Before enacting the Insolvency and Bankruptcy Code, 2016 ("Code"), the law governing insolvency and bankruptcy was multitudinous. The erstwhile framework created ambiguity leading to problems like multiple forums and lack of business or financial expertise.

A company may adopt a successful business model although, it may fail to repay its creditors. The insolvency process incorporated under the Code preserves the economic value of the business by helping the creditors and debtors to agree on a financial rearrangement. In Binani Industries Limited and Ors. v.Bank of Baroda and Ors , the National Company Law Appellate Tribunal ("NCLAT") observed that the objective of the Code is to rescue a failing but viable business.

The Code provides for reorganisation, bankruptcy and insolvency resolution of corporate persons, partnership firms and individuals. At present, the Code applies only to corporate persons and personal guarantors. The sickness of non-corporate bodies like partnership firms, individuals, etc., is governed under the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

The new structure under the Code offers procedural security in reducing difficulties vis-à-vis common property held by the debtor and information asymmetry for all economic participants. The Code places its focuses on obstructing malfeasant behaviour through penalty being civil and criminal.

The offences under the Code are threefold, namely:

1. Offences committed by corporate persons,
2. Offences committed during the bankruptcy process, and
3. General contravention.

Let us examine the above heads in detail.

I. Offences Committed By Corporate Persons

Part II of the Code deals with insolvency resolution and liquidation for corporate persons. The offences and penalties committed thereunder are governed under sections 68 to 77 of Chapter VII of the Code.

Definition of corporate person under the Code

The term "corporate person" under section 3(7) of the Code means a –

1. Company as defined under section 2(20) of the Companies Act, 2013 ("Companies Act"),
2. Limited liability partnership defined under section 2(1)(n) of the Limited Liability Partnership Act, 2008 ("LLP Act"), or
3. Any other body corporate incorporated with limited liability under any law for the time being in force.

The Code does not recognise any financial service provider as a corporate person.

Categories of corporate persons

The offences committed under Part II can be segregated on the basis of the following category of corporate persons:

1. Corporate debtor or its officer
2. Any person
3. Insolvency professional
4. Creditor
5. Persons on whom the resolution plan is binding

Let us examine the offences committed by the above persons in detail.

Offences Committed By Corporate Debtor Or Its Officers

Under section 3(8) of the Code the term "corporate debtor" means a corporate person who owes a debt to any person.

The term "officer" as defined under section 5(19) of the Code states that for the purposes of Chapters VI and VII of Part II of the Code, an officer who is in default as defined under section 2(60) of the Companies Act or a designated partner as defined in section 2(j) of the LLP Act.

Sections 68, 69, 70(1), 72, 73, 74(1) and 77(a) of the Code lay down the offences committed by the corporate debtor or its officers along with penalties thereon.

Punishment For Concealment Of Property:

Section 68 of the Code punishes any officer of the corporate debtor with imprisonment for 3 years extendable up to 5 years, or fine of Rs.1 lakh extendable up to Rs.1 crore or both, if within 12 months immediately preceding the insolvency commencement date wilfully concealed or fraudulently or destroyed, mutilated or falsified:

1. Removed any property or part thereof owned by the corporate debtor or any debt due having value of Rs.10,000/-, or
2. Any book or paper affecting or relating to the property of the corporate debtor or its affairs, or
3. Any false entry in any book or paper affecting or relating to the property of the corporate debtor or its affairs, or
4. Parted with, altered or made any omission in any document affecting or relating to the property of the corporate debtor or its affairs, or
5. Created any security interest over, transferred or disposed of any property of the corporate debtor which has been obtained on credit and not been paid for unless such creation, transfer or disposal was in the ordinary course of the business of the corporate debtor, or
6. Knowledge of doing by others or had at any time after the insolvency commencement date, committed any of the above mentioned or pawned or pledged, or otherwise received the property knowing it to be secured, transferred or disposed.

Punishment For Transactions Defrauding Creditors:

Section 69 of the Code punishes a corporate debtor or its officer with imprisonment for 1 year extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both, if on or after the insolvency commencement date he/she has-

• Made or caused to be made any gift or transfer or charge on or connived in the execution of a decree or order against the property of the corporate debtor;
• Concealed or removed any part of the property of the corporate debtor within 2 months before the date of any unsatisfied judgment, decree or order for payment of money obtained against the corporate debtor.

Punishment For Misconduct In Course Of Corporate Insolvency Resolution Process:

Section 70(1) of the Code punishes an officer of the corporate debtor with imprisonment for 3 years extendable up to 5 years, or fine of Rs.1 lakh extendable up to Rs.1 crore, or both, when he/she to resolution professional on or after insolvency commencement date does not–

• Disclose all details of the property held by corporate debtor and transactions thereof, or any such other information as required; or
• Deliver all or part of the property or all books and papers of the corporate debtor in his control or custody; or
• Fails to inform 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 or attempts to account for any part of property of the corporate debtor by fictitious losses or expenses at any meeting of the creditors of the corporate debtor within the 12 months immediately preceding the insolvency commencement date.

Punishment For Wilful And Material Omissions From Statements Relating To Affairs Of Corporate Debtor:

Section 72 of the Code punishes an officer of the corporate debtor with imprisonment for 3 years extendable up to 5 years, or fine of Rs.1 lakh extendable up to Rs.1 crore, or both, for making any material and wilful omission in any statement vis-à-vis affairs of the corporate debtor.

Punishment For False Representations To Creditors:

Section 73 of the Code punishes any officer of the corporate debtor with imprisonment for 3 years extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both when on/after/before the insolvency commencement date or during the corporate insolvency resolution process, or the liquidation process, he/she makes a false representation or commits any fraud for 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.

