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Offences and Penalties under IBC, 2016

Table of Contents

The Offences and Penalties under IBC are listed Chapter VII of the Insolvency and Bankruptcy Code, 2016. The inclusion of Offences and Penalties under IBC in the Code are important for preventing fraud, misconduct, and ensuring that there is strict adherence to the Insolvency and Bankruptcy Code, 2016.

 As per section 236 of the IBC, Offences and Penalties under IBC are triable by Special Courts and prosecution can be initiated by the Insolvency and Bankruptcy Board of India (IBBI). The NCLT primarily handles the insolvency resolution and liquidation processes, and while they can impose costs, they cannot try offences under the IBC. Penalties and fines, which require prosecution, are within the purview of the Special courts

A corporate debtor can obtain immunity from certain liabilities related to past Offences and Penalties under IBC after a resolution plan is approved under section 32A. However, this immunity is specifically for the corporate debtor and does not extend to individuals who may have been involved in those offences. This provision is intended to encourage resolution applicants to invest in distressed companies by removing the fear of facing prosecution for past actions of the previous management. In simpler terms, if  a company has been mismanaged and has committed Offences and Penalties under IBC, the new owner which takes over the company under the new plan approved by the NCLT will not be liable for any past offences. However, the individuals who were responsible for the mismanagement and offences can still be prosecuted.

 

Offences and Penalties under IBC committed by the officer of the corporate debtor 

Section Title Offence Penalty
68 Punishment for concealment of property. Where the officer of the corporate debtor has:Wilfully concealment any property or part of of the corporate debtor or debt of Rs 10,000 or more due to or from the corporate debtorFraudulently removed any part of  property worth Rs 10,000 of corporate debtor wilfully concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the property of the corporate debtor or its affairswilfully made any false entry in any book or paper affecting or relating to the property of the corporate debtor or its affairsfraudulently parted with, altered or made any omission in any document affecting or relating to the property of the corporate debtor or its affairswilfully created any security interest over, transferred or disposed of any property of the corporate debtor which has been obtained on creditWillfully concealed any information of the Offences and Penalties under IBC mentioned above                OR  At any time after the insolvency commencement date, taken in pawn pledge , or otherwise received the property  knowing it to be secured, transferred or disposed of. Imprisonment: not less than 3 years, may extend to 5 years, orFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
69 Punishment for transactions defrauding creditors Has made any gift/ transfer/ charge, or has connived in the execution of a decree/ order against the property of the corporate debtorHas concealed or removed any part of the debtor’s property within 2 months before the date of such judgement, decree, or order of the payment of money obtained against corporate debtor Imprisonment:Not less than 1 yearMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
70 Punishment for misconduct in course of corporate insolvency resolution process On or before the insolvency commencement date:Does not disclose the relevant details of the debtor’s property that the resolution professional (RP) may requireDoes not deliver the debtor’s property or part of in his control or custody that he is required to deliver to the RPDoes not deliver documents of the debtor in his custody to the RP that he is required to deliverFails to inform the RP the information in his knowledge that a debt has been falsely proved by any person during the corporate insolvency resolution process (CIRP)Prevents the production of any book or paper affecting or relating to the property or affairs of the debtorEntering into transactions defrauding creditors or removing any part of the property of the corporate debtor within two months before the date of any unsatisfied judgement, decree or order for payment of money obtained against the corporate debtor Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
    If insolvency professional contravenes the provisions of this Part Imprisonment:May extend to 6 monthsFine: not less than Rs. 1 lakh, may extend to Rs 5 lakhs,Both
71 Punishment for falsification of books of corporate debtor On or after  insolvency commencement date:destroys, mutilates, alters or falsifies any books, papers or securities, Makes is in the knowledge of making of any false or fraudulent entry in any register, books of account or document belonging to the corporate debtor with intent to defraud or deceive any person Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
72 Punishment for wilful and material omissions from statements relating to affairs of corporate debtor Makes any wilful and material omissions from statements relating to affairs of corporate debtor Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
73 Punishment for falsification of books of corporate debtor on or after the insolvency commencement date: makes a false representation or commits any fraud for the purpose of obtaining the consent of the creditors of the corporate debtor or any of them to an agreement with reference to the affairs of the corporate debtor, during the CIRP  or the liquidation process;prior to the insolvency commencement date: has made any false representation, or committed any fraud, for that purpose Imprisonment:Not less than 3 yearMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
75 Punishment for false information furnished in application Any person furnishes information in the application made under section 7, which isfalse in material particulars, knowing it to be false or omits any material fact, knowing it to be material Fine: not less than Rs. 1 lakh, may extend to Rs 1 crore
76 Punishment for non-disclosure of dispute or payment of debt by operational creditor An operational creditor has wilfully or knowingly concealed in an application under section 9 the fact that the corporate debtor had notified him of a dispute in respect of the unpaid operational debt or the full and final copayment of the debt; orany person who knowingly and wilfully authorised or permitted such concealment Imprisonment:Not less than 1 yearMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
77 Punishment for providing false information in application made by corporate debtor Corporate debtor provides information an application under section 10, which is false in materials, knowing it to be false and omits any material fact, or any person who knowingly and willingly authorised or permitted the furnishing of such information Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
77A Punishment for Offences and Penalties under IBC related to pre-packaged insolvency resolution process Where the corporate debtor:provides false information in material particulars under section 54C knowing it is false or omits it knowing it was materialprovides false information in material particulars in the list of claims/ preliminary information memorandum under section 54C(1) knowing it is false or omits it knowing it was materialany person who knowingly and willingly authorised or permitted  Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both

