HOW TO INITIATE CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP) UNDER THE IBC FOR UNPAID CORPORATE BONDS

HOW TO INITIATE CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP) UNDER THE IBC FOR UNPAID CORPORATE BONDS

A Study of Sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016 with reference to Bondholder and Debenture-Trustee Litigation before the NCLT

Introduction

​Corporate bonds—from NCDs to OCDs—have rapidly become the lifeblood of long-term capital for Indian companies outside traditional banking channels. But when an issuer defaults, the stakes are massive, and the path to recovery must be swift. For bondholders, the strategy is no longer about initiating scattered, individual civil recovery suits. Instead, it is about triggering the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

​The critical battlefield in this process lies in a single, vital distinction: filing under Section 7 versus Section 9 of the IBC.

​For bondholders, whose interests are typically represented by a SEBI-registered debenture trustee, this distinction is everything. Attempting to recover dues as an operational creditor under Section 9 exposes the claim to the perilous “pre-existing dispute” defense, which can indefinitely stall proceedings. Section 7, however, classifies bondholders as financial creditors. This offers a streamlined, largely non-adversarial route where the National Company Law Tribunal (NCLT) is simply tasked with verifying the existence of a default, rather than adjudicating competing claims in depth.

Corporate Bonds as ‘Financial Debt’ under the Code

First question you’ve got to ask in any bond-default insolvency case: does the money owed actually count as “financial debt” under Section 5(8) of the IBC? The section defines it as debt handed over in exchange for the time value of money — and clause (c) spells it out further, covering any amount raised through a note purchase facility, bonds, notes, debentures, loan stock, that sort of instrument. So bondholders fall under Section 5(7) as financial creditors. Fairly straightforward on paper.

The NCLAT backed this up in Zubin Bharucha v. Reliance AIF Management Company Ltd. Debenture holders were held to be financial creditors here, mainly because a co-obligor had guaranteed repayment under the DTD. The Tribunal also confirmed something worth remembering — the NCLT had actually checked whether debt and default existed before admitting the Section 7 application.1 Not just rubber-stamping it.

But here’s the catch, and it’s an important one: what you call the document doesn’t matter if the substance isn’t there. Section 5(8)’s real test — disbursal against the time value of money — has to be met on its own terms, regardless of labels. NCLT benches have turned down Section 7 applications built solely on a Transfer Agreement for buying debentures, where the actual deal was just a sale. No time-value-of-money element, no financial debt, no financial creditor status — however the parties chose to describe the transaction.

Section 7: The Financial Creditor Route

Section 7(1) of the IBC is the workhorse provision here. It lets a financial creditor — alone, jointly with others, or through someone the Central Government has notified — walk into the NCLT and ask for CIRP against a corporate debtor once default has happened. Worth flagging: the Explanation to Section 7(1) widens “default” to cover not just what’s owed to the applicant, but debt owed to any financial creditor of that debtor. This is the route almost everyone uses for unpaid bonds, so here’s what actually needs to be shown:

Financial debt exists: The applicant has to prove the corporate debtor owes something covered under Section 5(8) — for bonds, that means the principal and coupon obligations spelled out in the offer document and the DTD.

Default has occurred: Section 3(12) defines default simply as non-payment, whole or part, once it’s due. For listed bonds, this usually shows up as the ISIN-wise default disclosure filed with stock exchanges, plus the redemption or demand notice from the debenture trustee, plus bank statements showing the money never came through.

The threshold amount: A notification from 24 March 2020 (under the proviso to Section 4(1)) bumped the minimum default threshold way up — from Rs 1 lakh to Rs 1 crore. That’s still the figure governing bond-default petitions today. Big jump, and it’s kept a lot of smaller claims out of NCLT altogether.

Who can actually file — the debenture trustee:  When bonds are spread across multiple investors through a trust setup, nobody needs every single bondholder joined as a party. The Insolvency Law Committee’s March 2018 report made this clear, and a Central Government notification from 27 February 2019 confirmed it: a properly appointed debenture trustee can file the Section 7 application on behalf of everyone.

Form and filing: The application goes in on Form 1, under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, filed with the NCLT bench that has jurisdiction over the debtor’s registered office. You’ll need a proposed Interim Resolution Professional named, plus your evidence — DTD, redemption notice, demand certificate, bank statements, the works.