Punishment For Contravention Of Moratorium:

Section 74(1) of the Code punishes the corporate debtor or its officer with imprisonment for 3 years extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.3 lakhs, or both, on known or wilful violation of section 14 of the Code.

In Ranjit Kapoor v. Hemant Sharma^[1], the NCLAT upheld that order passed by the National Company Law Tribunal ("NCLT"), New Delhi, whereunder transfer of a sum of Rs.1,50,75,000/- by the Promoter in favour of Yajur International Pvt. Ltd. (Operational Creditor) was held to be in violation of Section 14 of the Code. The Supreme Court in appeal found no ground for interference with the order passed by NCLT^[2].

Punishment For Providing False Information In Application Made By Corporate Debtor:

Section 77(a) of the Code punishes a corporate debtor with imprisonment for 3 years extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both on providing false information of material particulars and omission of material fact, knowing it to be material under section 10 of the Code.

Offences Committed By Any Person

Section 3(23) of the Code defines the term "person" to include an individual, a HUF, company, trust, partnership, limited liability partnership, and any other entity established under a statute including a person resident outside India.

Sections 65, 71, 75 and 77(b) of the Code lay down the offences committed by any person along with penalties thereon.

Punishment For Fraudulent Or Malicious Initiation Of Proceedings:

Section 65 of the Code punishes any person with penalty of Rs.1 lakh extendable up to Rs.1 crore for initiating insolvency resolution process, liquidation proceedings or pre-packaged insolvency resolution process fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, or to defraud any person.

In Bank of India v. IRIS Electro Optics Pvt. Ltd , the NCLAT remanded an application filed under section 65 by the Appellant to NCLT, Hyderabad for fresh consideration and to record a finding on Respondent No. 3's status as a 'related party' and whether she had fraudulently initiated Corporate Insolvency Resolution Process by filing an application under Section 7 of the Code.

Punishment For Falsification Of Books Of Corporate Debtor:

Section 71 of the Code punishes any person with imprisonment for 3 years extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both, for destruction, mutilation, alteration or falsification of any books, papers or securities, or having knowledge of making of any false or fraudulent entry in any register, books of account or document belonging to the corporate debtor to defraud or deceive any person on and after the insolvency commencement date.

Punishment For False Information Furnished In Application:

Section 75 of the Code punishes any person who furnishes information under section 7 of the Code through an application to be false in material particulars, knowing it to be false or omits any material fact, knowing it to be material with fine of Rs.1 lakh extendable up to Rs.1 crore.

In Pankaj Khetan v. Kushal International Limited reported , the NCLT, Allahabad observed that there were no grounds to invoke Section 75 of the Code against Financial Creditor and it does not have jurisdiction to enquire into the loan transaction between Financial Creditor and Corporate Debtor after an order of admission was passed.

Punishment For Providing False Information In Application Made By Corporate Debtor:

Section 77(b) of the Code punishes any person with imprisonment for 3 years extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both, on furnishing such information under section 10 with knowledge and wilful authorisation or permission.

Offences Committed By Insolvency Professional

Section 3(19) of the Code defines the term "insolvency professional" to mean a person enrolled under section 206 of the Code with an insolvency professional agency as its member and registered with the Board as an insolvency professional under section 207 of the Code.

Section 70(2) of the Code states the offence committed by an Insolvency Professional along with penalty as stated therein.

Punishment For Misconduct In Course Of Corporate Insolvency Resolution Process:0

Section 70(2) of the Code punishes an insolvency professional on deliberate contravention of Part II with imprisonment for 6 months or fine of Rs.1 lakh extendable up to Rs.5 lakhs, or both.

Offences Committed By Creditor

Section 3(10) of the Code defines the term "creditor" to mean any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

Sections 74(2) and 76 of the Code lay down the offences committed by a creditor along with penalties for such offences.

Punishment for contravention of moratorium:

Section 74(2) of the Code punishes a creditor with imprisonment for 3 years extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both on violation of section 14 of the Code committed or authorised or permitted knowingly or wilfully.

Punishment For Non-Disclosure Of Dispute Or Payment Of Debt By Operational Creditor:

Section 76 of the Code punishes an operational creditor with imprisonment for a year extendable up to 5 years or fine of Rs.1 lakh extendable up to Rs.1 crore, or both for wilful or known concealment of the notification by corporate debtor of the dispute vis-à-vis the unpaid operational debt or full and final payment of the unpaid operational debt under section 9 of the Code.

Offences Committed By Persons On Whom Resolution Plan Is Binding

Section 74(3) of the Code punishes persons on whom the approved resolution plan is binding under section 31 of the Code, for known and wilfully contravenes of its terms with imprisonment of 1 year extendable up to 5 years, or fine of Rs.1 lakh to Rs.1 crore, or both.

II. Offences Committed During The Bankruptcy Process

Section 79(8) of the Code defines the term "bankruptcy process" to mean a process against a debtor under Chapters IV and V of Part III of the Code.

Sections 184 to 187 under Chapter VII of Part III of the Code provide for offences committed during the Bankruptcy process. Section 184 punishes the creditors for providing false information, etc., in the insolvency resolution process. Section 185 punishes the insolvency professionals for contravention of Part III. Section 186 punishes the bankrupt for providing false information, concealment, etc. Lastly, section 187 punishes the bankruptcy trustee for actions stated therein.

III. General Contravention

Section 235A punishes any person for contravening the Code or subordinate legislation thereunder where no specific penalty or punishment is prescribed with fine of Rs.1 lakh extendable up to Rs.2 crores.

Given the foregoing, the Code lays down stringent provisions to punish the wrong-doer irrespective of the nature of the entity, person, etc. for successful revival of a business.