Sections 68-69 of the IBC address fraudulent activities involving deception, concealment of facts, or other misconduct. As per this section, if the accused can demonstrate they did not have the specific intent to commit fraud, it could be used as a mitigating factor during sentencing or other legal proceedings. This defence hinges on proving that the actions, while possibly appearing fraudulent on the surface, were not done with the deliberate purpose of deceiving or causing harm. This is related to sections Section 74(1) and Section 74(3). Section 74(1) focuses on the liability of a corporate debtor’s officer for knowingly or willfully violating the moratorium under section 14 of the IBC. Section 74(3), on the other hand, addresses liability for contravention of a resolution plan that is binding under section 31, and can apply to the corporate debtor, its officers, creditors, or any other person bound by the resolution plan.

Read more: Role of NCLT in insolvency proceedings

Offences and Penalties under IBC by insolvency professional agency or insolvency professional

Section Title Offence Penalty
70(2) Punishment for misconduct in course of corporate insolvency resolution process If insolvency professional contravenes the provisions of Part II Imprisonment:May extend to 6 monthsFine: not less than Rs. 1 lakh, may extend to Rs 5 lakhs,Both
185 Punishment of contravention of provisions If insolvency professional contravenes the provisions of Part III Imprisonment:May extend to 6 monthsFine: not less than Rs. 1 lakh, may extend to Rs 5 lakhs,Both
220 (3) Appointment of Disciplinary Committee Insolvency Professional Agency, Insolvency Professional, Information Utility contravenes provisions of this IBC, rules, regulations,  Disciplinary Committee imposes penalty:3 times amount of lossOR3 times amount of unlawful gain 
Whichever is higher
Under section 220(3) of the IBC, the Disciplinary Committee can impose penalties on insolvency professional agencies, insolvency professionals, or information utilities for contravening the IBC or related regulations. The penalty is calculated as three times the amount of the loss caused or unlawful gain made, whichever is higher. If the loss or gain is not quantifiable, a penalty of up to one crore rupees can be imposed. The IBBI can also order the disgorgement of any unlawful gains and direct restitution to those who suffered losses, ensuring victims are compensative. 

Offences and Penalties under IBC by any person on whom the resolution plan is binding

Section Title Offence Penalty
71 Punishment for falsification of books of corporate debtor On or after  insolvency commencement date:destroys, mutilates, alters or falsifies any books, papers or securities, Makes is in the knowledge of making of any false or fraudulent entry in any register, books of account or document belonging to the corporate debtor with intent to defraud or deceive any person Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
74(3) Punishment for contravention of moratorium or the resolution plan Corporate debtor or any of its officers violates, or any person on whom resolution plan is binding under section 31 Imprisonment:Not less than 1 yearMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
75 Punishment for false information furnished in application Any person furnishes information in the application made under section 7, which isfalse in material particulars, knowing it to be false or omits any material fact, knowing it to be material Fine: not less than Rs. 1 lakh, may extend to Rs 1 crore

 

Section 32 of the IBC provides immunity to the corporate debtor and its assets under other laws, after a resolution plan is approved, but does not extend to individuals or promoters in Offences and Penalties under IBC committed prior the the commencement of the insolvency process. The JSW Steel and Dunar Food cases illustrate this principle, showing that while the corporate entity receives a clean slate, individuals responsible for past wrongdoings can still be held liable. In the JSW Steel and BPSL case, the ED continued its investigations and actions against individuals involved in the alleged money laundering activities related to BPSL, highlighting that section 32A shields the corporate entity, not the individuals. Similarly in the Dunar Foods case, the court discharged the corporate debtor under this section because the resolution plan had been approved and resulted in a change of control. However, the court explicitly stated that this discharge did not extend to individuals or promoters who were co-accused in the NSEL scam, demonstrating that section 32A is not intended to protect wrongdoers.

