Bypassing the Bench: The Radical Shift to Creditor-Initiated Insolvency and the Boundaries of NCLT Jurisdiction

The End of Section 7 Delays?

For nearly a decade, corporate insolvency practice in India has been defined by the infamous bottleneck at the very gates of the National Company Law Tribunal (NCLT). Taking a corporate debtor to insolvency under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was supposed to be a summary proceeding. Instead, it devolved into protracted litigation, with admission hearings dragging on for months. But the landscape of Indian corporate law is about to undergo a seismic shift.

The Insolvency and Bankruptcy (Amendment) Bill 2025, passed by the Lok Sabha in March 2026 and currently awaiting Rajya Sabha clearance, introduces a radical "creditor-initiated insolvency resolution process." For practicing lawyers, this changes the fundamental mechanics of corporate restructuring.

Under the proposed regime, financial creditors can trigger insolvency without immediate tribunal intervention. Proceedings will commence via a public announcement once lenders holding at least 51% of the debt give their approval. By explicitly bypassing the NCLT at the admission stage, the legislature is sending a clear message: the commercial determination of default by a majority of financial creditors is sufficient to wrest control from the promoters.

"The era of weaponizing procedural delays to stall CIRP admission is ending. By shifting the initiation trigger from the courtroom to the boardroom, the Code is finally honoring its foundational promise of speed."

However, this legislative pivot demands a change in strategy for practitioners. Litigation will inevitably shift from NCLT admission hearings to High Court writ petitions under Article 226. Promoters, deprived of a judicial hearing prior to the public announcement, will likely argue violations of natural justice. Furthermore, the Amendment sets a strict 30-day limit for courts to approve or reject resolution plans, and a 180-day limit for liquidation. While ambitious, seasoned practitioners will recall the Supreme Court's ruling in Essar Steel, which read mandatory timelines under Section 12 as directory to save the statute from unconstitutionality. Expect similar judicial softening here.

Section 238 Strikes Again: IBC Overrides Securities Law

While the legislature seeks to reduce the NCLT's burden at the initiation stage, the National Company Law Appellate Tribunal (NCLAT) has been aggressively defending the tribunal's primacy in ongoing resolutions. In a landmark 2026 judgment, the NCLAT affirmed the NCLT's jurisdiction to direct the de-freezing of a corporate debtor's demat accounts, effectively overriding securities regulations enforced by SEBI.

This ruling breathes fresh life into Section 238 of the IBC (the non-obstante clause). For resolution professionals (RPs) and their legal counsel, dealing with assets frozen by SEBI or the Enforcement Directorate has been a logistical nightmare. The NCLAT has rightly recognized that the IBC must operate as a complete code. If regulatory attachments are allowed to paralyze the corporate debtor's asset base, the very objective of value maximization is defeated. This cements the IBC's supremacy over concurrent regulatory regimes during the Corporate Insolvency Resolution Process (CIRP).

Drawing the Line: Section 60(5) is Not a Civil Suit

Despite the expansive interpretation of Section 238, the tribunals are pushing back against the bar's tendency to use the NCLT as a fast-track civil court. Section 60(5) of the IBC is arguably the most heavily litigated—and abused—provision in the Code, often invoked to adjudicate complex disputes under the guise of them "arising out of or in relation to" the insolvency.

In May 2026, the NCLT Kolkata delivered a crucial reality check. The bench ruled explicitly that ownership and title disputes over property cannot be decided under Section 60(5). Such matters require the leading of detailed evidence, cross-examination, and the application of the Transfer of Property Act and Specific Relief Act—domain strictly reserved for competent civil courts.

For litigators, the takeaway is absolute: do not attempt to bypass civil court fees and CPC delays by dressing up a title dispute as an interim application under the IBC. The NCLT is a summary jurisdiction tribunal, not a substitute for civil trials.

Commercial Wisdom and Simultaneous CIRP

Two other major judicial developments this year provide much-needed clarity for the banking bar. First, the Supreme Court definitively upheld that CIRP can be initiated simultaneously against both a principal debtor and a corporate guarantor. This reinforces Section 60(2) of the IBC and strengthens the hands of financial creditors looking to maximize recovery avenues.

Second, the NCLAT reiterated the sanctity of the Committee of Creditors' (CoC) commercial wisdom regarding Section 30(2)(b). The appellate tribunal held that as long as operational creditors (including employees) receive an amount not less than the liquidation value, the resolution plan cannot be interfered with. This is a stark reminder to operational creditors that their leverage in the IBC remains fundamentally limited compared to financial creditors.

The Threat is the Remedy

Recent statistics reveal that over 30,000 cases involving Rs 14 lakh crore were resolved at the pre-admission stage. This proves that the true power of the IBC lies not in its resolution mechanism, but in the existential threat it poses to promoters. The new 2025/2026 Amendment, by lowering the barrier to entry through creditor-initiated insolvency, weaponizes this threat further.

As we move into the second half of 2026, corporate lawyers must adapt. The focus of insolvency practice is migrating. Pre-admission negotiations, out-of-court lender consensus building, and defending the actions of the CoC will become the primary arenas of legal battle, while the NCLT's role becomes increasingly supervisory at the tail-end of the process.