IBC amendment seeks to end legal confusion and discretionary power

Various Supreme Court judgments in recent years have played their part in influencing the amendment to the Insolvency and Bankruptcy Code (IBC) proposed last week, as the government seeks to remove any legal ambiguity from the extant legislation, experts said.

As per the proposed amendment, only the proof of default would be enough to admit an insolvency case. This would curb the discretionary power of the adjudicating authority in delving into other issues while deciding whether to admit a case.

In the Vidarbha Industries Power versus Axis Bank case in 2022, the apex court had stated that section 7 of the IBC provides discretionary power to the National Company Law Tribunal (NCLT) to accept or reject an insolvency application, and that it can also consider relevant issues other than just default while doing so.


The IBC amendment was introduced in the Lok Sabha last week and referred to a select committee.

Anoop Rawat, national practice head (insolvency and restructuring practice) at Shardul Amarchand Mangaldas, said, "By clarifying that only default is required for admission into insolvency under section 7, prescribing timelines for the NCLT for admission of insolvency and approval of resolution plans, clarifying the definition of security interest (in aftermath of SC judgment in Rainbow Papers), and laying down the procedure for settlement proposals under Section 12A (in light of the SC judgment in Byju's), the amendment bill intends to remove ambiguities marring the IBC today."

In the state tax officer versus Rainbow Papers case in 2023, the Supreme Court relied on the Gujarat VAT Act and held that the state tax department was a secured creditor. Experts had then said it was against the IBC intent and sought clarity on the status of government dues.

The latest amendment clarified that government dues come lower in the priority order under the IBC's waterfall mechanism than those of secured creditors.

The secured creditor status will be recognised only if there are commercial agreements between the parties to this effect, it clarified.

Similarly, the latest amendment made it clear that once an insolvency case is admitted, the case can't be withdrawn by parties until the constitution of the committee of creditors (CoC). This is in sync with the Supreme Court verdict in a case involving Byju's parent Think and Learn and the Board of Control for Cricket in India (BCCI).