NCLAT Delhi: Fine For Non-Cooperation By Ex-Management Under IBC Is A “Penalty” Not “Cost” And Outside NCLT’s Jurisdiction

Background Facts

M/s Gupta Marriage Halls Pvt. Ltd (“Corporate Debtor”) is a private limited company incorporated under the provisions of the Companies Act, of 1956. The Corporate Debtor was engaged in the business of hiring Hotels, Restaurants, and Marriage Halls.

On 03.09.2019, a Corporate Insolvency Resolution Petition (“CIRP”) was initiated against the Corporate Debtor. Mr. Mahesh Bansal (“Respondent”) was appointed as the Interim Resolution Professional. The Respondent during the pendency of CIRP filed application CA-871/2019 u/s 19(2) of IBC alleging non-cooperation from the suspended board of directors (“Appellants”).

On 04.01.2021, liquidation of the Corporate Debtor was initiated. Mr. Nitin Narang was appointed as the Liquidator.

The liquidator filed a fresh application I.A. No. 3588/2021 u/s 34(3) of IBC on the same ground of non-cooperation by the Appellants.

On 02.03.2022, NCLT while adjudicating both the applications held that the act of Appellants constituted misconduct during CIRP and was punishable under Section 70 of IBC. The Appellants were accordingly fined Rs. 5 lakhs. Aggrieved by the order of NCLT, the Appellants filed an appeal before NCLAT.

Contentions of Applicant

The Applicant argued that any fine or penalty for offences is dealt under Chapter VII of IBC and trial of offences under Sections 70 and 236 can only be done by a Special Court established under Chapter XXVIII of the Companies Act, 2013. The Appellants relied on the judgment in Writer Business Services Pvt. Ltd. & Anr. v. Mr. Ashutosh Agrawala wherein it was held that the jurisdiction to impose a fine under IBC is only with the Special Court.

Writer Business Services Pvt. Ltd. & Anr. v. Mr Ashutosh Agrawala Resolution Professional for Cox & Kings Ltd., Comp App (AT) (Ins) No. 956 of 2021 while defining the scope of fine under the Code, held that punishment of fine is a fine which is imposed on a delinquent for an offence and therefore, fine can only be imposed for an offence and as such the jurisdiction to impose fine after convicting the accused rests only with Special Court established under Chapter XXVIII of Companies Act, 2013 and the Adjudicating Authority does not have any jurisdiction to impose fine.

The Appellants further argued that the claim of the Respondent that NCLT has imposed “cost” under Rule 149 of the Companies Rules cannot be sustained as the word 'cost' has not been used even once in the entire order of NCLT.

Contentions of Respondent

The Respondent opposed the submissions and argued that misconduct during CIRP is punishable under Section 70 of IBC and therefore the fine of Rs.5 Lakhs imposed on the Appellants is valid.

The Respondent further argued that under Section 236(2) of IBC, any offences or penalty is to be adjudicated by a Special Court however NCLT in this case, using its discretionary power has passed an order to impose “cost” as per Rule 149 of the Companies Rules.

NCLT Verdict

The NCLAT allowed the appeal and set aside the order of NCLT observing that the term “fine” is covered under the term “penalty” as per Sections 70 and 236 and not under the term “cost” as per Rule 149 of the Companies Rules and is outside the jurisdiction of NCLT.

“We are clear that the intent and legal basis of cost is different from intent and legal basis of penalty which includes “fine”. Therefore, we do not have any hesitation in holding that the word “fine”, used consciously by the Adjudicating Authority in the Impugned Order, is covered in penalty which is required to be dealt under Section 70 and 236 of the Code and which further is not within jurisdiction of the Adjudicating Authority.”

Case Title: Rakesh Gupta & Ors. vs Mahesh Bansal.

Case No.: COMPANY APPEAL (AT) (Insolvency) No. 401 of 2022

Counsel For Appellants: Mr. Ashish Choudhury, Mr. S C Das, Advocates.

Counsel For Respondent: Mr. Mohak Sharma, Mr. Supriyo Banerjee, Advocates.

Click Here To Read/Download Order