Read more: How do international insolvency laws affect local practices?

Offences and Penalties under IBC by creditors or operational creditor

Section Title Offence Penalty
74(1) Punishment for contravention of moratorium or the resolution plan Corporate debtor or any of its officers violates of section 14, knowingly or willingly committed, authorised, permitted  Imprisonment:Not less than 3 yearsMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
74(1) Punishment for contravention of moratorium or the resolution plan Creditor violates section 14, knowingly or willingly committed, authorised, permitted  Imprisonment:Not less than 1 yearMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both
76 Punishment for non-disclosure of dispute or payment of debt by operational creditor An operational creditor has wilfully or knowingly concealed in an application under section 9 the fact that the corporate debtor had notified him of a dispute in respect of the unpaid operational debt or the full and final copayment of the debt; orany person who knowingly and wilfully authorised or permitted such concealment Imprisonment:Not less than 1 yearMay extend to 5 yearsFine: not less than Rs. 1 lakh, may extend to Rs 1 crore,Both

 The IBC, specifically sections 8 and 9, outlines the process for operational creditors to initiate the insolvency process. Section 9(5)(2)(d) mandates the rejection of an application if a notice of dispute has been received by the operating creditor or if a dispute is recorded with the information utility. Operational creditors must disclose any exciting disputes or payment related to their claims. Failing to do so, or providing false information, can lead to imprisonment for 1 to 5 years and a fine. This measure is in place to ensure the integrity and transparency of the CIRP.

Offences and Penalties under IBC by Bankrupt

Section Sub-section Title Offence Penalty
186 (a) Punishment for false information, concealment, etc, by bankrupt   Imprisonment:May extend to 6 monthsFine:Not less than Rs 5 lakhsBoth
  (b)     Imprisonment:May extend to 1 yearFine:Not less than Rs 5 lakhsBoth
  (c)     Imprisonment:May extend to 6 monthsFine:Not less than Rs 5 lakhsBoth
  (d)     Imprisonment:May extend to 6 monthsFine:Not less than Rs 5 lakhsBoth
  (e)     Imprisonment:May extend to 2 yearsFine:Not less than 3 times 
  (f)     Imprisonment:May extend to 1 yearFine:Not less than Rs 5 lakhsBoth
187 (a) Punishment for certain actions fraudulently misapplied, retained or accounted for any money or propertycomprised in the estate of the bankrupt Imprisonment:May extend to 3 yearsFine:Less than 3 times the amount of loss caused, or likely to have been caused.Both
  (b) Punishment for certain actions wilfully acted in a manner that the estate of the bankrupt has suffered any loss in consequence of breach of any duty of the bankruptcy trustee in carrying out his functions under section 149 Imprisonment:May extend to 3 yearsFine:Less than 3 times the amount of loss caused, or likely to have been caused.Both
      If such loss/ unlawful gain is not quantifiable  Total amount of fine should not exceed Rs. 5 lakhs

These sections pertain to Offences and Penalties under IBC related to individuals and partnership forms under Part III of the IBC. Section 187(b) outlines penalties for certain actions by trustees, and addresses actions like providing false information, concealing assets, or absconding after the insolvency commencement date. For instance, if a trustee intentionally hides assets worth a certain amount, they could be penalized with a fine that is three times that amount, if the loss is quantifiable. However, there is a provision that if the loss or unlawful gain is not quantifiable, the total fine imposed will not exceed a specified limit, such as Rs. 5 lakhs.

Amendments Related to Offences and Penalties under IBC

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 was enacted on 17th August, 2018. As per this Amendment, sections 69 officers of the corporate debtor for defrauding creditors and section 76 on the punishment for non-disclosure of dispute or payment of debt by operational creditor: 

Section Title Prior to Amendment, 2018 After Amendment, 2018
69 Punishment for transactions defrauding creditors “On or after the insolvency commencement date, if”  The word “if” substituted
76 Punishment for non-disclosure of dispute or payment of debt by operational creditor “Repayment” in the marginal title “payment”
76(a) Punishment for non-disclosure of dispute or payment of debt by operational creditor “repayment” “payment”

The primarily goal of the 2018 Amendment was to remove ambiguities and streamline the insolvency process for various stakeholders, including homebuyers and financial creditors. Specifically, it modified section 69 by simplifying the language and potentially broadening its applicability regarding transactions that defraud creditors. The amendment replaced the phrase “On or after the insolvency commencement date, if” with the word “If”. This change removes the explicit link to the insolvency commencement date, making the provision applicable to a wider range of situations.

