Imp. Rulings; Section 65, Fraudulent or malicious initiation of proceedings.
Index;
NCLT Mumbai-III (2025.09.09) in Mr. Modilal Dhanraj Pamecha [I.A. 68 of 2024 In C.P.(IB)/565 (MB)/C-III/2023] [suo-moto consideration by AA]
NCLAT (2025.09.08) in Expert Realty Professionals Pvt. Ltd. v. Logix Infrastructure Pvt. Ltd. and Ors., [(2025) ibclaw.in 724 NCLAT, Company Appeal (AT) (Insolvency) No. 383 of 2025]
NCLAT (2024.11.21) in Getz Cables Private Limited Vs State Bank of India [Company Appeal (AT) (Insolvency) No.1953 of 2024] held that;
NCLAT (2024.02.02) in Ashmeet Singh Bhatia Vs. Pragati Impex India Pvt. Ltd. and Anr.. [Company Appeal (AT) (Insolvency) No. 1413 of 2023]
NCLAT (2023.10.03) in Amour Infrastructure LLP Vs. Digital Integrated Technologies Pvt. Ltd.[Company Appeal (AT) (Ins.) No. 884 of 2022 & I.A. No. 2458 of 2022]
NCLT New Delhi-II (2023.03.16) In Mr. Pawan Kumar Goyal, IRP Vs. Alchemist XXXVII. [IA. No. 3818/ND/2021 in Company Petition No. (IB)-684(ND)/2020]
NCLT New Delhi (2022.12.16) in Mr. Sanjeev Mahajan Vs. Indian Bank (Erstwhile Allahabad Bank) & Ors. [IA. NO. 2611/ND/2022 IN CP No. (IB)-1913(ND)/2019 ]
NCLAT (2022.07.22) in Zoom Communications Pvt. Ltd. Vs. M/s. Par Excellence Real Estate Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 619 of 2022]
NCLAT (2022.02.28) in Telha Sareshwala Vs. Parsoli Motors Works Pvt. Ltd. [(2022) ibclaw.in 198 NCLAT, Company Appeal (AT) (Ins) No. 1115 of 2020]
NCLT Hyderabad (2022.02.14) in Laxmi Kantha Rao Thota Vs. IRIS Electro Optics Pvt Ltd [IA 785, 857&858/2019 & IA 72,193&629/2020 CP(IB) No.181/7/HDB/2019 ]
NCLT New Delhi-II (2021.07.29) in Om Logistics Limited & Anr. vs. M/s Ryder India Pvt. Ltd. [IA. 2038 /ND/2020 in Company Petition No. (IB)-1742(ND)/2019 ]
NCLAT (2021.07.13) in Shree Ambica Rice Mill Vs. M/s KaneriAgro Industries Limited [Company Appeal (AT)(Ins.) No. 143 of 2021]
SCI (2020.02.18) in Beacon Trusteeship Limited v. Earthcon Infracon (P) Ltd. [(2020) ibclaw.in 52 SC, Civil Appeal No. .7641/2019]
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1). NCLT Mumbai-III (2025.09.09) in Mr. Modilal Dhanraj Pamecha [I.A. 68 of 2024 In C.P.(IB)/565 (MB)/C-III/2023] held that;
Non-action on the part of CoC and RP could be possible only if such transactions are bogus/accommodation entries and CoC and CD do not want any action to keep the facts under the carpet. The conduct of CoC does not manifest exercise of commercial wisdom by an independent committee. The new shift in the position of creditors-in-possession from debtors-in-possession was with expectation that CoC would be responsible in unearthing the real nature of transactions by the CD and to resolve the crisis faced by CD in genuine cases not to abuse the process by giving clean chit to the suspicious transactions.
“while a strict determination of intent or mens rea may not always be possible by the NCLT and NCLAT in summary proceedings, it is possible to draw the inference from the facts at hand.”
Further, the fact that Adon Textiles which is a 50% shareholder in the SRA, is connected to the CoC Members puts question mark on the authenticity of the entire CIRP process and the approval of the resolution plan. Accordingly, we hold the voting on the resolution plan as null and void, and consequently, the approval of the Resolution Plan submitted by the SRA is also held to be in gross violation of the provisions of the Code.
