{"id":287341,"date":"2023-03-20T15:00:56","date_gmt":"2023-03-20T09:30:56","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=287341"},"modified":"2023-07-10T11:52:23","modified_gmt":"2023-07-10T06:22:23","slug":"the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2023\/03\/20\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\/","title":{"rendered":"The Road Often Taken \u2014 An In-Depth Analysis of Section 65 of Insolvency and Bankruptcy Code, 2016"},"content":{"rendered":"
\n

Introduction<\/h4>\n

The principle of “finality of litigation” cannot be stretched to the extent of an absurdity that it can be utilised as an engine of oppression by dishonest and fraudulent litigants.1<\/sup><\/a><\/p>\n

It is an established law, as reiterated by the Supreme Court of India, that even the most solemn proceedings stand vitiated and are a nullity if their foundations rests on fraud. In other words, it is a recognised principle that one who approaches the courts with unclean hands has not advanced on the path to gain justice but is merely maliciously rotating the wheel of judiciary so as to put into motion mala fide intentions and motives and hence, shall not be entertained and in fact should be heavily penalised for wasting prestigious time of the already saddled judiciary.<\/p>\n

Thus, even when the legislators brought in the Insolvency and Bankruptcy Code, 2016<\/a>2<\/sup><\/a> (the Code) which has led to a paradigm shift in the economy, by now making it more borrower friendly, by facilitating the revival of financially burdened companies, they pre-empted the possibility of misuse of the Code. Thus, Section 653<\/sup><\/a> was incorporated. Section 65 acts as a shield to weed out all such fraudulent initiations, which were filed only to defraud creditors or to escape from financial frauds.<\/p>\n

A glimpse at the provision as it exists in the Code<\/h4>\n

Section 65 sanctions any person who has put the machinery of the Code into motion maliciously with fraudulent intention and imposes a penalty of a minimum amount of rupees one lakh but extendable to rupees one crore.<\/p>\n

Judicial perspective<\/i><\/h4>\n

It is very interesting to note that even though Section 65 provides for a strict penalty in case of malicious and fraudulent initiation, the section per se, does not provide a mechanism for bringing to the forefront the malicious initiation of the corporate insolvency resolution process (CIRP) and thereby leaving a grey area, open to the interpretation of the courts, as to who has the locus to file an application under the said section.<\/p>\n

The logical connotation however would be that in a collusive petition, where there is malicious intention to jump start the CIRP between the corporate debtor and the applicant, the information exposing the fraud would necessarily flow from a third party who would be prejudiced by such initiation. In Infinity Infotech Parks Ltd.<\/i> v. Electroparts (India) (P) Ltd.<\/i>4<\/sup><\/a>, the National Company Law Tribunal (NCLT), Kolkata Bench, adjudicated upon an application filed under Section 65<\/a> of the Code<\/a> on behalf of one of the majority shareholders of the corporate debtor. In the said case, the NCLT not only set aside the order of admission passed in a Section 7 petition on grounds of fraudulent initiation, but also took the bold step of referring the matter to the Ministry of Corporate Affairs for further investigation into the corporate fraud played upon by the applicant and the corporate debtor.<\/p>\n

In most cases, however, a hypothetically used litmus test could be the response filed by the corporate debtor to the petition under Section 7<\/a>5<\/sup><\/a> or Section 9<\/a>6<\/sup><\/a> of the Code<\/a>. As a trend, it can be seen, in cases where the corporate debtor has admitted the debt in the reply affidavit,7<\/sup><\/a> in most of the cases, the respective NCLTs have caught hold of the fraudulent initiation and imposed penalties accordingly. In fact, the abovesaid can also be the reason as to why the Supreme Court8<\/sup><\/a> and the National Company Law Appellate Tribunal (NCLAT<\/span>)9<\/sup><\/a> have made it crystal clear that an application filed under Section 65 shall be adjudicated prior to adjudication of a Section 7 or Section 9 petition.<\/p>\n

