failed to comply with regulatory requirements, and had been unable to monetise its inventory despite repeated attempts. It was accepted that revocation of the restructuring arrangement was contractually justified due to failure of the Corporate Debtor to cure defaults within the stipulated period, and that the Financial Creditor was under no obligation to renegotiate or revive the restructuring. The plea of mala fide invocation was rejected on the ground that its acceptance would render lenders remediless and undermine the statutory architecture of the Code.
Accordingly, the Court held that the debt and default having been conclusively established, and the narrow exception carved out in Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 being clearly inapplicable, the Appellate Tribunal was fully justified in directing admission of the Corporate Debtor into CIRP. The refusal of the Adjudicating Authority was found to be contrary to settled jurisprudence and the statutory mandate of Section 7. The impugned judgment admitting the Corporate Debtor into the Corporate Insolvency Resolution Process was therefore upheld as legally sound and free from infirmity.
Ms. Madhavi Divan, Senior Advocate with Mr. Arjun Sheth, Mr. Rishabh Shah, Ms. Pooja Aggarwal, Advocates, Ms. Henna George, AOR and Ms. Purti Gupta, AOR, represented the Appellants in Civil Appeal No. 10261 of 2025 & IA No. 170106/2025 and IA No. 170102/2025.
Mr. Nikhil Goel, Senior Advocate, with Ms. Sunidhi Sah, Advocate and Ms. Heena George, AOR, represented the Appellants in Civil Appeal No. 10012 of 2025.
Mr. P Nagesh, Senior Advocate, with Mr. Atul Sharma, Ms. Renuka Iyer, Mr. Aditya Vashith, Mr. Anmol Bansal, Advocates, Mr. Abhishek Agarwal, AOR and Ms. Henna George, AOR, appeared for the Respondents.
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