2025 (3) TMI 438 - AT - IBC

Admission of Section 7 application filed by the financial creditor - Appellants claimed in the application that Section 7 application was filed fraudulently with malicious intent by financial creditors in collusion with the corporate debtor and its directors - imposition of penalties u/s 65 of the IBC on the financial creditors and the promoters of the corporate debtor for the alleged fraudulent initiation of CIRP - applicability of Rule 59 of the National Company Law Tribunal (NCLT) Rules 2016 for issuing show cause notices in the context of penalties under Section 65 of the IBC - HELD THAT - Initiation date has been defined in Section 5(11). From the definition of initiation date it is clear that initiation is by a financial creditor corporate applicant or operational creditor only. In Section 65 of the IBC when we examine the expression if any person initiates the insolvency resolution process fraudulently or with malicious intent for any purpose other than for resolution of insolvency the focus is on the person who initiates the insolvency resolution process - Insolvency resolution process can be initiated under Section 7 9 and 10 which is also clear from definition of initiation date under Section 5(11) and the scheme of the IBC as captured by Sections 7 9 and 10. No other person is entitled to initiate insolvency resolution process except financial creditor operational creditor or corporate applicant. The heading of Section 65 also provides fraudulent or malicious initiation of proceedings . It is not competent to the court to stretch the meaning of expression used by the legislature in order to carry out the intention of legislature. Even the literal construction of Section 65 does not contemplates that penalty can be imposed on any person other than one who has fraudulently or maliciously initiated the proceedings. It is well settled that penal statute are to be strictly construed. Section 65 of the IBC being a penal statute it is required to be strictly construed and as observed above even a literal reading of Section 65 which is a golden rule of construction of statutory statute no interpretation can be put on the provisions of Section 65 that penalty can be imposed on any other person except those who have initiated insolvency resolution process fraudulently or maliciously. The submission of the appellant cannot be accepted that in exercise of jurisdiction under Section 65 promoters are also need to be penalised. The next submission which has been pressed by the Appellant is that the Adjudicating Authority by the impugned order has issued notice to the financial creditors which is clear from direction under paragraph 18. It is submitted that the Adjudicating Authority has referred to Rule 59 of the NCLT Rules 2016 for issuance of notice which Rule is not applicable - Admittedly show cause notice was issued to the financial creditors in pursuance to the order dated 12.06.2024. The financial creditors to whom the notice has been issued are not aggrieved by the issuance of notice and it is the appellant who has challenged the issuance of notice by the Adjudicating Authority in paragraph 18 of the order. Although Rule 59 is not applicable while issuing notice of penalty under Section 59 and it was open for the Adjudicating Authority to impose penalty under Section 65 without issuing any notice to the financial creditors on the basis of materials on record. However fact remains that by the impugned order penalty was not imposed. Adjudicating Authority having returned finding that the CIRP was initiated fraudulently it is for the Adjudicating Authority to impose penalty under Section 65 - it is the Adjudicating Authority who has to take a decision on the penalty in reference to the order dated 12.06.2024 passed by the Adjudicating Authority - the Adjudicating Authority may proceed to pass an appropriate order with regard to penalty on the financial creditors in continuation of the order dated 12.06.2024 and in accordance with law. Conclusion - Section 65 of the IBC is a penal provision requiring strict interpretation applying penalties only to those who initiate proceedings fraudulently. The initiation of CIRP is fraudulent The penalties under Section 65 could not be imposed on promoters. Appeal disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code (IBC) was fraudulent and with malicious intent.
• Whether penalties under Section 65 of the IBC should be imposed on the financial creditors and the promoters of the corporate debtor for the alleged fraudulent initiation of CIRP.
• The applicability of Rule 59 of the National Company Law Tribunal (NCLT) Rules, 2016 for issuing show cause notices in the context of penalties under Section 65 of the IBC.

2. ISSUE-WISE DETAILED ANALYSIS

Fraudulent Initiation of CIRP:

• Relevant Legal Framework and Precedents: Section 7 of the IBC allows financial creditors to initiate CIRP against a corporate debtor in case of default. Section 65 of the IBC penalizes fraudulent or malicious initiation of insolvency proceedings.
• Court's Interpretation and Reasoning: The Tribunal found that the insolvency proceedings were initiated fraudulently and with malicious intent, not for the purpose of resolving the insolvency of the corporate debtor.
• Key Evidence and Findings: The Tribunal noted collusion between the financial creditors and the corporate debtor's promoters, which was intended to defeat the decade-long efforts in an oppression and mismanagement petition.
• Application of Law to Facts: The Tribunal applied Section 65 to determine that the initiation was fraudulent, warranting the recall of the earlier order admitting the CIRP.
• Treatment of Competing Arguments: The appellants argued for penalties on both financial creditors and promoters, while the promoters contended that penalties should not apply to them as they did not initiate the proceedings.
• Conclusions: The Tribunal concluded that the proceedings were initiated fraudulently and directed the return of control to the corporate debtor's management, while issuing a show cause notice to the financial creditors.

Imposition of Penalty under Section 65 of IBC:

• Relevant Legal Framework and Precedents: Section 65 provides for penalties on persons who fraudulently or maliciously initiate insolvency proceedings. The section requires strict interpretation as a penal statute.
• Court's Interpretation and Reasoning: The Tribunal interpreted Section 65 to apply penalties only to those who initiate proceedings, not to those who may collude or conspire.
• Key Evidence and Findings: The Tribunal did not find sufficient evidence to penalize promoters, as the statute does not explicitly include collusion within the penalty framework.
• Application of Law to Facts: The Tribunal determined that penalties could only be applied to the financial creditors who initiated the proceedings.
• Treatment of Competing Arguments: The appellants' argument for penalizing promoters was rejected due to the lack of statutory basis for such penalties under Section 65.
• Conclusions: The Tribunal decided not to impose penalties on promoters and issued show cause notices to the financial creditors.

Applicability of Rule 59 of the NCLT Rules, 2016:

• Relevant Legal Framework and Precedents: Rule 59 outlines procedures for imposing penalties under the Companies Act, 2013, not the IBC.
• Court's Interpretation and Reasoning: The Tribunal acknowledged that Rule 59 is not applicable to penalties under the IBC but allowed the issuance of show cause notices as a procedural step.
• Key Evidence and Findings: The Tribunal found that the issuance of show cause notices was not precluded by any statutory provisions.
• Application of Law to Facts: The Tribunal decided that the issuance of notices was a reasonable procedural step, although not strictly required by the IBC.
• Treatment of Competing Arguments: The appellants challenged the use of Rule 59, but the Tribunal maintained that the notices were appropriate.
• Conclusions: The Tribunal upheld the issuance of show cause notices and left the decision on penalties to the Adjudicating Authority.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The penal provision must be strictly construed in the first place. Secondly, there is no vicarious liability in criminal law unless the statute takes that also within its fold."
• Core principles established: Section 65 of the IBC is a penal provision requiring strict interpretation, applying penalties only to those who initiate proceedings fraudulently.
• Final determinations on each issue: The Tribunal found the initiation of CIRP fraudulent, recalled the order admitting CIRP, issued show cause notices to financial creditors, and determined that penalties under Section 65 could not be imposed on promoters.