\n

Misuse: Negating the essence of the Code<\/h4>\n

An exception to the above came to light in Amit Katyal<\/i> v. Meera Ahuja<\/i>10<\/sup><\/a> where on an application by the corporate debtor under Section 65, the NCLAT<\/span> noticed a peculiar circumstance where an allottee could be misusing the provisions of Section 7 in a colourable manner, to recover their investment in lieu of their allotted unit even when the project is nearing completion. The NCLAT<\/span> held:<\/p>\n

47.<\/i> … The Supreme Court in Pioneer Urban Land and Infrastructure Ltd.<\/i> v. Union of India<\/i>11<\/sup><\/a> has given an instance of homebuyer\/allottee, which does not have an interest in taking the possession and is only an investor, it has initiated the proceeding with malicious intent. The allottee does not want to go ahead with its obligation to take possession of the flat\/apartment under the Real Estate (Regulation and Development) Act, 2016<\/a>12<\/sup><\/a> (RERA) but wants to jump ship and wants to get back the monies already paid, by way of this coercive measure. In such cases, the use of Section 65 is held justified, because one “homebuyer” by misusing his position could not stall the entire real estate project. But it does not mean that any “insolvency application” satisfying the requirements of Section 7 or Section 9 of the Insolvency and Bankruptcy Code, could be dismissed arbitrarily under the guise of Section 65<\/a> of the Code<\/a>.<\/p>\n

Even though in the said case, the NCLAT<\/span> did not find any grounds of malicious initiation, it set a standard of determination in all other such cases where the allottees are misusing the Code.<\/p>\n

Escaping financial fraud by seeking shelter under the benevolent provisions of the Code — Misuse or misinterpretation<\/h4>\n

Significantly, Section 65 leads to a dichotomous situation when interpreting the language used therein. The section per se states that if an application has been filed for any purpose other than initiation of insolvency, it shall be set aside for being fraudulent. It, however, does not directly clutch onto a situation where the corporate debtor, in an attempt to cover up its financial frauds and eat the fruit of the forbidden tree, in other words, tries to avail unjust benefits of moratorium.<\/p>\n

Despite the above, the NCLT, Allahabad, in Shobhnath<\/i> v. Prism Industrial Complex Ltd.<\/i>13<\/sup><\/a>, was seized of a peculiar situation mirroring what has been stated hereinabove i.e. Section 7 to defraud creditors and take advantage of moratorium. The NCLT gauged the said fraud from the enthusiasm of the corporate debtor to push the company into CIRP by raising arguments in favour for the same. The relevant part of the order is reproduced below:<\/p>\n

7.<\/i> … Whether insolvency application can be entertained in a case where financial fraud exists? … The benevolent scheme of IBC for resolution of a company under distress is not meant for a case of financial fraud or irregularity, where the directors\/promoters have deliberately engaged in a scheme having striking similarity with the infamous “chit funds” or Ponzi schemes. The promoters\/directors face serious criminal implication for breach of the orders of Securities and Exchange Board of India (SEBI) as well as non-compliance of the provisions of Sections 73<\/a>14<\/sup><\/a>\/74<\/a>15<\/sup><\/a> of the Companies Act, 1956<\/a>. It is also notable that Section 75 of the Companies Act16<\/sup><\/a> provides that raising of deposits, or non-payment thereof, amounts to a serious corporate fraud, punishable under Section 447 of the Companies Act17<\/sup><\/a>. It can be no one’s case that in such a murky scenario of corporate fraud, Section 7, which is intended for a holistic collective healing process, could be rightly deployed. <\/p>\n

*       *       *<\/p>\n

Thus,it is clear that while a petition is filed under Insolvency and Bankruptcy Code, 2016<\/a> fraudulently with malicious intention for initiation of CIRP, then in that case the petition cannot be admitted, and actions should be initiated under Section 65<\/a> of the Code<\/a>. This is a fit case where we find that this petition has been filed fraudulently for initiation of corporate insolvency process therefore, the petition deserves to be dismissed.<\/p>\n

The aforesaid order was however set aside by the Appellate Tribunal18<\/sup><\/a> on the premise that in Section 7, the only two things to be looked into by the adjudicating authority are “debt” and “default”. The adjudicating authority shall not traverse into any other facts, especially suo motu, and thus, mere financial fraud cannot be reason enough to dismiss Section 7 petition.<\/p>\n