Even if the CD has commercial existence, still in a scenario where a CoC could not be constituted then the resolution process can never commence. After all, constituting the CoC is central to the theme of resolution process and the IBC has not provided for commencing a CIRP without the CoC at the helm of the said process. The only avenue then open is to pursue liquidation.
In the present case, since all the members of the CoC have been declared ineligible to participate and vote on the CIRP (including the resolution plan) of the Corporate Debtor, we are left with no option but to order for liquidation the Corporate Debtor under section 33(1)(b)(i) of the Code.
Considering the entire gamut of facts in the present case and the entanglement between Wellworth and Corporate Debtor as well as the relationship between the Wellworth and the other CoC Members of the Corporate Debtor, it is highly suspicious that the initiation of CIRP Process against the Corporate Debtor by Wellworth Apparels Private Limited has itself been done for purpose other than resolution of the Corporate Debtor.
Since this Tribunal is taking up this issue under section 65 of the Code suo-moto, we deem it appropriate to first issue notice to the Original Petitioner i.e. Wellworth Apparels Private Limited.
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2). NCLAT (2025.09.08) in Expert Realty Professionals Pvt. Ltd. v. Logix Infrastructure Pvt. Ltd. and Ors., [(2025) ibclaw.in 724 NCLAT, Company Appeal (AT) (Insolvency) No. 383 of 2025], held that;
Mr. Hemant Sharma, Director of CD-Logix, who is also director in another LLP- New Greens Landkart wherein Mr Niraj Gusian, the Director of FC is also a Director. So as per Section 5(24) both FC and CD are related parties. We thus find that Hemant Sharma and Neeraj Gusain are related parties in terms of Section 5(24)(a) read with Section 5(24A) (b) and Section 5(24)(m)(iii).
We note that under the Code, three critical stages must be satisfied for initiating the Corporate Insolvency Resolution Process (CIRP) the existence of a debt, the debt being due, and the occurrence of a default. At each of these stages, the relationship of the applicant with the Corporate Debtor (CD) assumes significant relevance. If the applicant is found to be a related party to the CD at any of those stages, it casts serious doubt on the bonafides of the initiation of insolvency proceedings and that also without disclosing the same to the Adjudicating Authority.
We cannot agree with the argument of the Appellant that the Application under Section 65 and impugned order was filed at the fag end of the CIRP and therefore it is not maintainable. We note that if there is fraud it will vitiate everything including order approving the resolution plan. Thus, the stage of CIRP is inconsequential, while considering the Section 65 application.
We also note that fact related to common director was neither disclosed in the Section 7 petition by the FC nor in the reply to said petition by the Corporate Debtor before Adjudicating Authority. Thus, in this background, we find that the underlying loan agreement, commercial transaction, or financial debt was either “fraudulent” or “malicious” in nature.
……if the Adjudicating Authority come to the conclusion that insolvency proceedings have been initiated fraudulently or with malicious intent for any other purpose other than for the resolution of insolvency of the Corporate Debtor, it can impose penalty as provided in the provision. While exercising jurisdiction under Section 65, the Adjudicating Authority is also fully entitled to close CIRP process and pass all consequential order.
We are of the view that the present case is a case of fraudulent and malicious initiation of CIRP, and hence, when the basic edifice on which the resolution plan of the corporate debtor is based is non-est in law, the superstructure of the resolution plan cannot sustain itself maintain its existence.”
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3). NCLAT (2024.11.21) in Getz Cables Private Limited Vs State Bank of India [Company Appeal (AT) (Insolvency) No.1953 of 2024] held that;
# 16. Necessary ingredients, which required to be proved under Section 65, sub-section (1) are that proceedings are initiated fraudulently or with malicious intent for any purpose other than for the resolution of insolvency. Both expression – fraudulent and malicious has definite connotation. The expression ‘fraudulently’ has been explained in Advanced Law Lexicon by P Ramanatha Aiyar 6th Edition in following words:
“Person does a thing fraudulently if he does it with an intent to defraud, and so to constitute fraud two elements are necessary – deceit, and injury and loss to some person.”
