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The Insolvency and Bankruptcy Code, 2016 (IBC) provides the adjudicating authorities with various powers to facilitate an effective and expeditious corporate insolvency resolution process (CIRP). It is, however, imperative to ensure that in the quest of an expeditious CIRP, the integrity of the process cannot be compromised. Section 65 of the IBC is one such provision that authorises NCLTs and NCLAT to penalise any person who initiates the resolution process or liquidation proceedings with fraudulent or malicious intent. The authorities even have the power to recall a petition that has already been admitted if they discover the resolution process violates Section 65.
Statutory Framework and Legal Significance of Section 65
Section 65 of IBC is comprised of three sub-sections. The first one imposes penalty on any person who initiates insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency or liquidation. The second brings voluntary initiation of liquidation proceedings with the intent to defraud any person within the penal provisions of Section 65. The third one brings pre-packaged insolvency resolution process within the ambit of Section 65.
Not only does Section 65 imposes penalties for fraudulent or malicious initiation of proceedings, but it also plays a crucial role in furthering the legislative intent of maximisation of the value of assets without compromising the integrity of the resolution or liquidation process. Coupled with Rule 11 of the NCLT Rules, 2016, which bestows inherent powers upon the Tribunals to pass orders that are necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal, Section 65 gives power to the Tribunals to look beyond the surface of an otherwise valid petition and pass an order recalling a previous order admitting a resolution or liquidation petition if fraud or malice is proven.
Judicial Precedents: A Survey of Important Judgements
One of the earliest cases dealing with the issue whether the Tribunals could recall a judgement was Union Bank of India (Erstwhile Corporation Bank) Vs. Dinkar T. Venkatasubramanian and Ors.1 In the said the judgement, it was held that the observation made in Agarwal Coal Corporation Pvt Limited vs Sun Paper Mills Limited2 that a Tribunal has no power to recall its judgement is incorrect law.
Thereafter, in the case of Hindalco Industries Ltd. V. Hirakud Industrial Works Ltd. & Ors.3 the NCLAT had observed, “…when the basic edifice on which the resolution plan of the corporate debtor is based is non-est in law, the superstructure of the resolution plan cannot sustain itself or maintain its existence”.
In the case of Ashmeet Singh Bhatia Vs. Pragati Impex India Private Limited & Anr., it was held by NCLAT that the powers under Section 65 can be exercised by the adjudicating authority when the grounds mentioned therein are satisfied.4 Further, the adjudicating authority also has to conclude that the insolvency proceedings have been initiated fraudulently or with malicious intent for extraneous considerations that are different from the insolvency resolution of the Corporate Debtor. It was further held that the adjudicating authorities are well within their power to end the CIRP process under Section 65 and mere admission of Section 7 application does not take away the power to examine the application under Section 65.
The power of the adjudicating authorities to take action against persons acting fraudulently or with malicious intention, while initiating insolvency process or liquidation proceedings, was further strengthened in the recent case of Expert Realty Professionals Private Limited vs Logix Infrastructure Private Limited.5 In this case it was held that merely because an application under Section 65 was filed at the end stages of CIRP does not mean that the application is not maintainable. It was rightly pointed out that that in case of fraud the entire process, including the order approving the resolution plan, will be vitiated. The NCLAT found clear instances of fraudulent activities and collusion in the business transactions and upheld the order passed by the NCLT wherein the order of admission and the CIRP initiated thereof in relation to the Corporate Debtor was cancelled and terminated.
Practical Implications for Insolvency Stakeholders
The jurisprudence, as established by various Courts and Tribunals, makes it mandatory for financial creditors to scrutinise the debt-default matrix and verify that all supporting documents are genuine. Section 65 has also brought pre-filing conduct under the scrutiny of the Courts.
Caution is mandated for operational creditors as well those who are reliant on IBC for expedited recovery. An application under Section 9 may not be viewed in a positive light in case there exists a genuine pre-existing dispute.
As far as corporate debtors are concerned, a Section 65 allegation should be levelled by them only after relying on credible and objective evidence like email trails, financial statements, independent audit reports, etc. Any unsubstantiated claim under Section 65 by the Corporate Debtor or any of its suspended directors may be seen as obstructionist in nature.
Resolution Professionals (RPs) will be put on the forefront once fraud is alleged under Section 65. Given the statutory mandate upon the RPs to maintain fairness in the entire resolution process, they must play a proactive role in assisting the Tribunals including disclosing any irregularity found during the forensic audit.
Further, public authorities in general and tax departments in specific must adopt a more calibrated approach in view of Section 65. The public authorities should refrain from using insolvency mechanisms as a device for collecting revenue in order to avoid judicial scrutiny.
Conclusion
Section 65 has gradually evolved into a prominent section with the evolution of IBC. What started out as an ancillary penal clause has turned into a lynchpin of a successful insolvency resolution. The plethora of judgements by the adjudicating authorities on Section 65 proves that expediency cannot replace fairness of process. The jurisdiction of the tribunals to reverse fraudulent or malicious initiation of proceedings prevents stakeholders from getting dragged into a process born out of extraneous considerations.
However, a uniform body of precedents on Section 65 is yet to emerge due to diverse findings across different benches. While such decisions are awaited, it is recommended that all stakeholders proceed with heightened diligence. This will ensure the reinforcement of the cardinal premise that the resolution process must be fair, swift, and most importantly, honest.
Footnotes
1 I.A. No. 3961 of 2022 in Company Appeal AT Ins. No. 729 of 2020
2 (2018) 1 SCC 407
3 MANU/NL/0032/2023
4 CA (AT) (Ins) No. 1413 of 2023
5 Company Appeal (AT) (Insolvency) No. 383 of 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
