Penalties U/S 65 Of IBC Can Be Imposed Against Those Who Fraudulently Initiate Insolvency Process: NCLAT

Brief Facts

The present appeal arises from an order passed by the National Company Law Tribunal (NCLT), New Delhi. The dispute is regarding an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), filed by M/s Acute Daily Media Pt. Ltd. and others claiming to be the financial creditors of M/s Sharp Eye Advertising Pt. Ltd., the corporate debtor. The NCLT accepted the application and admitted the corporate debtor into the CIRP process.

Subsequently, Rockman Advertising and Marketing (India) Ltd, a majority shareholder of the corporate debtor, filed an application stating that the Section 7 application was fraudulently filed in collusion with the corporate debtors' promoters. The Appellant stated that the CIRP was initiated with malicious intent to suppress the ongoing oppression and mismanagement proceedings that had been pending since 2013.

The NCLT after hearing all the parties concluded that the insolvency proceedings had been initiated fraudulently and recalled the order. The tribunal also issued a show cause notice directing the creditors as to why they should not be charged with penalty under the provisions of Section 65(1) of the Insolvency and Bankruptcy Code, 2016.

Dissatisfied with the order, Rockman Advertising and Marketing (India) Ltd and other appellants filed appeals before the NCLAT seekingthe  imposition of penalties on the financial creditors and the promoter, arguing that both were complicit in the fraudulent initiation of the CIRP.

NCLAT Judgement

The National Company Law Appellate Tribunal (NCLAT) upholds the order of NCLT dated June 12, 2024 which had found that the Corporate Insolvency Resolution Process (CIRP) against M/s Sharp Eye Advertising Pvt. Ltd. was fraudulently initiated. The appellate tribunal acknowledged that the NCLT had correctly determined that the financial creditors had colluded with the promoters of the CD to fraudulently initiate CIRP with a malicious intent, rather than for a legitimate resolution of insolvency. However, the NCLAT rejected that the appellant's plea to directly impose penalties on both the financial creditors and the promoters of the corporate debtor under Section 65 of the Insolvency and Bankruptcy Code (IBC). The court interpreted the literal meaning of Section 65 of the code and stated;

“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. We, thus, do not accept the submission of the appellant that in exercise of jurisdiction under Section 65, promoters are also need to be penalised.”

The NCLAT declined to impose penalties and stated that it was within the jurisdiction of the NCLT to determine the appropriate penalty based on the responses to the show cause notice. Accordingly, the appellate tribunal dismissed the appeals but directed NCLT to proceed with penalty determination.

Case Title: Rakesh Arora & Anr. V. Acute Daily Media Pvt. Ltd. & Ors. in Rockman Advertising & Marketing (India) Ltd. V. Acute Daily Media Pvt.

Case Number: Company Appeal (AT) (Insolvency) No. 1606 of 2024 & I.A. No. 5859 of 2024

Tribunal: National Company Law Appellate Tribunal, Principal Bench, New Delhi

Coram: Justice Ashok Bhushan (Chairperson) and Barun Mitra (Member Technical) and Arun Baroka (Member (Technical)

For Appellants: Mr. Rohit Gandhi, Ms. Akshita Nigam, Advocates.

For Appellant: Mr. Sakal Bhushan, Ms. Vasu Bhushan, Mr. Nipun Bhushan, Advocates.

For Respondents: Ms. Eshna Kumar, Mr. Harpreet Singh Malhotra, Advocates for R-8 to 15

Date of Judgement: 07^th March, 2025

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