# 17. Another expression which occurs in Section 65 is ‘malicious intent’. Advanced Law Lexicon by P Ramanatha Aiyar define the world ‘malice’ in the legal sense in following words:
“1. The intent, without justification or excuse, to commit a wrongful act. 2. Reckless disregard of the law or of a person’s legal rights.”
There is also a second definition, which is as follows:
“Malice in the legal sense imports (1) the absence of all elements of justifications, excuse or recognized mitigation, and (2) the presence of either (a) an actual intent to cause to particular harm which is produced or harm of the same general nature, or (b) the wanton and wilful doing of an act with awareness of a plain and strong likelihood that such harm may result…. The Model Penal Code does not use ‘malice’ because those who formulated the Code had a blind prejudice against the world. This is very regrettable because it represents a useful concept despite some unfortunate language employed at times in the effort to express it.” ROLLIN M. PERKINS & RONALD N. BOYCE, Criminal Law 860 (3d Edition 1982)”
# 18. The Hon’ble Supreme Court has defined ‘malice’ in (2003) 8 SCC 567 – Chairman & MD. BPL Ltd. vs. S.P. Gururaja and Ors. in paragraph 21, in following words: “21. Malice in common law or acceptance means ill will against a person, but in the legal sense it means a wrongful act done intentionally without just cause or excuse.”
# 19. The question to be answered is as to whether filing of an application by the Appellant under Section 10, can be termed as initiation of proceedings with fraudulent and malicious intent. The basis for Section 65 application filed by the SBI is the fact that SBI has initiated proceedings under Section 13, sub-section (2) of the SARFAESI Act vide notice dated 24.02.2023, prior to filing of the application under Section 10 by the Corporate Applicant. Admittedly, Section 10 application was filed by the Appellant, subsequent to initiation of proceedings under Section 13, subsection (2) by the SBI. The pleadings of the of the SBI in proceedings under Section 13, sub-section (2) were that 13(2) proceedings were on the verge of being completed, when Corporate Applicant has filed application under Section 10 with malafide and fraudulent intent. From the pleadings in Section 65 application, we do not find any foundation to come to the conclusion that application under Section 10 was fraudulently initiated. Thus, the question remains as to whether initiation of proceedings under Section 10, can be treated with malicious intent. For proving a malicious intent, two elements are required to be proved, i.e., to commit a wrongful act with absence of any justification and intent of causing a particular harm.
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4). NCLAT (2024.02.02) in Ashmeet Singh Bhatia Vs. Pragati Impex India Pvt. Ltd. and Anr.. [Company Appeal (AT) (Insolvency) No. 1413 of 2023] held that;
The power under Section 65 of the Code can be exercised by the Adjudicating Authority only after satisfying that grounds as mentioned exist,
if the Adjudicating Authority come to the conclusion that insolvency proceedings have been initiated fraudulently or with malicious intent for any other purpose other than for the resolution of insolvency of the Corporate Debtor, it can impose penalty as provided in the provision.
While exercising jurisdiction under Section 65, the Adjudicating Authority is also fully entitled to close CIRP process and pass all consequential order. The mere fact that Section 7 Application has been admitted does not denude the jurisdiction of the Adjudicating Authority to examine the application under Section 65 of the Code.
The observations of the Adjudicating Authority are that the Appellant is opposing the admission of the proceeding which admission has been affirmed by the Appellate Tribunal. The above does not denude the jurisdiction of the Adjudicating Authority to examine the allegations made in the Section 65 Application even after admission of the proceedings under Section 7.
Application have been filed belatedly at the stage when Resolution Plan of the Corporate Debtor is under consideration. The mere fact that Application has been filed at the time when plan is under consideration does not take away the jurisdiction of the Adjudicating Authority to consider the allegations and find out the truth, if any.