Legal Framework: Chapter VII and Special Courts under Section 236

Section 236(1) mandates certain Offences and Penalties under IBC under the IBC be tried by Special Courts established under Chapter XXVIII of the Companies Act, 2013. Furthermore, section 236(2) stipulates that no court can take cognizances of an offence under the IBC, except upon a complaint made by the IBBI, the Central Government, or a person authorised by the Central Government. Further, the Supreme Court in Kalyani Transco case has confirmed that Enforcement Directorate (ED) attachments under the Prevention of Money Laundering Act (PMLA) do not override the jurisdiction and has clarified that validly made and confirmed attachments by the ED cannot be undone by the IBC. This means that if the ED has attached assets of a company under PMLA, these assets remain attached even during the insolvency process.

Defences and Procedural Safeguards under IBC

Proving a lack of fraudulent intent, such as that under section 68 Offences and Penalties under IBC, requires demonstrating that the actions were taken in good faith, without the intention to receive or conceal information related to the company’s assets or financial status.The non-obstante clause in section 236 ensures that the legislative intent of having Special Courts for the IBC is upheld, even if there are other potential legal avenues. It provides clarity and certainty in the legal process, preventing conflicts and ensuring that the specialized jurisdiction of Special Courts is respected.

Summary Table:  Stakeholders & Offences and Penalties under IBC

Section

Stakeholder

Offence Description

Max Imprisonment & Fine

Defences Available

68

Officer of Corporate debtor

Specifies that officers of a corporate debtor can be penalized for concealing property, fraudulently removing property, or falsifying records related to the corporate debtor’s property or affairs.

1- 5 years, Rs. 1 lakh – 1 crore, or both
  • Lack of intent to defraud or conceal
  • Actions were taken in good faith and transparency
  • Accidental or unintentional concealment
  • Proper Disclosure of all assets and liabilities
  • Lack of knowledge or did not have access to the relevant information
  • Compliance with legal procedures

69

Officer of the corporate debtor or corporate debtor

Specific actions with the intent to defraud creditors

1- 5 years, Rs. 1 lakh – 1 crore, or both
  • Lack of intent to defraud
  • Statute of limitations (acts committed more than 5 years before the ICD)
  • Acquisition was in good faith

70

Officer of the corporate debtor 

Punishment for misconduct in the course of CIRP, such as failure to disclosure or deliver property, books, or information, to the RP who engage in fraudulent accounting practices

1- 5 years, Rs. 1 lakh – 1 crore, or both

Proving lack of intent to commit the misconduct 

71

Any person

Anyone who, on or after, the ICD, destroys, mutilates, alters, or falsifies any books, papers, or securities, or make false or fraudulent entries in any register, account books, or documents belonging to the corporate debtor with the intent to defraud or deceive, is liable to punishment.

3- 5 years, Rs. 1 lakh – 1 crore, or both
  • Proving lack of intent to defraud or deceive 
  • Lack of falsification
  • Proving that the actions were not related to the corporate debtor’s books

72

Officer of the corporate debtor

Knowingly and intentionally omit crucial information from financial statements or other documents related to the company’s financial status

3- 5 years, Rs. 1 lakh – 1 crore, or both
  • Lack of intent
  • Relied on the advice of legal or financial professionals
  • The omitted information was material
  • If there was a genuine dispute about the information omitted.

73

Officer of corporate debtor

Offence of making false representations or committing fraud to obtain creditor consent during CIRP or liquidation

3- 5 years, Rs. 1 lakh – 1 crore, or both
  • Absence of false representation
  • Lack of fraudulent intent
  • Consent obtained through legitimate means

74

Corporate debtor or Officer of the corporate debtor 

Punishment for violating the moratorium or the resolution plan approved by the Adjudicating Authority

1-5 years, Rs. 1 lakh – 1 crore, or both
  • Proving that the contravention was no knowing or wilful 
  • The actions taken did not actually violate the moratorium or resolution plan

75

Any person who furnishes information in the application under section 7

Knowingly furnish false information in a material particular or omit a material fact in section 7 application. 

Rs. 1 lakh – 1 crore, or both
  • Demonstrate that the information was not false 
  • The person providing the information did not know it was false or did not omit a material fact knowingly.