Checking default and admitting the case:  Under Section 7(4), the Adjudicating Authority has fourteen days to confirm default exists. If it does, the application’s complete, and there’s no disciplinary case pending against the proposed IRP — admission is mandatory under Section 7(5)(a). If something’s missing, Section 7(5)(b) allows rejection, but only after giving the applicant seven days to fix the defect first.

What happens after admission: A moratorium kicks in under Section 14. The Board of Directors gets suspended. The Interim Resolution Professional takes the wheel, and the clock starts on the 180-day CIRP timeline — extendable by ninety more days, capped at 330 days total under Section 12.

Now, here’s where it got messy for a while. The Supreme Court’s ruling in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. read the word “may” in Section 7(5)(a) as giving NCLT actual discretion — meaning it could refuse admission even with debt and default clearly proven, if the overall resolution just didn’t look feasible. That shook up what was supposed to be a fairly mechanical test. The Court later walked this back somewhat while disposing of a review petition, saying those observations were tied to the specific facts of that case and shouldn’t be treated as overriding the usual debt-and-default standard. And the Government’s since proposed an amendment to nail down that admission should be mandatory once default is proved — basically undoing the ambiguity Vidarbha created.

Section 9: The Operational Creditor Route — and Why It Rarely Applies to Bonds

Section 9 works differently. It lets an operational creditor kick off CIRP once ten days have passed since a demand notice went out under Section 8 — but only if the corporate debtor hasn’t paid up, and hasn’t flagged any dispute back to the creditor. “Operational debt” under Section 5(21) is a narrower category, though — it only covers goods, services, employment dues, or statutory payments. A bond doesn’t fit any of that. By definition, it’s a financial instrument, money disbursed for the time value of money. So a bondholder’s claim almost always lands under Section 5(8) as financial debt, not operational debt. Which means Section 7 is the route, not Section 9. Simple as that, really.

This isn’t just a technical distinction lawyers argue over for fun (though it can feel that way sometimes). Section 9 comes with an extra hurdle — no “pre-existing dispute” can exist. After Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., the Supreme Court gave NCLT the power to reject an operational creditor’s application the moment a plausible dispute shows up — no need to dig into whether the dispute actually has merit, just that it’s plausible. Financial creditors under Section 7 don’t face this defence at all. That’s a real, practical reason bondholders and debenture trustees stick with Section 7 rather than trying to dress up coupon or redemption dues as operational debt. It wouldn’t hold up anyway, and it’d just cost time for the existence of a dispute. ‘Operational debt’ under Section 5(21) is confined to claims in respect of the provision of goods or services, employment, or dues payable under statute. Because a bond is, by definition, a financial instrument disbursed against the time value of money, a bondholder’s claim will almost invariably be classified as financial debt under Section 5(8) rather than operational debt, and the appropriate route is Section 7, not Section 9.

The distinction is not merely academic. Section 9 additionally requires the absence of a ‘pre-existing dispute’ — a bar that, following the Supreme Court’s decision in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd. Financial creditors under Section 7 face no such pre-existing-dispute defence, which is one reason bondholders and debenture trustees consistently proceed under Section 7 rather than attempting to characterise coupon or redemption dues as operational debt. It wouldn’t hold up anyway, and it’d just cost time.

How Tribunals Handle Bond Defaults: Key Precedents

1. Innoventive Industries Ltd. v. ICICI Bank

In this foundational judgment, the Supreme Court explained the architecture of Section 7 in detail, holding that the Adjudicating Authority’s enquiry at the admission stage is confined to the existence of a financial debt and a default, and that the corporate debtor’s defence on merits is not to be examined at that stage.

2. IDBI Trusteeship Services Ltd. v. Hubtown Ltd.

Although decided under Order XXXVII of the Code of Civil Procedure, 1908 rather than the IBC, this case remains a leading authority on the enforcement of corporate guarantees securing debenture obligations. The debenture trustee, acting for the benefit of the debenture holder, sued to recover over Rs 532 crore under a corporate guarantee executed to secure optionally partially convertible debentures; the Supreme Court restated the principles governing the grant of leave to defend such suits and is frequently cited in subsequent NCLT bond-default rulings for the proposition that a debenture trustee has locus to enforce the underlying debt instrument on behalf of bondholders.

