Section 7 IBC Petition by a Financial Creditor

Who is a financial creditor under the IBC?

A financial creditor is a person to whom a financial debt is owed, and a financial debt is money disbursed against consideration for the time value of money (sections 5(7) and 5(8)). The obvious examples are banks and NBFCs that gave term loans, working capital or overdraft facilities. The definition is much wider: debenture holders and bondholders, lessors under a finance lease, buyers of receivables with recourse, counterparties to derivative transactions, a bank that issued a guarantee or letter of credit and seeks reimbursement, and anyone holding a guarantee for any of these debts.

Private lenders are financial creditors too. A company that placed an inter-corporate deposit, a director or shareholder who lent money to the company, or a family member who advanced a loan repayable with interest can all file under section 7 if the amount and default qualify. The Supreme Court held in Orator Marketing v Samtex Desinz (2021) that even an interest-free term loan can be a financial debt, because time value of money does not require interest to be charged; the money was lent for a period and was to be repaid.

Homebuyers are financial creditors by virtue of the explanation to section 5(8)(f), which treats amounts raised from allottees of a real estate project as having the commercial effect of a borrowing. They face an extra filing threshold, explained below, and their position after a builder enters insolvency is covered in our post on what homebuyers can do when the builder is under insolvency.

Is your claim a financial debt? Common cases

The label decides the section, and a petition under the wrong section is dismissed. These are the situations that come up most often.

Where the paperwork is thin, as with loans between related companies, the NCLT looks at the company's own audited balance sheet, the bank transfers, TDS deducted on interest, and board resolutions approving the borrowing. A loan that the borrower has shown as a borrowing in its own accounts is very hard to recharacterise later.

What did the 2026 amendment change for section 7?

The main change is that admission is no longer discretionary. In Vidarbha Industries v Axis Bank (2022), the Supreme Court read the word "may" in section 7(5)(a) as giving the NCLT discretion to refuse admission even where default was shown, for example where the company was solvent and had money due to it from elsewhere. That reading led to many companies arguing commercial grounds against admission. The IBC (Amendment) Act 2026, which received assent on 6 April 2026 and whose main provisions came into force on 26 May 2026, substituted section 7(5).

Under the substituted provision, the NCLT must admit or reject within 14 days, and must admit where a default has occurred, the application is complete, and no disciplinary proceeding is pending against the proposed resolution professional. An explanation says the application cannot be rejected on any other ground when these conditions are met. Before rejecting for incompleteness, the NCLT must give the applicant seven days to cure the defect. For financial creditors regulated by a financial sector regulator, a record of default from an information utility is sufficient to establish default.

In practice, this narrows the hearing to three questions: is there a financial debt, is there a default of at least ₹1 crore, and is the petition within limitation. Arguments about the company's future profitability, pending settlement talks or claims the company has against third parties no longer stop admission. They may still matter for settlement and for what the company does next, but not for the admission order itself.

Can a lender file on a default owed to someone else?

Yes. The explanation to section 7(1) says a default includes a default in respect of a financial debt owed not only to the applicant but to any other financial creditor of the company. A small lender whose own loan is not yet due can rely on the company's admitted default to a bank, provided it is itself a financial creditor and the default relied on is at least ₹1 crore. Financial creditors can also file jointly, or a debenture trustee or authorised representative can file on behalf of a class.

Two classes face a numerical threshold added in 2020 and upheld by the Supreme Court in Manish Kumar v Union of India (2021). Allottees of a real estate project must file jointly, with at least 100 allottees of the same project or 10% of the total allottees of that project, whichever is less. The same rule applies to holders of securities and deposits represented through a trustee or agent. If the threshold is not met on the date of filing, the petition is not maintainable.

The minimum default of ₹1 crore under section 4 applies to every section 7 petition. You can count principal and contractual interest that has fallen due, but not penal charges that the loan agreement does not clearly provide for. Where the claim is close to the threshold, show the calculation clearly in the petition, instalment by instalment.

Is your section 7 petition within limitation?

A section 7 petition must be filed within three years from the date of default, because Article 137 of the Limitation Act 1963 applies. The default occurs when an instalment or the recalled amount is not paid when due. Banks often plead the date the account was classified as a non-performing asset, but strictly the default is the earlier date of non-payment, and the company will point that out if it helps.

Limitation is extended by a written acknowledgment of the debt signed before the period expires (section 18 of the Limitation Act). The Supreme Court held in Asset Reconstruction Company v Bishal Jaiswal (2021) that an entry in the company's audited balance sheet showing the debt can amount to such an acknowledgment, depending on the notes and auditor's remarks. Restructuring letters, one-time settlement proposals signed by the company and confirmations of balance can also work. In Dena Bank v C. Shivakumar Reddy (2021) the Court held that a decree or a DRT recovery certificate in the lender's favour gives a fresh cause of action, so a section 7 petition can be filed within three years of it.

