The IBC, enacted in 2016, consolidates and amends laws relating to insolvency resolution and bankruptcy for companies, partnership firms, and individuals. Section 65 specifically targets the misuse of this framework, acting as a deterrent against fraudulent or malicious initiations of insolvency resolution, liquidation or pre-packaged insolvency resolution processes. It ensures that the insolvency process is utilized for genuine resolution or liquidation, rather than for defrauding creditors or escaping financial obligations.
The provision was introduced to address potential abuses, given the significant legal protections and moratoriums available during insolvency proceedings, which could be exploited for personal gain or to delay legitimate creditor actions.
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Section 65, Insolvency and Bankruptcy Code, 2016
Section 65 of the Insolvency and Bankruptcy Code, 2016 (IBC), addresses the misuse of insolvency processes by imposing penalties for fraudulent or malicious actions. It applies to various proceedings like insolvency resolution, liquidation and pre-packaged insolvency, ensuring these are used for legitimate purposes.
This article is an examination of Section 65 of the Insolvency and Bankruptcy Code, 2016 (IBC) and provides a thorough understanding of its provisions, purpose and implications.
Detailed Provisions
Section 65 is divided into three subsections, each addressing specific scenarios of misuse, with penalties enforced by the Adjudicating Authority, typically the National Company Law Tribunal (NCLT).
Subsection 65(1): Fraudulent or Malicious Initiation of Insolvency Resolution or Liquidation
This subsection applies if any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent, for purposes other than resolving insolvency or effecting liquidation.
Penalty: The Adjudicating Authority may impose a penalty ranging from ₹1,00,000 (one lakh rupees) to ₹1,00,00,000 (one crore rupees).
Effective From: December 1, 2016, as part of the initial enforcement of the IBC.
Subsection 65(2): Initiation of Voluntary Liquidation with Intent to Defraud
This covers cases where a person initiates voluntary liquidation proceedings with the intent to defraud any person, such as creditors or stakeholders.
Penalty: Similar to Subsection (1), the penalty ranges from ₹1,00,000 to ₹1,00,00,000.
Effective From: December 1, 2016, aligning with the initial implementation of the IBC.
Subsection 65(3): Fraudulent or Malicious Initiation of Pre-Packaged Insolvency Resolution Process
Introduced later to address the pre-packaged insolvency resolution process, this subsection penalizes fraudulent or malicious initiation for purposes other than resolution, or with intent to defraud any person.
Penalty: The penalty range remains ₹1,00,000 to ₹1,00,00,000.
Effective From: April 4, 2021, following the Insolvency and Bankruptcy Code (Amendment) Act, 2021, which added provisions for pre-packaged insolvency to expedite resolution for certain companies.
Read Section 147 of Income Tax Act, 1961.
Implementation and Judicial Interpretation
The enforcement of Section 65 began with the notification dated December 1, 2016, under Part II, Section 3(ii). This notification also included other sections like 60, 61, 62, 63, 66, 67, 68, 69, 70, 198, 231, 236, 237, 238, and specific clauses of Section 239, indicating a comprehensive rollout of the IBC's adjudicating authority framework.
Judicial interpretations have highlighted the role of Section 65 in weeding out fraudulent initiations. For instance, Section 65 does not provide a clear mechanism for identifying malicious intent and so, leaving a grey area for courts to determine locus standi, often relying on information from third parties prejudiced by such actions. Case laws, such as Infinity Infotech Parks Ltd. v. Electroparts (India) (P) Ltd., illustrate its application, where the NCLT Kolkata set aside a Section 7 order for fraudulent initiation and referred the matter to the Ministry of Corporate Affairs.
Other notable cases include:
Amit Katyal v. Meera Ahuja: The NCLAT noticed misuse by allottees under Section 7, setting standards for determination and justifying Section 65 to prevent stalling real estate projects.
Shobhnath v. Prism Industrial Complex Ltd.: The NCLT Allahabad dismissed a Section 7 petition for financial fraud and misuse of moratorium, though the order was later set aside by the Appellate Tribunal, focusing on "debt" and "default."
Wave Megacity Centre Private Limited v. Rakesh Taneja: The NCLAT upheld the NCLT's rejection of a Section 10 application for malicious initiation, allowing a Section 65 application.
These cases underscore the section's practical application in preventing misuse, though interpretations can vary, suggesting a need for broader application in cases where companies admit liabilities to evade financial fraud, even without collusion.
Also, Learn about Deductions under Section 80C of Income Tax Act, 1961.
Summary
Section 65 of Insolvency and Bankruptcy Code, 2016 ensures the integrity of insolvency proceedings with clear penalties for fraudulent or malicious initiations. Its evolution includes the 2021 amendment for pre-packaged insolvency, which reflects ongoing efforts to adapt to emerging needs while preventing abuse. Judicial interpretations continue to shape its application, highlighting the need for clarity in identifying malicious intent.
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Section 65 of IBC: FAQs
Q1. What is Section 65 of the IBC Code?
Section 65 of the Insolvency and Bankruptcy Code (IBC), 2016, addresses fraudulent or malicious initiation of insolvency proceedings. It allows the Adjudicating Authority to impose penalties if an application is filed with intent to defraud or delay creditors.
Q2. What is the minimum amount for insolvency?
The minimum default amount for initiating insolvency proceedings under the IBC is ₹1 crore for corporate debtors (as per the 2020 amendment) and ₹1 lakh for individuals/partnership firms.
Q3. What is Section 60 of the IBC Code?
Section 60 of the IBC, 2016, specifies that the National Company Law Tribunal (NCLT) is the Adjudicating Authority for corporate insolvency and bankruptcy cases, with jurisdiction over related proceedings, including those involving corporate debtors and their personal guarantors.
Q4. What is Section 63 of the IBC Code?
Section 63 of the IBC, 2016, bars civil courts from having jurisdiction over matters that the Adjudicating Authority (NCLT) or the Appellate Authority (NCLAT) is empowered to decide under the IBC.
Q5. What is Section 65 of the Insolvency Act?
There is no "Insolvency Act" distinct from the IBC in India. Assuming this refers to Section 65 of the IBC, 2016, it penalizes fraudulent or malicious initiation of insolvency proceedings, as described above.
