IBC Section 65: Fraudulent or malicious initiation of proceedings

Section 65 of Insolvency and Bankruptcy Code, 2016: Fraudulent or malicious initiation of proceedings

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

(2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees.

Legal Commentary & Landmark Judgments: Section 65

Section 65 prescribes stringent punitive penalties for initiating insolvency proceedings fraudulently or with malicious intent for purposes other than resolution or liquidation.

Penal Consequences & Liability: Where any person initiates CIRP, pre-packaged insolvency, or liquidation fraudulently or with malicious intent, the Adjudicating Authority may impose a financial penalty ranging between ₹1 Lakh and ₹1 Crore.
Fraudulent Initiation Penalties: This provision serves as a critical statutory deterrent against the abuse of process by creditors using insolvency as a summary debt-collection bludgeon or promoters orchestrating sham filings to trigger moratorium protections.

Key Landmark Precedents:

Beacon Trusteeship Ltd. v. Earthcon Infracon Pvt. Ltd. (2020) SCC OnLine SC 1233: Held that where allegations of collusion and fraud between the applicant and corporate debtor are raised, NCLT must thoroughly examine whether Section 65 is attracted before admitting CIRP.
Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: Emphasized that Section 65 acts as an effective legislative check against frivolous, speculative, or malicious insolvency applications.

Legal Commentary:

Section 65 polices the statutory gateway of the IBC. It empowers tribunals to penalize litigants who weaponize insolvency machinery for collateral commercial coercion or fraudulent asset protection.