3. IDBI Trusteeship Services Ltd. v. Ornate Spaces Private Ltd.

The NCLT, Mumbai admitted a Section 7 application filed by a debenture trustee acting on behalf of a debenture holder in respect of non-convertible debentures secured by an English mortgage under a Debenture Trust Deed. The Tribunal held that the Central Government’s notification of 27 February 2019 merely clarified the debenture trustee’s pre-existing statutory right to apply under Section 7, and that the rights of financial creditors could not be defeated by technical objections regarding a pari-passu agreement.

4. Zubin Bharucha v. Reliance AIF Management Company Ltd.

As noted above, the NCLAT affirmed the admission of a Section 7 application on the ground that debenture holders were financial creditors entitled to demand payment upon a Demand Certificate being issued by the debenture trustee, and that guarantors were jointly and severally liable under the Debenture Trust Deed, dismissing the corporate debtor’s appeal.

5. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd.

The Supreme Court examined whether a lender to whom a corporate debtor had furnished security for a third party’s debt could be treated as a financial creditor of the corporate debtor itself, and answered in the negative in the absence of disbursal to, or for the benefit of, the corporate debtor. The ruling is regularly invoked in bond-default proceedings to test whether a security provider that has merely guaranteed or mortgaged assets — without itself receiving the bond proceeds — can be pursued as a financial creditor’s debtor under Section 7.

5. Catalyst Trusteeship Ltd. v. Corporate Debtor (Restructuring-Proposal Case)

In a 2026 ruling, the Supreme Court set aside concurrent findings of the NCLT and the NCLAT that had refused to admit a Section 7 application filed by a debenture trustee on the footing that an unapproved loan-restructuring proposal had modified the Debenture Trust Deed. The Court held that a Debenture Trust Deed can be varied only through the contractually prescribed mechanism of approved instructions from debenture holders, that no such variation had occurred, that the debenture trustee had not colluded with debenture holders in seeking recovery, and that the pre-existing dispute doctrine could not defeat an established default; the matter was restored to the NCLT for admission of CIRP.

6. Arvind Kumar v. Beacon Trusteeship Ltd.

The NCLAT upheld admission of a Section 7 petition arising from optionally convertible debentures where conversion had not been completed for want of statutory compliance and expiry of the ISIN, holding that the debenture holder retained financial-creditor status and could validly exercise a put option to demand redemption, notwithstanding board resolutions or balance-sheet entries suggesting deemed conversion.

7. Vidarbha Industries Power Ltd. v. Axis Bank Ltd. and Related Clarifications

Discussed in Part III above, this line of authority remains directly relevant to bond-default petitions because it governs the extent of the NCLT’s discretion at the admission stage even where debt and default are otherwise clearly established through the DTD, the redemption or demand notice, and the debenture trustee’s certificate of default.

8. Practical Checklist for Bondholders and Debenture Trustees

So what does this actually look like in practice? Pulling together everything above, here’s what a debenture trustee — or, in the rare case, an individual bondholder — needs to nail down before filing for CIRP over unpaid bonds.

First, check the threshold. Does the default actually cross Rs 1 crore under Section 4? If it doesn’t, there’s no point going further — NCLT won’t touch it.

Second, get the notice right. Issue a redemption or recall notice, along with a demand certificate, and stick exactly to what the Debenture Trust Deed says. This matters more than people think — straying from the contractual mechanism for variation or restructuring can turn into its own dispute. That 2026 Supreme Court ruling we discussed earlier is a good example of exactly how that plays out.

Third, get your paperwork in order. You’ll want the DTD, the information memorandum, ISIN-wise default disclosures filed with the stock exchanges, bank statements showing non-payment, and any correspondence where the debtors acknowledged the debt. The more complete this file is, the smoother things go later.

Fourth, line up your Interim Resolution Professional. They need to be properly qualified, they need to give written consent on Form 2, and — this one gets missed sometimes — there shouldn’t be any disciplinary proceeding pending against them.