76

Operational creditor

If an operational creditor knowingly or wilfully conceals the fact that a corporate debtor has notified them of a dispute or has already paid the debt, they can be penalized. 

1-5 years, Rs. 1 lakh – 1 crore, or both

Proving that there was no wilful non-disclosure of a dispute or repayment

77

Corporate debtor, or any person submitting such information

Addresses situations where a corporate debtor knowingly provides false information or omits material facts in a section 10 application, or if any person authorizes or permits such actions.

3-5 years, Rs. 1 lakh – 1 crore, or both
  • The information provided was not knowingly or wilfully false
  • Omission was not material

77A

Corporate debtor

Addresses situations where the corporate debtor knowingly provides false information or omits material facts in the application for the pre-packaged insolvency process or in the list of claims.

3-5 years, Rs. 1 lakh – 1 crore, or both
  • Lack of knowledge or wilful intent
  • Not false in material particulars
  • No deliberate contravention

185

Insolvency professional 

Deliberately contravenes the IBC provisions

6 months, Rs. 1 lakh-5 lakhs, or both
  • Acting in good faith
  • Following directions of the Adjudicating Authority
  • Compliance with IBC, rules, regulations
  • Lack of willful intent
  • Absence of dispute 
  • Ordinary course of business (for avoidance transactions)

186

Bankrupt individuals

Knowingly making false representations, concealing material information during the bankruptcy process, or failing to account for significant loss of property

1 year, Rs.5 lakhs, both
  • Transactions are not loans or investments
  • Compliance with section 186 limits
  • Required shareholder approvals

187

Bankruptcy trustee

Punishment for certain actions related to a bankrupt’s estate, outline two main Offences and Penalties under IBC; misapplying or misusing the bankrupt’s assets and intentionally causing loss to the estate through misconduct.

3 years, Rs. 5 years
  • Reasonable belief regarding property seizure
  • Good faith and compliance with the IBC
  • No knowledge of the fraudulent or prohibited actions
  • Acting under the orders of the Adjudicating Authority

220(3)

Insolvency Professional Agency, Insolvency professional, Insolvency utility

Offences and Penalties under IBC for contraventions of the IBC, or related rules and regulations, which resulted in any unlawful gain made

Rs 1 crore when losses or gains are not quantifiable
  • Unaware of the specific facts or circumstances that led to contravention
  • All reasonable steps were taken
  • No intent to defraud
  • No direct loss or gain attributed to them
  • Show cause notice was not properly served

Conclusion

The Insolvency and Bankruptcy Code, 2016 ensures that any Offences and Penalties under IBC such asmalpractices, fraud, and misconduct of corporate debtors, creditors, and other stakeholders, including insolvency professionals are liable for their actions. These provisions are important for so that the integrity of the insolvency and bankruptcy processes and ensuring that there is no contravention to the resolution plan or the Insolvency and Bankruptcy Code, 2016, rules, or regulations. 

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  1. Classic Transformers Private Limited (Corporate Debtor or CD) was incorporated in 1985. It is classified as Non-Government company and it has its registered office in Ahmedabad. It has one manufacturing unit in Talegaon district in Pune, Maharashtra and a principal office in New Delhi. As per records of MCA, its authorized share capital and paid-up share capital is Rs. 200 lacs. It carries on the business of manufacture of television and radio transmitters and wireless apparatus. The directors of Classic Transformers Private Limited are Mr. Paras Singhania and Mr. Raman Nair.
  2. One of the operational creditors, Best Tradex Private Limited filed an application for initiating corporate insolvency resolution process of Classic Transformers Private Limited for non-payment of its dues to the tune of Rs. 1.30 crores. The Adjudicating Authority, after issuing notice to the CD passes an order of admission on 30th August, 2023. Mr. Rajiv Khosla was appointed as Interim Resolution Professional (IRP)on the same date. In its first meeting held on 10th October, 2023, committee of creditors appointed Ms. Anamika Rajendran as Resolution Professional (RP) in place of Mr. Rajiv Khosla.
  3. IRP had made a public announcement in Form A on 1st September, 2023 in two newspapers (one english language newspaper and one regional language newspaper) in english language circulating at the location of the registered office of the company and in Pune, as the IRP felt that the CD conducts material business operations from Pune also. It was also published on the website of CD and website designated by IBBI. The last date for submission was stated as 13th September, 2023. Mr. Rajiv Khosla incurred Rs. 80,000/- as cost of publishing. The committee of creditors ratified the expense on publication to the tune of Rs. 50,000/- in its first meeting. IRP has filed application (IA 510 of 2023) against CoC and Best Tradex Pvt Ltd. for payment of remaining publication expenses.
  4. The following claims were received and admitted by Mr. Rajiv Khosla, IRP and later on by Ms. Anamika Rajendran, RP :

S. No.

Name

Amount

Status

Date of

Admission/Rejection

1.

