Section 7 IBC: A Corporate Debtor Cannot Escape Insolvency by Claiming It Can Pay

A Defence That Keeps Being Tried

When a financial creditor files a petition under Section 7 of the Insolvency and Bankruptcy Code to initiate the Corporate Insolvency Resolution Process against a defaulting company, the company's legal team frequently responds with arguments that go beyond the narrow question of whether a debt exists and a default occurred. They argue that the company is solvent, that it has assets exceeding liabilities, that it intends to pay and is in a position to do so, that initiating CIRP at this stage would be disproportionate and harmful to a viable business.

These arguments have been tried in various forms before the NCLT, NCLAT, and the Supreme Court since the IBC came into force in 2016. And they have been rejected: repeatedly, clearly, and on principled grounds. The most recent Supreme Court ruling on this question, in Power Trust v. Bhuvan Madan (2026), has reinforced this position with particular clarity.

The Two-Element Test Under Section 7

Section 7 of the IBC allows a financial creditor: which means any person to whom a financial debt is owed: to file an application before the NCLT to initiate CIRP against a corporate debtor. The provision is deliberately simple in its structure. The NCLT must determine two things and two things only:

First, is there a financial debt? A financial debt is defined in the IBC as a debt with interest, if any, that is disbursed against consideration for the time value of money: broadly covering loans, bonds, guarantees, and similar instruments. Second, has there been a default? Default means non-payment of a debt when it became due and payable.

If both elements are established, the NCLT is required to admit the application and initiate CIRP. The word used in the statute is "shall": it is a mandatory direction, not a discretionary power. The NCLT does not have the option to decline admission on grounds that seem equitable or commercially sensible but that fall outside these two elements.

"The jurisdiction conferred by Section 7 of the IBC is a limited one. The Adjudicating Authority must ascertain the existence of a financial debt and a default. Once those facts are established, admission follows as a matter of statutory mandate. The financial health or paying capacity of the corporate debtor at the time of the application is not a relevant consideration."

Why the "Ability to Pay" Defence Fails

Corporate debtors and their counsel have advanced the "ability to pay" defence in various guises. Sometimes it is framed as a solvency argument: the company has assets, its net worth is positive, it is not insolvent in the balance sheet sense. Sometimes it is framed as a proportionality argument: CIRP is a nuclear remedy that should not be deployed against a company that can pay if given time. Sometimes it is framed as a misuse argument: the financial creditor is using the IBC as a debt collection mechanism rather than as a genuine resolution tool.

Each of these arguments fails at the same point: the IBC does not condition the right to initiate CIRP on the corporate debtor being insolvent in any technical financial sense. The threshold for triggering CIRP under Section 7 is default: not insolvency, not inability to pay, not negative net worth. A company can be financially healthy in every balance sheet metric and still have committed a default that triggers the right to initiate CIRP.

This design is intentional. The legislative history of the IBC makes clear that Parliament deliberately chose a low trigger threshold: default rather than insolvency: to ensure that creditors had a real and timely remedy. A threshold that required proof of insolvency would invite endless disputes about the debtor's financial health and would allow companies to delay CIRP by demonstrating temporary solvency while continuing to default.

What About Threshold and Minimum Debt Amount?

Section 4 of the IBC sets a minimum default threshold: currently Rs. 1 crore: below which a petition under Section 7 cannot be admitted. This threshold was revised upward from the original Rs. 1 lakh during the COVID-19 pandemic and has been maintained since. A petition must therefore establish that the financial debt in default is at least Rs. 1 crore.

Beyond this threshold, the NCLT's inquiry under Section 7 remains limited to the two elements: existence of financial debt and occurrence of default. Disputes about the quantum of the debt: for example, whether interest was correctly calculated, or whether certain instalments were in fact paid: are genuinely relevant because they bear on whether a default of the required quantum has occurred. But these are disputes about the existence and extent of debt and default, not about the debtor's financial capacity or intentions.

The Pre-Existing Dispute Exception

One genuine ground on which a Section 7 application may be contested is a bona fide pre-existing dispute about the debt itself. If the corporate debtor can demonstrate that the alleged debt is genuinely disputed: not merely asserted to be disputed, but actually contested with some credible basis: the NCLT may decline admission on the ground that the debt itself is not established.

This is different from a dispute about ability to pay. It is a dispute about the fundamental question of whether the financial debt exists and whether a default has occurred. Establishing a genuine dispute requires more than the debtor's bare denial: there must be some material to suggest that the debt is bona fide contested, for example because the contract is disputed, because a prior court order is claimed to have extinguished the debt, or because the debt documentation itself is challenged.

Practical Implications for Financial Creditors and Corporate Debtors

For financial creditors, this judgment reinforces that a Section 7 petition, properly supported by debt documentation and evidence of default, will be admitted as a matter of course. The debtor cannot derail admission by pointing to its balance sheet or making payment promises. If a creditor has a valid financial debt and a genuine default, the NCLT will admit the application.

For corporate debtors, the practical message is that negotiation and settlement: if the company genuinely wants to avoid CIRP: must happen before a Section 7 petition is filed, or must result in actual payment rather than mere offers. Once a petition is admitted, the consequences: moratorium, replacement of management, CIRP process: are immediate. The time to negotiate is before default or immediately upon receipt of a demand, not at the NCLT hearing.

For lenders and banks, this judgment underscores the importance of IBC as a debt recovery and corporate governance tool. The IBC was designed, in part, to give lenders a credible threat: one that motivates companies to honour their obligations. A Supreme Court ruling that confirms the low threshold for admission makes this threat credible and consistent.