One window is closed permanently. Section 10A, inserted during the pandemic, bars any petition for a default that occurred between 25 March 2020 and 24 March 2021. If the only default you can prove falls in that year, look for a later default, such as non-payment after a fresh recall notice or a missed instalment under a restructuring. Our post on limitation periods explains acknowledgments more generally.

How is the default proved?

Section 7(3)(a) requires the applicant to file the record of default held with an information utility or any other record or evidence of default that the IBBI specifies. India's information utility is National E-Governance Services Limited (NeSL). Banks and NBFCs file their loan information with NeSL, which sends the record to the borrower for authentication. If the borrower confirms or does not respond within the time allowed, the record is treated as authenticated. Since May 2026, for regulated financial creditors, this record is enough to establish default.

Lenders who are not regulated by the RBI or another financial regulator, such as a company that placed an inter-corporate deposit or a director who lent money, prove default through documents. The core set is the loan agreement or the board resolution approving the borrowing, the bank statement showing disbursement, the repayment schedule, the borrower's balance sheets showing the loan, Form 26AS or TDS certificates showing tax deducted on interest, and a recall notice or demand letter showing the amount fell due. A section 7 petition does not need a prior demand notice, but a clear recall letter fixes the date of default and makes the petition easier to read.

When Advocate B.K. Singh looks at a section 7 file for a private lender, the first thing he checks is how the borrower has treated the money in its own audited accounts and tax filings. If the borrower has shown it as a loan and deducted TDS on interest, the argument that it was an investment or a gift rarely survives. If the borrower has shown it as share application money or an advance, the petition needs a careful explanation before it is filed.

How to file a section 7 application before the NCLT

The petition is a document-heavy filing. It should let the bench see the debt, the default and the limitation position within the first few pages.

1. Prepare Form 1

   The application is made in Form 1 under Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. It sets out the applicant, the company, the financial debt, the date of default, the amount in default, any security and the documents relied on. Part IV, which covers the debt and default, is where most of the drafting effort goes.

2. Propose an interim resolution professional

   A financial creditor must propose a registered insolvency professional to act as IRP, with the professional's written consent in Form 2. The NCLT checks with the IBBI that no disciplinary proceeding is pending against that professional, since that is one of the conditions for admission.

3. Attach the record of default and supporting papers

   Annex the information utility record, the loan documents, statements of account, the sanction letter, any guarantees and security documents, the recall notice, and documents on limitation such as balance sheets or acknowledgments. A board resolution or power of attorney authorising the signatory is required for a company or bank.

4. Send a copy to the company

   Rule 4(3) requires the applicant to dispatch a copy of the application to the registered office of the company by registered post or speed post. Keep the dispatch receipts and tracking report, and email a copy to the directors as well.

5. File on the NCLT portal and cure defects

   The petition is filed electronically with the prescribed fee. The registry scrutinises it and may raise objections; respond quickly so that the matter is listed before the bench.

6. Argue admission

   The bench issues notice to the company, which can file a reply. The hearing turns on debt, default and limitation. Once these are shown, the NCLT admits the petition, appoints the IRP, declares the moratorium and directs the public announcement.

The Code requires a decision within 14 days of receipt, with reasons recorded for any delay. Contested petitions still take a few hearings in practice, depending on the bench's list. A clean, well-indexed paper book shortens that time more than any other factor.

Documents for a section 7 petition

The papers differ depending on whether the lender is a regulated bank or NBFC or a private lender. Both lists overlap at the core.

Can a section 7 petition be filed against a corporate guarantor?

Yes. A company that guaranteed another's loan owes a financial debt to the lender under section 5(8)(i), and when the guarantee is invoked and not honoured, the guarantor company is in default. The Supreme Court held in Laxmi Pat Surana v Union Bank of India (2021) that a section 7 petition lies against a corporate guarantor even where the principal borrower is not a company, for example a partnership firm or an individual.

The lender must invoke the guarantee in writing before the guarantor can be said to be in default, and limitation against the guarantor generally runs from the date of invocation and refusal. A lender can pursue the principal borrower and the corporate guarantor at the same time, though it cannot recover the same money twice. If the guarantor is an individual, such as a promoter-director, the route is not section 7 but Part III of the Code; see our posts on section 95 petitions against personal guarantors and a guarantor's liability when the borrower defaults.

What can the company argue against admission?

After the 2026 amendment, the company's defences are confined to the statutory conditions. It can argue that the debt is not a financial debt at all, for instance that the money was an investment or an advance for supplies. It can argue that there is no default because the amount was not yet due, the loan was restructured and the restructured instalments are being paid, or the debt was repaid. It can argue that the default is below ₹1 crore, that the petition is time-barred, that the default falls in the section 10A period, or that the application is incomplete.

Some arguments do not work. A pending DRT case or SARFAESI action by the same lender does not bar a section 7 petition. The company's claims against the lender for damages, or its claim that it is profitable and will recover, are not grounds to refuse admission. Unlike section 9, a dispute about the debt does not defeat a section 7 petition unless it shows there is no financial debt or no default; the existence of a genuine dispute is an operational creditor defence, not a financial creditor one.

