Section 65: Fraudulent or Malicious Initiation of Proceedings under the Insolvency and Bankruptcy Code 2016
Section 65 of the Insolvency and Bankruptcy Code, 2016 provides for a monetary penalty where insolvency resolution, liquidation or voluntary liquidation proceedings are initiated fraudulently, maliciously or, in the case of voluntary liquidation, with intent to defraud.
Section 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.
Meaning and scope of Section 65
Section 65 is intended to discourage misuse of proceedings under the Insolvency and Bankruptcy Code. Sub-section (1) applies where a person initiates an insolvency resolution process or liquidation proceeding fraudulently or with malicious intent for a purpose other than insolvency resolution or liquidation. Sub-section (2) specifically addresses voluntary liquidation proceedings initiated with an intent to defraud any person.
Penalty under Section 65
Where the statutory requirements are established, the Adjudicating Authority may impose a penalty. The prescribed range under Section 65 is not less than Rs. 1 lakh and may extend to Rs. 1 crore.
What is the Adjudicating Authority?
For corporate persons, Section 5(1) of the Insolvency and Bankruptcy Code defines the "Adjudicating Authority" for Part II as the National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013. Jurisdiction is determined in accordance with the provisions of the Code.
Key requirements
Section 65 does not merely address an unsuccessful insolvency application. Its language focuses on the purpose and intent behind initiation of the proceeding. Under sub-section (1), the relevant elements include fraudulent initiation or malicious intent and a purpose other than resolution of insolvency or liquidation. Under sub-section (2), the provision expressly requires an intent to defraud in initiating voluntary liquidation.
Related provisions
Readers may also refer to Section 63 - Civil court not to have jurisdiction, Section 64 - Expeditious disposal of applications, Section 66 - Fraudulent trading or wrongful trading and Section 67 - Proceedings under Section 66.