2026 (3) TMI 990 - AT - IBC

Fraudulent Invocation of CIRP permits termination and imposition of penal and compensatory costs, including RP fees, when justified.

Where surrounding facts and conduct demonstrated invocation of insolvency proceedings for purposes other than genuine resolution, the article explains ... Invocation of Section 65 for fraudulent or malicious initiation of CIRP - malicious intent - termination of corporate insolvency resolution process - adjudicating authority's power to examine abuse of CIRP at any stage - imposition of penalty under section 65 - failed to record reasons to justify imposition of such heavy penalty without disclosing the basis for quantifying the penal amount - non-filing of claims - non-cooperation of suspended management - Whether the Adjudicating Authority was correct in holding that the Appellant should bear the fees of the RP and the CIRP expenses. Whether Section 65 of the IBC could be invoked and adjudicated upon after admission of CIRP and at a stage when the CIRP had stagnated - HELD THAT: - The Tribunal held that Section 65 embodies a legislative mandate prohibiting invocation of the insolvency resolution process fraudulently or with malicious intent and that the Adjudicating Authority may examine and interdict such abuse at any stage. There is no temporal bar or requirement of a separate formal application for the exercise of Section 65 jurisdiction; the authority may take suo-moto cognizance or entertain an application whenever the surrounding facts and circumstances satisfy it that fraud or malicious intent exists. Accordingly, the pendency or prior admission of CIRP does not preclude later adjudication under Section 65 when evidence of abuse emerges. [Paras 10, 11, 12] Section 65 could be invoked and adjudicated upon despite prior admission of CIRP and after stagnation of proceedings. Invocation of Section 65 for fraudulent or malicious initiation of CIRP - HELD THAT:- The Tribunal affirmed the Adjudicating Authority's conclusion that the Appellant's conduct evidenced malicious intent. The determinative factors were the Appellant's failure to file claims after initiating the Section 9 petition despite public announcement, the coincidence of CIRP admission with pending tax recovery by statutory authorities (yielding only tax authorities as claimants), the Appellant's close familial and past directorial links with the corporate debtor, and the absence of a credible explanation for non-pursuit of claims. These surrounding facts, taken together, supported the finding that the Section 9 petition was used to secure moratorium protection to thwart tax recovery rather than to pursue bona fide insolvency resolution. [Paras 15, 16, 17, 18, 19] The Adjudicating Authority rightly found that the CIRP had been fraudulently/maliciously initiated by the Appellant. Liability for CIRP costs and resolution professional fees in cases of abuse - HELD THAT: - The Tribunal accepted the Adjudicating Authority's exercise of residuary equitable jurisdiction to fasten costs on the Appellant in the exceptional factual matrix of this case. Although CIRP costs are ordinarily met from corporate assets or through the CoC, the CoC here comprised only tax authorities who had not initiated CIRP, the CoC had become non-functional, there were no available assets, and prima facie abuse of process by the Appellant had been established. In that context, it was not impermissible to fix the RP's fees and CIRP expenses on the party found to have abused the insolvency process. [Paras 20] Given the factual matrix, the Adjudicating Authority was justified in directing the Appellant to bear the RP's fees and CIRP expenses. Final Conclusion: The Tribunal found no merit in the appeal and upheld the Adjudicating Authority's findings that the CIRP had been fraudulently and maliciously initiated, and that penal costs and RP/CIRP expenses could be imposed on the Appellant; the appeal is dismissed. Issues: (i) Whether the CIRP initiated by the Appellant was fraudulently and/or with malicious intent attracting liability under Section 65 of the Insolvency and Bankruptcy Code, 2016; (ii) Whether the Adjudicating Authority was justified in directing the Appellant to bear penalty and the Resolution Professional's fees and CIRP expenses.Issue (i): Whether the CIRP initiated by the Appellant was fraudulently and/or with malicious intent attracting liability under Section 65 of the Insolvency and Bankruptcy Code, 2016.Analysis: The Tribunal examined (a) the Appellant's omission to file claims after admission of CIRP despite being the petitioner whose Section 9 petition led to admission; (b) timing of CIRP admission vis-a -vis pending tax recoveries and the effect of moratorium; (c) familial and prior directorship links between the Appellant and the corporate debtor; and (d) surrounding facts indicating use of CIRP to frustrate tax recovery. The Tribunal also noted that Section 65 may be invoked at any stage where facts and circumstances show fraudulent or malicious invocation of insolvency process.Conclusion: The Tribunal affirmed the Adjudicating Authority's finding that the CIRP was initiated for purposes other than genuine insolvency resolution and that Section 65 of the Insolvency and Bankruptcy Code, 2016 applied; this conclusion is against the Appellant.Issue (ii): Whether the Adjudicating Authority was justified in directing the Appellant to bear penalty and the Resolution Professional's fees and CIRP expenses.Analysis: The Tribunal considered that the CoC comprised only tax authorities, the CIRP had stagnated, assets were absent and the RP had funded the process. Given the established abuse of CIRP proceedings and the non-functioning CoC, the Tribunal held that equitably the Appellant could be directed to bear penal and compensatory costs and RP fees. The Tribunal accepted that ordinarily such costs are met from corporate assets or by the CoC, but found the present factual matrix justified departure from the ordinary rule.Conclusion: The Tribunal upheld the Adjudicating Authority's directions imposing a penalty and directing the Appellant to bear RP fees and CIRP expenses; this conclusion is against the Appellant.Final Conclusion: The Tribunal found no infirmity in the impugned order and dismissed the appeal, thereby upholding the termination of CIRP, the imposition of penalty under Section 65 of the Insolvency and Bankruptcy Code, 2016, and the direction to the Appellant to bear RP fees and CIRP expenses.Ratio Decidendi: Where surrounding facts and conduct demonstrate that insolvency proceedings were invoked fraudulently or with malicious intent for purposes other than resolution of insolvency, the Adjudicating Authority may, under Section 65 of the Insolvency and Bankruptcy Code, 2016, terminate CIRP and impose penal and compensatory costs including directing the petitioner to bear RP fees and CIRP expenses, even if such measures depart from ordinary cost-bearing norms, provided the factual matrix justifies such relief.