OFFENCES AND PENALTIES – CIRP - UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

[Mr. M. GOVINDARAJAN]

Introduction

Chapter VII of Part II provides for penalties for the offences contained in sections 68 to 77A.  Section 77A provides penalty for pre packaged resolution process.  The penalties are imposed on corporate debtor, creditors, In this article the offences that are attracted penalties in the process of corporation insolvency resolution process are to be discussed. 

Penalties on officers of corporate debtor

Concealment

Section 68(1) of the Code provides that if any officer of the corporate debtor has-

1. wilfully concealed any property or part of such property of the corporate debtor or concealed any debt due to, or from, the corporate debtor, of the value of ten thousand rupees or more; or
2. fraudulently removed any part of the property of the corporate debtor of the value of ten thousand rupees or more; or
3. wilfully concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the property of the corporate debtor or its affairs; or
4. wilfully made any false entry in any book or paper affecting or relating to the property of the corporate debtor or its affairs; or
5. fraudulently parted with, altered or made any omission in any document affecting or relating to the property of the corporate debtor or its affairs; or
6. wilfully created any security interest over, transferred or disposed of any property of the corporate debtor which has been obtained on credit and has not been paid for unless such creation, transfer or disposal was in the ordinary course of the business of the corporate debtor; or
7. wilfully concealed the knowledge of the doing by others of any of the acts mentioned in clauses (c), (d) or clause (e); or

• at any time after the insolvency commencement date, committed any of the acts mentioned in sub-clauses (a) to (f) of clause (i) or has the knowledge of the doing by others of any of the things mentioned in sub-clauses (c) to (e) of clause (i); or
• at any time after the insolvency commencement date, taken in pawn or pledge, or otherwise received the property knowing it to be so secured, transferred or disposed,

shall be punishable with imprisonment – not less than  3 years but upto 5 years and fine – not less than ₹ 1 lakh but up to ₹ 1 crore or with both.

Defrauding creditors

Section 69 provides for punishment to the officer of the corporate debtor or corporate debtor with the intention to defraud creditors-

• has made or caused to be made any gift or transfer of, or charge on, or has caused or connived in the execution of a decree or order against, the property of the corporate debtor;
•  has concealed or removed any part of the property of the corporate debtor within two months before the date of any unsatisfied judgment, decree or order for payment of money obtained against the corporate debtor.

They shall be punished with imprisonment for not less than one year but may extend to five years.  The fine shall be not less than ₹ 1 lakh but may extend to ₹ 1 crore or with both the imprisonment and fine.

There is no punishment if the offence mentioned in first point was committed five years before the commencement of insolvency commencement date or if it is proved that at the time commission of the Act, he has no intention to defraud corporate debtor.

Misconduct

Section 70 of the Code provides that on or after the commencement of insolvency commencement date if the officer of the corporate debtor-

•  does not disclose to the resolution professional all the details of property of the corporate debtor, and details of transactions thereof, or any such other information as the resolution professional may require; or
• does not deliver to the resolution professional all or part of the property of the corporate debtor in his control or custody and which he is required to deliver; or
• does not deliver to the resolution professional all books and papers in his control or custody belonging to the corporate debtor and which he is required to deliver; or
• fails to inform the resolution professional the information in his knowledge that a debt has been falsely proved by any person during the corporate insolvency resolution process; or
•  prevents the production of any book or paper affecting or relating to the property or affairs of the corporate debtor; or
• accounts for any part of the property of the corporate debtor by fictitious losses or expenses, or if he has so attempted at any meeting of the creditors of the corporate debtor within the twelve months immediately preceding the insolvency commencement date,

he shall be punishable with imprisonment for a term which shall not be less than three years, but which may extend to 5 years, or with fine, which shall not be less than ₹ 1 lakh, but may extend to ₹ 1 crore, or with both.

Falsification of books

Section 71 of the Code provides that on and after the insolvency commencement date, where any person destroys, mutilates, alters or falsifies any books, papers or securities, or makes or is in the knowledge of making of any false or fraudulent entry in any register, book of account or document belonging to the corporate debtor with intent to defraud or deceive any person, he shall be punishable with imprisonment for a term which shall not be less than 3 years, but which may extend to 5 years, or with fine which shall not be less than ₹ 1 lakh , but may extend to ₹ 1 crore, or with both.

Omission from Statements

Section 72 of the Code provides that where an officer of the corporate debtor makes any material and willful omission in any statement relating to the affairs of the corporate debtor, he shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 5 years, or with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 1 crore, or with both.

False representations to creditors

Section 73 of the Code provides that if any officer of the corporate debtor-

• on or after the insolvency commencement date, makes a false representation or commits any fraud for the purpose of obtaining the consent of the creditors of the corporate debtor or any of them to an agreement with reference to the affairs of the corporate debtor, during the corporate insolvency resolution process, or the liquidation process;
• prior to the insolvency commencement date, has made any false representation, or committed any fraud, for that purpose,

he shall be punishable with imprisonment for a term which shall not be less than 3  years, but may extend to 5 years or with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 1 crore, or with both.

Contravention of moratorium

Section 74 (1) of the Code provides that where the corporate debtor or any of its officer violates the provisions of section 14, any such officer who knowingly or willfully committed or authorized or permitted such contravention shall be punishable with imprisonment for a term which shall not be less than 3 years, but may extend to 5 years or with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 3 lakhs, or with both.