That the Adjudicating Authority committed error in rejecting the Application without considering the Application on its merit. In result, the Order dated 01.09.2023 is set aside,
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5). NCLAT (2023.10.03) in Amour Infrastructure LLP Vs. Digital Integrated Technologies Pvt. Ltd.[Company Appeal (AT) (Ins.) No. 884 of 2022 & I.A. No. 2458 of 2022] held that;
We are of the view that for proving the ingredient of Section 65 there has to be adequate pleadings and findings. Observations made in paragraph 26 does not fulfill the requirement of Section 65 so as to reject the Section 7 application.
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6). NCLT New Delhi-II (16.03.2023) In Mr. Pawan Kumar Goyal, IRP Vs. Alchemist XXXVII. [IA. No. 3818/ND/2021 in Company Petition No. (IB)-684(ND)/2020] held that;
Without publishing Form-G, CoC could not have been in a position to formulate an opinion that there were no prospective buyers available for the CD. The scheme of IBC gives every Corporate Debtor a fair chance to stand on their own feet and to come out of financial distress. That is why every Corporate Debtormust go through the IBC-mandated CIR process before facing the liquidationproceedings.
Judicial review of the decision of the CoC in a particular case is not precluded. In Sreedhar Tripathy, it has been clearly held that judicial review of the decision of the CoC is not precluded and it depends on facts of each case.”
We are of the prima facie opinion that the present IA for the Liquidation of CD has been filed with malicious intent, and it is a fit case for issuance of show cause notice (U/s. 65) to the Assenting CoC members jointly, who voted in favour of the Liquidation of the CD without even exploring the possibility of resolution of the Corporate Debtor,
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7). NCLT New Delhi (2022.12.16) in Mr. Sanjeev Mahajan Vs. Indian Bank (Erstwhile Allahabad Bank) & Ors. [IA. NO. 2611/ND/2022 IN CP No. (IB)-1913(ND)/2019 ] held that;
Since the debt and default was admitted by the Corporate Debtor itself during the hearing on admission of CIRP of the Corporate Debtor, therefore, in our considered view, at this stage, the Applicant cannot claim that the said IB Petition was filed by by the Financial Creditor/Indian Bank with malicious and fraudulent intent.
We thus are of the view that the Order dated 04.07.2022 clearly entitled that the CoC to weigh the Resolution Plans as well as Settlement Proposal together.
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8). NCLAT (2022.07.22) in Zoom Communications Pvt. Ltd. Vs. M/s. Par Excellence Real Estate Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 619 of 2022] held that
Here is a case, where Director of the Corporate Debtor (in the capacity of Director of the Applicant Company) has procured a loan for his own company and is charging procurement fee therefor.
Hence, in our considered view, the related party is having no control in the CIR Process. Therefore, the intention of a related party of initiating the CIR Process shall always raise eyebrows.
Application for initiating the CIR Process has been filed by concealing a material fact that the Applicant and the Corporate Debtor were related Parties at the time of transaction basing on which operational debt has been claimed.
Hence, before taking any action under Section 65(1) IBC 2016, we think it proper to issue a show cause notice, under Rule 59 of the National Company Law Tribunal Rules 2016,
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9). NCLAT (2022.02.28) in Telha Sareshwala Vs. Parsoli Motors Works Pvt. Ltd. [(2022) ibclaw.in 198 NCLAT, Company Appeal (AT) (Ins) No. 1115 of 2020] held that;
Considering the provision of Section 65 of the IBC, it is necessary for the Adjudicating Authority in case such an allegation is raised to go into the same. In case, such an objection is raised or application is filed before the Adjudicating Authority, obviously, it has to be dealt with in accordance with law.
The plea of collusion could not have been raised for the first time in the appeal before the NCLAT or before this Court in this appeal. Thus, we relegate the appellant to the remedy before the Adjudicating Authority.
In case, a proper application is filed, aspect whether the proceedings have been initiated in collusive manner will be looked into, in accordance with law and the appropriate orders have to be passed, considering the facts and circumstances of the case.
Even fraudulent tradings carried on by the Corporate Debtor during the insolvency resolution, can be inquired into by the Adjudicating Authority under Section 66. Section 69 makes an officer of the corporate debtor and the corporate debtor liable for punishment, for carrying on transactions with a view to defraud creditors.