Janta Bank

3.60 crores

Financial Creditor

20.9.2023

2.

Parivaar Bank

3.00 crores

Financial Creditor

20.9.2023

3.

Rashi Singhania(wife of Paras

Singhania)

50 Lakhs

Financial Creditor

20.9.2023

4.

Best Tradex

1.60 crores

Operational Creditor

20.9.2023

5.

Electrolux

Supplies Inc

45 lacs

 

 

Rejected as filed late

18.12.2023

6.

70 workmen

1.60 crores

Operational creditors

20.9.2023

7.

15 Employees

1.50 crores

Operational creditors

20.9.2023

8.

GST dues

70 lacs

Operational creditors

20.9.2023

9.

Income Tax dues

30 lacs

Operational creditors

20.9.2023

10.

Provident Fund Dues

20 lacs

Operational creditors

20.9.2023

11.

Revive Finance(filed on 4th

September, 2023)

1.50 crores

Financial Creditor

10.12.2023

12.

Raman Nair (Loan to company

without interest)

1 crore

Financial Creditor

20.9.2023

13.

Electricity dues

25 lacs

Operational Creditor

20.9.2023

14.

Big Lease -Landlord forarrears of Rent onlease of Principal

Office

10 lacs

Financial Creditor

20.9.2023
  1. The break-up of claims admitted till date is as under :

Financial Creditors         – Rs. 9.70 crores

Operational Creditors – Rs. 6.15 crores

 Total                               Rs. 15.85 crores

  1. The committee of creditors was constituted by IRP as follows:
  2. Janta Bank
  3. Parivaar Bank
  4. Revive Finance
  5. Big Lease
  6. According to IRP, though Raman Nair is a financial creditor but being a suspended director, he is not part of committee of creditors. IRP had written to all operational creditors to select one of their representatives to participate in the meeting of committee of creditors but despite sending 3 emails, the operational creditors collectively have not named a single representative. 
  7. IRP and RP invited suspended directors Paras Singhania and Raman Nair to attend meeting of committee of creditors by sending them notices of all committee of creditors meetings. Three meetings of committee of creditors were held until 12th December, 2023.
  8. One of the operational creditors Electrolux Supplies Inc based in New Delhi files its claim on 15th December, 2023 with the RP for Rs. 45 lacs. After receiving the claim RP writes e-mail to Electrolux Supplies Inc. that its claim cannot be considered as it has been filed after the time limit mentioned in the Code read with CIRP Regulations though the books of account also show that Rs. 45 lacs is due to Electrolux Supplies Inc. Based on legal advice, Electrolux Supplies Inc files an application (IA 810 of 2023)  under section 60(5) before Adjudicating Authority against rejection of the claim on the ground that the delay occurred on the following grounds: 
  9. Electrolux Supplies Inc was not aware of the initiation of CIRP against the CD as it is based in Gurugram (adjacent to New Delhi) and the public announcement was not made in newspapers circulating in New Delhi. 
  10. RP should have admitted the claim of Electrolux Supplies Inc on the basis of books of account and it was not necessary for Electrolux Supplies Inc. to file its claim.
  11. Best Tradex has also filed an application (IA 633 of 2023) before Adjudicating Authority that they have not been included in committee of creditors in terms of section 21 and 24 of the Code. RP’s stand is that since individually the operational creditor’s claim is not more than 10% of the total dues, IRP or RP was under no obligation to send notice of committee of creditors meeting to operational creditors. Best Tradex, while reiterating that since total claims of OC’s is more than 10%, being a largest OC, it is entitled to participate in committee of creditors.
  12. Revive Finance, whose claim was admitted after more than 3 months of its filing, moved an application (IA 754 of 2023) to the Adjudicating Authority stating that the  decisions taken in all three meetings of committee of creditors held before they were included in committee of creditors as invalid. In these 3 meetings, they claimed, crucial decisions were taken relating to appointment of RP, ratification of expenses, appointment of valuers, approval of fees of RP and other crucial decisions relating to running of CD as a going concern. Thy also claimed that unnecessary queries were raised by IRP/RP to delay the admission of claim. On behalf of RP, it was stated that 3 emails were sent as documents filed by them are deficient, they did not submit loan agreement despite repeated emails.
  13. On 1st January, 2024, the promoters of Classic Transformers Private Limited entered  into a settlement with the Applicant Best Tradex and agreed to pay all their dues in exchange of Best Tradex filing an application for withdrawal of corporate insolvency resolution process. The promoters of the CD have filed an application (IA No. 17 of 2024) to Adjudicating Authority for withdrawal on 15th January, 2024 on the basis that their claims have been paid by the promoters in full and final.
  14. The books of account of the CD shows that loan of Rs. 1 crore was taken from Raman Nair in 2018 and is still outstanding. Another account “Advance to Raman Nair” appeared in the books of account and the last 2 financial years, 2021-22 and 2022-23 showed the following transactions:

