FRAUDULENT OR MALICIOUS CIRP INITIATION UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

There is provision of penalty under the Code if Corporate Insolvency Resolution Process, Liquidation Proceedings or Pre-Packaged Insolvency Resolution Process has been initiated fraudulently or maliciously. The Adjudicating Authority has been empowered to impose penalty of at least one lakh which may extend to one crore on a person who initiates Corporate Insolvency Resolution Process or Liquidation Proceedings or Pre-Packaged Insolvency Resolution Process with fraudulently or malicious intent under Section 65.

Section 65 of the Code reads as under:

65. FRAUDULENT OR MALICIOUS INITIATION OF PROCEEDINGS

65. Fraudulent or malicious initiation of proceedings. –

 (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

(2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees.

(3) If any person initiates the pre-packaged insolvency resolution process— (a) fraudulently or with malicious intent for any purpose other than for the resolution of insolvency; or (b) with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

Fraudulent initiation or malicious intent is essential component for initiating proceedings under this Section 65.  Fraudulently has not been defined under the Code. But the same has been defined in the Indian Penal Code. Indian Penal Code defines the word fraudulently as under:

25. “Fraudulently”. —A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.

The Supreme Court analysed the definition of fraudulently extensively in the case of Dr. Vimla¹. The Supreme Court held that ‘defraud’ involves two elements i.e., deceit and injury. The relevant para is reproduced as under:

To summarise the expression “’defraud” involves two elements, namely, deceit and injury to the person deceived. injury is something other than economic loss that is deprivation of property, whether movable or immovable, or of money, and it will include any harm whatever caused to any person in body, mind, reputation or such others. In short, it is a non economic or nonpecuniary loss. A benefit or advantage to the deceiver will almost always cause loss or detriment to the deceived. Even in those rare cases where there is a benefit or advantage to the deceiver, but no corresponding loss to the deceived, the second condition is satisfied.

Malicious intent has also not been defined under the Code. The Supreme Court has an opportunity to analyse malicious prosecution in the matter of West Bengal State Electricity Board².  The Supreme Court held that malicious prosecution has two elements that there was no probable cause for institution of prosecution or suit and such prosecution or suit has terminated favorably to other party. The relevant para is reproduced herein. 

In malicious prosecution there are two essential elements, namely, that no probable cause existed for instituting the prosecution or suit complained of, and that such prosecution or suit terminated in some way favorably to the defendant therein.

 1. The institution of a criminal or civil proceeding for an improper purpose and without probable cause.

2. The cause of action resulting from the institution of such a proceeding. Once a wrongful prosecution has ended in the defendant’s favor, lie or she may sue for tort damages – Also termed (in the context of civil proceedings) malicious use of process. (Black, 7th End., 1999)

NCLAT in Amit Katyal³ has held that Section 65 cannot be used to reject application for initiating Corporate Insolvency Resolution Process if other criteria have been fulfilled. The relevant para is as under:

46. It is not impertinent to mention that we often notice that despite fulfilling all the requirements for Section 7 and 9 of the Code, the petitions are rejected only on the pretext that the petition is filed for recovery of Debt and not for the resolution of Insolvency. It is necessary to keep in mind that Sec 65 of the Code is not meant to negate the process U/S 7 or 9 of the Code. Penal action U/S Sec 65 can be taken only when the provision of the Code has been invoked fraudulently, with malicious intent. The Hon’ble Supreme Court in Pioneer’s case has given an instance of Home Buyer/ Allottee, who does not have an interest in taking the possession and is only an investor, it has initiated the proceeding with malicious intent. The Allottee does not want to go ahead with its obligation to take possession of the flat/Apartment under RERA but wants to jump ship and wants to get back the monies already paid, by way of this coercive measure. In such cases, the use of Sec 65 is held justified, because one ‘Home Buyer’ by misusing his position could not stall the entire Real Estate Project. But it does not mean that any ‘Insolvency Application’ satisfying the requirements of Sec 7 or 9 of the I&B Code, could be dismissed Arbitrarily under the guise of Sec 65 of the Code.

The NCLAT has further held in the said judgment that a prima facie opinion is required to be recorded regarding malicious or fraudulent prosecution. Relevant Para is reproduced as under:

48. Thus, it is clear that the Code provides stringent action U/S 65 against the person who initiates proceeding under the Code fraudulently or with malicious intent, for the purpose other than the resolution of Insolvency or liquidation under the Code. To levy a penalty under Section 65 of the Code, a ‘prima facie’ opinion is required to be arrived at that a person has filed the petition for initiation of proceedings fraudulently or with malicious intent. No penalty can be saddled either under Section 65(1) or (2) of the Code without recording an opinion that a prima facie case is established to suggest that a person ‘fraudulently’ or with malicious intent for the purpose other than the resolution of Insolvency or Liquidation or with an intent to defraud any person has filed the Application.

NCLT in   Hytone Merchants Pvt. Ltd.⁴ has held that an application for initiating insolvency can be rejected, if it has been filed with fraudulently or malicious intent.  Relevant Para is as under:

45. Based on the above discussion, we believe that even if the petition complies with all requirements of Section 7 of the Insolvency and Bankruptcy Code, 2016, it is filed collusively, not with the intention of Resolution of Insolvency but otherwise. Therefore, it is not mandatory to admit the Application to save the Corporate Debtor from being dragged into Corporate Insolvency Resolution Process with mala fide.

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1. Dr. Vimla Vs. Delhi Administration; 1963AIR1572
2. West Bengal State Electricity Board vs Dilip Kumar Day; Appeal (Civil) 5188 of 2006
3. Amit Katyal Vs. Meera Ahuja; CA (AT) (Ins) 1380/2019
4. Hytone Merchants Pvt. Ltd. Vs. Satabadi Investments Consultants Pvt. Ltd.; CA (AT) 258 of 2021