Contravention of resolution plan

Section 74(3) provides that where the corporate debtor, any of its officers or creditors or any person on whom the approved resolution plan is binding under section 31, knowingly and willfully contravenes any of the terms of such resolution plan or abets such contravention, such corporate debtor, officer, creditor or person shall be punishable with imprisonment of not less than 1 year, but may extend to 5 years, or with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 1 crore, or with both.

Creditors

Section 74(2) of the Code provides that where any creditor violates the provisions of section 14, any person who knowingly and willfully authorized or permitted such contravention by a creditor shall be punishable with imprisonment for a term which shall not be less than 1 year, but may extend to 5 years, or with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 1 crore, or with both.

Financial creditors

Section 75 of the Code provides that where any person furnishes information in the application made under section 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 1 crore.

Operational creditors

Section 76(1) of the Code provides that if-

• an operational creditor has wilfully or knowingly concealed in an application under section 9 the fact that the corporate debtor had notified him of a dispute in respect of the unpaid operational debt or the full and final payment of the unpaid operational debt; or
• any person who knowingly and willfully authorized or permitted such concealment

they shall be punishable with imprisonment for a term which shall not be less than 1 year but may extend to 5 years or with fine which shall not be less than ₹ 1 lakh but may extend to ₹ 1 crore, or with both.

Corporate applicant

Section 77 of the Code provides that if-

•  a corporate debtor provides information in the application under section 10 which is false in material particulars, knowing it to be false and omits any material fact, knowing it to be material; or
• any person who knowingly and willfully authorized or permitted the furnishing of such information 

they shall be punishable with imprisonment for a term which shall not be less than 3 years, but which may extend to 5 years or with fine which shall not be less than ₹ 1 lakh, but which may extend to ₹ 1 crore, or with both.

 Insolvency Professional

Section 70(2) and 220(2) of the Code imposes penalty on insolvency professionals for contraventions of the Code or rules or regulations.

Section 70(2) of the Code provides that if an insolvency professional deliberately contravenes the provisions of Part –II of the Code he shall be punishable with imprisonment for a term which may extend to 6 months, or with fine which shall not be less than ₹ 1 lakh, but may extend to ₹ 5 lakhs, or with both.

Section 220(2) of the Code provides that where any insolvency professional has contravened any provision of this Code or rules or regulations made there under, the disciplinary committee may impose penalty which shall be-

• three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention; or
• three times the amount of the unlawful gain made on account of such contravention, whichever is higher,

whichever is higher.  Where such loss or unlawful gain is not quantifiable, the total amount of the penalty imposed shall not exceed more than ₹ 1 crore.

Monetary penalty

The Insolvency and Bankruptcy Board of India has come up with a step to ensure Insolvency Professionals better discharge their duties and at the same time help distinguish the performers and non-performers amongst them. It has come up with a graduated system of levy of monetary penalty for minor non-compliances by the Insolvency Professionals.

Vide Circular No. IBBI/IPA/43/2021, dated 28.07.2021 the Board suggests the Disciplinary Committee of Insolvency Professional Agency may impose monetary penalty on its professional members under Clause 24(2)(d) of the Schedule to the Insolvency and Bankruptcy Board of India  (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016.  This circular came into effect from 28.07.2021.

The monetary penalties that may be imposed on the Insolvency professionals if the Insolvency Professional-

• Fails to submit disclosures, returns, etc. to Insolvency Professional Agencies or submits inadequate or incorrect disclosures, returns, etc., relating to any assignment, as required under the Code and Regulations made there under or Bye-laws of the Insolvency Professional Agency or called upon by the Board or the Insolvency Professional Agency. – Up to ₹ 1,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 50,000.
• Accepts an assignment having conflict of interests with the stakeholders - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Fails to maintain records properly relating to any of his assignments - Up to ₹ 1,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 50,000.
• Rejects a claim(s) without giving any proper reason while undertaking an assignment or fails to exercise due diligence in claim verification - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Fails to comply with directions issued by Adjudicating Authority or the Appellant Tribunal - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Outsources his duties and obligations - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Fails to appoint registered valuers, wherever required, under the Code or Regulations made there under, for conducting valuation - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Fails to supply the information called for or to comply with the requirements of information sought by the Insolvency Professional Agency, Board, Adjudicating Authority or the Appellant Tribunal or does not cooperate with the inspection or investigating authority - Up to ₹ 1,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 50,000.
• Fails to make public announcement in the manner provided for in the relevant Regulations - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Fails to provide notice regarding meetings of creditors - Up to ₹ 1,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 50,000.
• Fails to reject resolution plan from ineligible resolution applicants - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Fails to take action in respect of Preferential, Undervalued, Fraudulent or Extortionate transactions - Up to ₹ 2,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 1,00,000.
• Enters into contract or agreement with professionals in an incomplete and improper manner - Up to ₹ 1,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 50,000.
• Contravenes any provision of the Bye-laws, or Regulations for which no specific penalty has been provided - Up to ₹ 1,00,000 or 25% of fee, whichever is higher, subject to a minimum ₹ 50,000.

However mixed responses are there from insolvency professionals.  Majority of insolvency professionals are in the view that the monetary penalties proposed to be imposed on insolvency professionals are on the higher side and want the Insolvency and Bankruptcy Board of India to review the same.