Ironically, the law with regard to Section 7 petition has now evolved after the judgment of the Supreme Court in Vidarbha Industries Power Ltd.<\/i> v. Axis Bank Ltd.<\/i>19<\/sup><\/a> giving leeway to the fact that now even in a Section 7 petition, the adjudicating authority has the power to reasonably trespass from the basic requirement and accordingly it “may” or “may not” admit a petition even when the debt and default is established.<\/p>\n

In light of such developments, with more and more cases coming to light where the corporate debtor is keen on getting the CIRP initiated, it becomes quintessential that the provision of Section 65 is given a broader interpretation, so as to include cases where companies in order to evade financial fraud are admitting liabilities, even though there might not be collusion between them and the applicants, however the nefarious intent and malice behind initiation of insolvency exists predominantly.<\/p>\n

In such a scenario, one would also look at the case of Wave Megacity Centre Private Limited<\/i> v. Rakesh Taneja<\/i>20<\/sup><\/a>, wherein the Appellate Tribunal upheld an order of NCLT, New Delhi, rejecting a Section 10 application filed on behalf of the corporate debtor on grounds of malicious initiation and accordingly, allowed the application filed under Section 65. Drawing a parallel between the two, on one hand the corporate debtor approached the Tribunal for initiation of CIRP by filing a fraudulent application under Section 10<\/a> of the Code<\/a>21<\/sup><\/a>, and on the other hand, the corporate debtor gave easy access by admitting its liabilities and consenting to initiation of CIRP on an application filed under Section 7<\/a> or Section 9<\/a> of the Code<\/a>. From a bird’s eye view, both appear identical as the inevitable outcome of both is initiation of CIRP for a purpose other than revival of the corporate debtor.<\/p>\n

Conclusion<\/h4>\n

Hence, in the author’s opinion, it is of paramount importance that companies, especially big conglomerates and groups, which are already under scrutiny for financial frauds shall not be pushed into CIRP only on the existence of debt and default, but, if it can be proven that the same is being facilitated for evasion of liabilities, such petitions shall be dismissed in limine and such matters shall be referred to the Serious Fraud Investigation Office for further investigation in the interests of the genuine stakeholders. <\/p>\n<\/div>\n\n

† Practising Advocate, New Delhi. Author can be reached at ridhima.verma50@gmail.com<\/a>.<\/span><\/strong><\/p>\n

1.<\/a> A.V. Papayya Sastry<\/i> v. Govt. of A.P.<\/i>, (2007) 4 SCC 221<\/a>.<\/p>\n

2.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>.<\/p>\n

3.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 65<\/a>.<\/p>\n

4.<\/a> IA (IBC) No. 907 \/KB\/2021 in CP (IB) No. 140\/KB\/2021.<\/p>\n

5.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 7<\/a>.<\/p>\n

6.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 9<\/a>.<\/p>\n

7.<\/a> Beacon Trusteeship Ltd.<\/i> v. Earthcon Infracon (P) Ltd.<\/i>, 2020 SCC OnLine SC 1233<\/a>; Hytone Merchants (P) Ltd.<\/i> v. Satabadi Investment Consultants (P) Ltd.<\/i>, 2021 SCC OnLine NCLAT 598<\/a>.<\/p>\n

8.<\/a> Beacon Trusteeship Ltd.<\/i> v. Earthcon Infracon (P) Ltd.<\/i>, 2020 SCC OnLine SC 1233<\/a>.<\/p>\n

9.<\/a> Hytone Merchants (P) Ltd.<\/i> v. Satabadi Investment Consultants (P) Ltd.<\/i>, 2021 SCC OnLine NCLAT 598<\/a>.<\/p>\n