Fifth, file Form 1 with the NCLT bench that has jurisdiction. And don’t sleep on the clock here: Section 238A, read with Article 137 of the Limitation Act, 1963, gives you three years from the date of default. Miss that window, and the whole thing falls apart regardless of how strong the underlying claim is.

FREQUENTLY ASKED QUESTIONS(FAQS)

Q1. Why do bondholders go to the NCLT instead of filing a regular civil recovery suit?

Because CIRP under the IBC is faster and time-bound. A civil suit can drag on for years across multiple bondholders filing separately. Section 7, by contrast, gives a debenture trustee one clean route to force the issuer into resolution — with the NCLT bound to decide admission within fourteen days of the application.

Q2. Are corporate bonds treated as financial debt or operational debt under the IBC?

Financial debt, almost always. Section 5(8) defines financial debt as money disbursed against the time value of money, and clause (c) specifically names bonds, debentures, and similar instruments. That’s why bondholders qualify as financial creditors under Section 5(7) — not operational creditors.

Q3. Can a single debenture trustee file on behalf of hundreds of bondholders?

Yes. There’s no need to join every individual bondholder as a party. The Insolvency Law Committee’s March 2018 report, followed by the Central Government’s notification of 27 February 2019, confirmed that a validly appointed debenture trustee can file the Section 7 application for the entire class of debenture holders.

Q4. What’s the minimum default amount needed to trigger CIRP?

Rs 1 crore. This was raised from Rs 1 lakh by a notification dated 24 March 2020, and it still governs bond-default petitions today. Anything below that threshold simply won’t get admitted.

Q5. What’s the limitation period for filing a Section 7 application over bond default?

Three years from the date of default, under Section 238A read with Article 137 of the Limitation Act, 1963. Miss that window, and the application won’t survive — no matter how strong the underlying claim.

Conclusion

Section e trustee, rarely alone — a real shot at forcing a defaulting issuer to the table. Faster and cleaner than chasing recovery through scattered civil suits, and time-bound to boot.

Most of the hard questions are settled by now. Bonds count as financial debt. Trustees can file under Section 7 on everyone’s behalf. A DTD can only be varied the way it says it can. And Section 9 just isn’t built for bondholder claims.

What’s still open is how far NCLT’s discretion goes — can it refuse admission even when debt and default are proven? That one’s still being worked out, and an amendment seems likely. Until then, the safest bet for anyone advising bondholders: follow the DTD’s own mechanisms to the letter. Recent cases show it’s that compliance, not just the default itself, that tends to decide things.

Table of Statutes

The Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016), ss. 3(12), 4, 5(7), 5(8), 5(21), 7, 8, 9, 12, 14, 16, 21(6A), 238A.

The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

The Companies Act, 2013, s. 71.

The Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993.

The Limitation Act, 1963, art. 137.

Table of Cases

Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401.

Arvind Kumar v. Beacon Trusteeship Ltd., (2026) ibclaw.in 226 NCLAT.

Catalyst Trusteeship Ltd. v. Ecstasy Realty Pvt. Ltd., 2026 INSC 186

IDBI Trusteeship Services Ltd. v. Hubtown Ltd., (2017) 1 SCC 568.

IDBI Trusteeship Services Ltd. v. Ornate Spaces (P) Ltd., CP (IB) No. 3729/MB/2019 (NCLT Mumbai, 29 June 2020).

Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407.

Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353.

Palogix Infrastructure (P) Ltd. v. ICICI Bank Ltd., Company Appeal (AT) (Ins) No. 30 of 2017 (NCLAT).

Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 32.

Zubin Bharucha v. Reliance AIF Management Co. Ltd., Company Appeal (AT) (Ins) No. 504 of 2021 (NCLAT).

Bibliography 

Insolvency Law Committee, Report of the Insolvency Law Committee (Ministry of Corporate Affairs, Government of India, March 2018).

Ministry of Corporate Affairs, Notification No. S.O. 1205(E) (24 March 2020) (raising the minimum default threshold under s. 4, IBC to Rs 1,00,00,000).

Ministry of Corporate Affairs, Notification No. S.O. 1091(E) (27 February 2019) (clarifying the right of a debenture trustee to file an application under s. 7, IBC).

Insolvency and Bankruptcy Board of India, Section-wise Jurisprudence on the IBC (updated to 30 September 2023).