Therefore, NCLT is vested with the power to inquire into (i) fraudulent initiation of proceedings as well as (ii) fraudulent transactions. It is significant to note that Section 65(1) deals with a situation where CIRP is initiated fraudulently “for any purpose other than for the resolution of insolvency or liquidation”.
“It is not in dispute that there is no ‘debt’ and ‘default which is the basic requirement of the Section 7 of the Code. However, the ‘Adjudicating Authority’ has the inherent power to restrict the perpetuation of applications motivated by fraud or malice under section 65 of the code. . . .”
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10). NCLT Hyderabad (14.02.2022) in Laxmi Kantha Rao Thota Vs. IRIS Electro Optics Pvt Ltd [IA 785, 857&858/2019 & IA 72,193&629/2020 CP(IB) No.181/7/HDB/2019 ] held that;
Therefore, in the wake of authentic public record stated above which emphatically discloses that Mrs. Archana Thota as the director of the 1st respondent Company till date, we refrain ourselves from giving any credence to the photo copy of the so called resignation letter of Mrs.Archana Thota dated 30.11.2018.
No penalty can be saddled either under Section 65(1) or (2) of the Code without recording an opinion that a prima facie case is established to suggest that a person ‘fraudulently or with malicious intent for the purpose other than the resolution of Insolvency or Liquidation or with an intent to defraud any person has filed the Application.
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11). NCLT New Delhi-II (29.07.2021) in Om Logistics Limited & Anr. vs. M/s Ryder India Pvt. Ltd. [IA. 2038 /ND/2020 in Company Petition No. (IB)-1742(ND)/2019 ] held that;
As per the Code, if any person [as defined under Section 3(23) of IBC] initiates the Insolvency Resolution Process fraudulently or with malicious intent for any purpose other than for the resolution of the insolvency, or liquidation, such an act is punishable under Section 65 (1) of IBC 2016.
when the Applicant (IRP) is unable to carry forward the CIR process for want of cooperation/participation from the sole member of CoC, we feel it appropriate to terminate the CIR process of the Corporate Debtor. In view of the above, by exercising our jurisdiction under Section 60(5) of IBC 2016 along with inherent power under Rule 11 of the NCLT Rules, 2016, we hereby terminate the CIR process of the Corporate Debtor with immediate effect and release the Corporate Debtor from the rigors of the CIRP and moratorium.
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12). NCLAT (2021.07.13) in Shree Ambica Rice Mill Vs. M/s KaneriAgro Industries Limited [Company Appeal (AT)(Ins.) No. 143 of 2021] held that;
What is also of relevance is that in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process mala fide, the Code prescribes penalties.
With the aforesaid discussion we are unable to convince with the argument of Ld. Counsel for the Appellant that Ld. Adjudicating Authority when entered into investigating the nature of the transaction then exceeded in its jurisdiction under Section 7 (5) of the IBC.
That for acts or documents to be a “sham,” with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
We are in agreement with the Ld. Adjudicating Authority as there is inevitable conclusion that the Financial Creditor colluded with the Corporate Debtor and filed the Application with other than the Resolution or for ulterior motive to prevent the Bank of Baroda to recover the debt from the Corporate Debtor.
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13). SCI (2020.02.18) in Beacon Trusteeship Limited v. Earthcon Infracon (P) Ltd. [(2020) ibclaw.in 52 SC, Civil Appeal No. .7641/2019] held that;
Considering the provision of Section 65 of the IBC, it is necessary for the Adjudicating Authority in case such an allegation is raised to go into the same. In case, such an objection is raised or application is filed before the Adjudicating Authority, obviously, it has to be dealt with in accordance with law.
The plea of collusion could not have been raised for the first time in the appeal before the NCLAT or before this Court in this appeal. Thus, we relegate the appellant to the remedy before the Adjudicating Authority.
In case, a proper application is filed, aspect whether the proceedings have been initiated in collusive manner will be looked into, in accordance with law and the appropriate orders have to be passed, considering the facts and circumstances of the case.
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