IBC Amendment Makes Insolvency Admission Mandatory Once Default Is Proven

New Delhi, Jun 29 (KNN) The government has amended the Insolvency and Bankruptcy Code (IBC) to make it mandatory for the National Company Law Tribunal (NCLT) to admit insolvency applications filed by financial creditors once a payment default is established, a move aimed at reducing delays in corporate insolvency proceedings.

Amendment Makes Admission of Insolvency Cases Mandatory 

Under the IBC (Amendment) Act, 2026, the government has replaced the word ‘may’ with ‘shall’ in Section 7(5) of the Code, removing the NCLT's discretion to defer or reject Corporate Insolvency Resolution Process (CIRP) applications after default has been verified through Information Utility (IU) records.

The amendment effectively overturns the Supreme Court's ruling in the Vidarbha Industries Power Ltd vs Axis Bank Ltd case, which had allowed the tribunal to consider the financial position and commercial circumstances of a corporate debtor even after a default had been established.

Experts Say Amendment Restores Original Intent of IBC 

Legal experts said the amendment restores the original objective of the IBC by limiting the admission stage to determining the existence of default, rather than assessing the viability of the business, reported Financial Express.

Bikash Jhawar, Senior Partner, Saraf and Partners, said the amendment addresses the uncertainty created by the Vidarbha judgment, which had enabled NCLTs to examine broader circumstances surrounding a debtor despite the existence of a proven default.

He said that while the judgment had expanded the rights available to borrowers and guarantors, the amendment restores greater predictability and strengthens the effectiveness of the insolvency framework.

Section 7 Now Aligned With Operational Creditor Provisions 

Section 7 of the IBC governs insolvency applications filed by banks and financial institutions against defaulting companies. 

Earlier, the provision stated that the NCLT ‘may’ admit an application after establishing default, unlike Section 9 relating to operational creditors, where the law mandates admission by using the word ‘shall.’

The Vidarbha ruling had raised concerns among lenders that defaulting promoters could prolong the admission process by encouraging tribunals to examine their financial position and commercial prospects before admitting insolvency cases.

Move Expected to Reduce Delays in Resolution Process 

According to Durgesh Khanapurkar, Partner, Desai & Diwanji, the amendment has been introduced specifically to reverse the impact of the Vidarbha judgment.

He said the key consequence of the amendment is that the NCLT will no longer have the discretion to consider wider commercial factors once a default has been established, thereby helping reduce delays in insolvency proceedings and improving the efficiency of the resolution process.

(KNN Bureau)