10.<\/a> 2020 SCC OnLine NCLAT 748<\/a>.<\/p>\n

11.<\/a> (2019) 8 SCC 416<\/a>.<\/p>\n

12.<\/a> Real Estate (Regulation and Development) Act, 2016<\/a>.<\/p>\n

13.<\/a> 2018 SCC OnLine NCLT 30489<\/a>.<\/p>\n

14.<\/a> Companies Act, 1956<\/a>, S. 73<\/a>.<\/p>\n

15.<\/a> Companies Act, 1956<\/a>, S. 74<\/a>.<\/p>\n

16.<\/a> Companies Act, 1956<\/a>, S. 75<\/a>.<\/p>\n

17.<\/a> Companies Act, 1956<\/a>, S. 447<\/a><\/a>.<\/p>\n

18.<\/a> 2019 SCC OnLine NCLAT 1095<\/a>.<\/p>\n

19.<\/a> (2022) 8 SCC 352<\/a>.<\/p>\n

20.<\/a> 2023 SCC OnLine NCLAT 50<\/a>.<\/p>\n

21.<\/a> Insolvency and Bankruptcy Code, 2016<\/a>, S. 10<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

by Ridhima Verma†<\/p>\n","protected":false},"author":67011,"featured_media":287358,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42503,1191],"tags":[38188,56088,42845,44583,33924,33452,56087],"class_list":["post-287341","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-legal-analysis","category-op-ed","tag-allottee","tag-finality-of-litigation","tag-homebuyer","tag-insolvency-and-bankruptcy","tag-insolvency-application","tag-liabilities","tag-road-often"],"yoast_head":"\nThe Road Often Taken \u2014 An In-Depth Analysis of Section 65 of Insolvency and Bankruptcy Code, 2016 | SCC Times<\/title>\n<meta name=\"description\" content=\"The principle of \u201cfinality of litigation\u201d cannot be stretched to the extent of an absurdity that it can be utilised as an engine\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.scconline.com\/blog\/post\/2023\/03\/20\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Road Often Taken \u2014 An In-Depth Analysis of Section 65 of Insolvency and Bankruptcy Code, 2016\" \/>\n<meta property=\"og:description\" content=\"The principle of \u201cfinality of litigation\u201d cannot be stretched to the extent of an absurdity that it can be utilised as an engine\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.scconline.com\/blog\/post\/2023\/03\/20\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\/\" \/>\n<meta property=\"og:site_name\" content=\"SCC Times\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/scc.online\/\" \/>\n<meta property=\"article:published_time\" content=\"2023-03-20T09:30:56+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-07-10T06:22:23+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.scconline.com\/blog\/wp-content\/uploads\/2023\/03\/MicrosoftTeams-image-798.png\" \/>\n\t<meta property=\"og:image:width\" content=\"860\" \/>\n\t<meta property=\"og:image:height\" content=\"590\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Editor\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Editor\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"9 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.scconline.com\\\/blog\\\/post\\\/2023\\\/03\\\/20\\\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.scconline.com\\\/blog\\\/post\\\/2023\\\/03\\\/20\\\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\\\/\"},\"author\":{\"name\":\"Editor\",\"@id\":\"https:\\\/\\\/www.scconline.com\\\/blog\\\/#\\\/schema\\\/person\\\/84e42bab48238baf12c7e33b3d9761fe\"},\"headline\":\"The Road Often Taken \u2014 An In-Depth Analysis of Section 65 of Insolvency and Bankruptcy Code, 2016\",\"datePublished\":\"2023-03-20T09:30:56+00:00\",\"dateModified\":\"2023-07-10T06:22:23+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/www.scconline.com\\\/blog\\\/post\\\/2023\\\/03\\\/20\\\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\\\/\"},\"wordCount\":1832,\"commentCount\":0,\"image\":{\"@id\":\"https:\\\/\\\/www.scconline.com\\\/blog\\\/post\\\/2023\\\/03\\\/20\\\/the-road-often-taken-an-in-depth-analysis-of-section-65-of-insolvency-and-bankruptcy-code-2016\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/www.scconline.com\\\/blog\\\/wp-content\\\/uploads\\\/2023\\\/03\\\/MicrosoftTeams-image-798.png\",\"keywords\":[\"Allottee\",\"finality of litigation\",\"Homebuyer\",\"Insolvency and Bankruptcy\",\"Insolvency Application\",\"Liabilities\",\"Road Often\"],\"articleSection\":[\"Op Eds\",\"OP. 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