The company can also point to a pending disciplinary proceeding against the proposed IRP. That does not end the petition; the NCLT can ask the IBBI for another name. Where a company believes the petition is being used for a collateral purpose, such as to force a buyout, section 65 lets the NCLT penalise a person who starts insolvency fraudulently or with malicious intent for a purpose other than resolution, and the 2026 amendment added further civil penalties for vexatious filings.

Section 7 alongside DRT and SARFAESI proceedings

A bank can run a section 7 petition, a DRT original application and SARFAESI action against the same borrower at the same time; none bars the others before admission. Once the NCLT admits the petition, the section 14 moratorium stops the DRT case and SARFAESI measures against the company and its assets. The bank then participates as a financial creditor in the Committee of Creditors, and its security interest is dealt with through the resolution plan or, if that fails, in liquidation.

The choice between routes is commercial. SARFAESI gives the secured lender control over its own security. Section 7 puts the company in the hands of a resolution professional and the CoC, where the lender's vote depends on its share of the total financial debt. A lender with strong security and a small share of total debt may prefer SARFAESI; a lender with a large share and weak security may prefer section 7. The borrower's side of SARFAESI and DRT proceedings is covered in our posts on defending a bank's original application before the DRT and on the DRT practice page.

The provisions that matter in a section 7 petition

What happens after a section 7 petition is admitted?

Admission starts the corporate insolvency resolution process. The IRP takes control of the company, the board is suspended, a moratorium under section 14 stops suits and enforcement, and a public announcement invites claims. The applicant, like every other creditor, must file its claim with proof. Financial creditors form the Committee of Creditors and vote in proportion to their share of the financial debt, except related parties, who cannot vote. Our posts on the section 14 moratorium and filing your claim with the resolution professional explain those stages.

The CoC decides whether to approve a resolution plan, which needs 66% of the voting share. Persons barred by section 29A, including promoters of a company whose account has been a non-performing asset for a year or more unless they clear the overdue amounts, cannot submit a plan. The process should end within 180 days, extendable by 90, with an outer limit of 330 days including litigation, although in practice many cases take longer. If no plan is approved, the company goes into liquidation, explained in our post on liquidation under the IBC.

An admission order can be challenged before the NCLAT within 30 days, extendable by 15 days, under section 61. Withdrawal after admission requires 90% of the CoC's voting share under section 12A, within the narrower window allowed by the 2026 amendment; see settling through section 12A.

Mistakes that weaken section 7 petitions

• Getting the date of default wrong. Pleading only the NPA date when the account statement shows an earlier missed payment can push the petition outside limitation.
• Ignoring section 10A. If the default relied on falls between 25 March 2020 and 24 March 2021, the petition is barred, however large the debt.
• Thin proof of disbursement. Private lenders sometimes file without the bank statement showing the money actually went to the company.
• Unclear amount in default. A lump-sum figure without an instalment-wise calculation invites questions about whether ₹1 crore is really in default.
• Not invoking a guarantee before suing the guarantor. Against a corporate guarantor, the default arises on invocation and non-payment; skipping invocation gives an easy objection.
• An IRP with a problem. Check that the proposed professional has a valid authorisation for assignment and no pending disciplinary proceeding.
• Using section 7 as pressure without being ready for admission. Once admitted, the process belongs to all creditors, and withdrawal is no longer in the applicant's hands alone.

If your company has been served with a section 7 petition

Read the petition the day it arrives and check four things: whether the debt is really a financial debt, the date of default relied on, the amount in default, and the limitation position. These are the only issues that will decide admission. If there is a real answer on any of them, file a reply supported by documents. If there is not, the realistic options are to pay, to settle before admission, or to prepare for the process, including whether the promoters can be eligible to propose a plan.

Settlement before admission is much simpler than settlement after it, because before admission the applicant can withdraw with the bench's leave without any CoC vote. A company that intends to settle should open the conversation early and make a written proposal with a realistic payment plan. Directors should also understand their exposure once a resolution professional takes over, which is covered in our post on director liability after a company goes into insolvency.

Time, cost and what to do this week

The costs of a section 7 petition are the filing fee prescribed under the 2016 Rules, the advocate's fees, and the IRP's fee and initial costs, which the applicant usually advances until the CoC ratifies them as insolvency resolution process costs. At B.K. Singh & Associates, fees are agreed in writing at the first meeting, stage by stage, with out-of-pocket costs shown separately. The time to admission depends on the bench's list and how hard the company contests, but the 2026 amendment has narrowed what can be contested.

If a company owes you money it borrowed, start by putting together the loan papers, the bank transfer, the company's balance sheets for the last three years, any TDS records and every written communication about repayment. Work out the date of the first missed payment and whether anything signed by the company since then acknowledges the debt. If you would like an advocate to read the file and tell you whether section 7 is open to you and within time, the team of Advocate B.K. Singh can look at the papers; write to us through the online enquiry form or see the insolvency practice page.