Date

Particulars

Debit

Credit

Balance

1.4.2021

Opening Balance (Payable by Raman Nair)

 

 

20,00,000

15.5.2021

Expense Adjustment/Received by CD

 

5,00,000

15,00,000

17.8.2021

Paid by CD

7,00,000

 

22,00,000

20.12.2021

Paid by CD

2,00,000

 

24,00,000

12.4.2022

Expense Adjustment/Received by CD

 

3,00,000

21,00,000

18.9.2022

Paid by CD

1,00,000

 

22,00,000

2.1.2023

Expense Adjustment/Received by CD

 

5,00,000

17,00,000

28.8.2023

Paid by CD

6,00,000

 

23,00,000

RP has filed an application with the Adjudicating Authority (IA 25 of 2024) on 20th January 2024 claiming Rs 31 lacs (amount outstanding as on 30.8.2021 plus amounts paid by CD to Raman Nair on 20.12.2021, 18.9.2022 and 2.1.2023) as preferential transactions u/s 43 of the Code and prayed for recovery of these amounts. Raman Nair has filed a reply stating that these transactions are not preferential on the following grounds:

  1. Advance account was a running account for the expenses to be incurred on behalf of the CD and he has in his possession bills not accounted for in the books of account.
  2. RP has aggregated the amounts paid by CD and does not take into account the expense adjustment done or amounts received back by CD.
  3. He has given an interest free loan and his claim has been admitted to that extent. Assuming but not admitting that RP is correct, Raman Nair is entitled for set off.
  4. RP has filed the application beyond the stipulated period as provided in Regulations and hence the application is time barred.
  5. Draft of Forensic Audit report was not shared with the suspended directors and hence there is violation of principles of natural justice.
  6. Even otherwise the transactions were in the ordinary course of business.

RP, in rejoinder, claims that payment transaction is not to be mixed with expense adjustment or amount received from Raman Nair. For amounts paid by Raman Nair, he should file a claim and there is no provision of set off in CIRP. The application in filing preferential transaction application was delayed due to non-cooperation of suspended directors in providing information to forensic auditor who had sent 2 emails to them. The final report was placed before committee of creditors who had directed RP to file application.

  1. RP, based on forensic audit, in the same IA 25 of 2024, also alleged that substantial amounts to the tune of Rs. 1.50 crores, shown as investments, were written off on 31.3.2023 by the suspended directors as reflected in books of account. The amount was paid to 2 related parties, namely, Hi-life Technologies Pvt Ltd (Rs. 70 lacs) and Super Motors Private Limited (Rs. 80 lacs). These amounts were paid as investment in 2016 and 2017. RP has treated them as fraudulent transactions and has prayed for recovery of the amounts from suspended transactions as fraudulent and wrongful trading under section 66 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).  

Suspended directors have filed a common reply stating that by no stretch of imaginations, write offs can be treated as fraudulent transaction as there is no outflow. RP has the freedom to revise the accounts and reverse the transactions in books. The amounts relate to 2016 and 2017 and is beyond the purview of scope of RP. Further, the investments were made in good faith to expand the business of CD but could not fructify. Moreover, RP has filed a single IA u/s 43 and 66, which is not permitted.

RP, argues that suspended directors had the knowledge of the fact that CD is going under insolvency and they should have taken steps to recover the amounts. The amounts written off in the books of CD are still being shown in the books of account of Hi-life Technologies Pvt Ltd and Super Motors Private Limited and produced financial statement of both the companies filed with Registrar of companies for FY 2022-23. 

  1. The plant and machinery of CD is charged to Janta Bank and is worth 8 crores @ 18% p.a. interest. IRP  was in need of funds to run the CD as a going concern and hence obtained interim  finance of Rs 1 crore by charging plant and machinery to Perfect Finance. Janta Bank has now objected to this action by IRP by stating that neither its consent nor CoC’s consent was obtained. Janta Bank has filed the application (IA 603 of 2023) before the adjudicating authority praying that the amount received from Perfect Finance should not be classified as Interim Finance and the mortgage created on Plant and Machinery should be set aside.
  2. RP has taken up the issue of completion of audit but the statutory auditor, RAK Associates is not cooperating. RP has filed an application for non-cooperation against the statutory auditor u/s 19(2) of the Insolvency and Bankruptcy Code, 2016 (IA 540 of 2023).  Statutory auditor contends that he is not covered u/s 19 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and hence the application should be dismissed in limine. Secondly, he has provided all documents to the RP whatever was in his possession. RP states that the statutory auditor has not supplied working papers containing details of debtors of CD. 
  3. RP has also issued a letter terminating the appointment of statutory auditor and appointing a new one. Having done that, he places this fact before the committee of creditors in their meeting, who ratify his action unanimously. Previous statutory auditor is aggrieved and he files an application  (IA 56 of 2024) challenging the decision of RP and its ratification by committee of creditors to replace him.
  4. Janta Bank has filed an IA 602 of 2023 objecting the inclusion of Big Lease as financial creditor in the committee of creditors. As per them, Big Lease is an operational creditor and not financial creditor.

CSM 2 Case Study on PPIRP

ABC Ltd., a medium-sized manufacturing company based in India, has been struggling with financial difficulties exacerbated by the economic downturn caused by the COVID-19 pandemic. With mounting debt and dwindling revenues, ABC Ltd. finds itself in a situation where it needs to explore insolvency resolution options to salvage its operations and protect the interests of its stakeholders.

ABC Ltd. is classified as a medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 though registration is pending. ABC Ltd. has committed a default of Rs 54 lacs to My Bank. The company has not undergone any insolvency resolution process in the past three years. Financial creditors representing at least 66% of the financial debt due to them have proposed the appointment of an insolvency professional for conducting the PPIRP.

A majority of the directors of ABC Ltd. have made a declaration stating the intent to initiate the PPIRP and affirming that it is not for fraudulent purposes. A special resolution has been passed by the members of ABC Ltd. approving the initiation of the PPIRP. There is an application under section 43 against one of the directors of ABC Limited for his involvement in Bright Star Limited, a company under CIRP. ABC Limited has prepared a draft Base Resolution Plan. ABC Limited files an application to the Adjudicating Authority for initiating pre-packaged insolvency resolution process. Base Resolution Plan prepared by ABC Ltd contains lower payment to financial creditors with a proposal to pay in full to the operational creditors.

CSM 3- Case Study on Voluntary Liquidation

 

Sunmark Enterprises Limited, a medium-sized manufacturing company, has been experiencing financial difficulties for the past several years due to a decrease in demand for its products and heightened competition in the market. Following a comprehensive evaluation of its financial standing and future outlook, the Board of Directors opts to commence voluntary liquidation pursuant to Section 59 of the Insolvency and Bankruptcy Code (IBC) to ensure a systematic conclusion of the company’s operations.

  1. Appointment of Liquidator:
    • On 20th December 2023, the Board of Directors convenes a meeting and passes a resolution proposing voluntary liquidation.
    • Mr. John, a registered insolvency professional, is appointed as the liquidator to oversee the liquidation process on 10th February 2024.
  2. Declaration of Solvency:
    • A board meeting is held, during which a declaration of solvency is made, affirming that Sunmark Enterprises Ltd. is solvent and capable of settling its debts within a specified period not exceeding one year from the onset of liquidation.
  3. Approval of Shareholders:
    • On 10th January 2024, shareholders of Sunmark Enterprises Ltd. pass a special resolution, endorsing the decision to commence voluntary liquidation.
    • The resolution garners approval by a majority vote representing at least 75% of the shareholders’ voting power.

Following the shareholders’ approval by a special resolution, creditors of the company also consent to the voluntary liquidation with a two-thirds majority on 1st February 2024. Despite incurring losses in the previous year and anticipating further losses, the liquidator expresses intent to continue business operations during the liquidation period. Seeking professional guidance, the liquidator faces several challenges and scenarios:

  1. Preparation of Preliminary Report:
    • The liquidator drafts a Preliminary Report, estimating the assets and liabilities as of the liquidation commencement date. However, doubts arise regarding the reliability of the company’s financial records.
  2. Unfiled Claims and Foreign Creditor:
    • Despite issuing announcements inviting claims, three employees fail to file their claims. Additionally, a foreign creditor submits a claim of $2000, prompting uncertainty regarding the applicable foreign exchange rate for claim admission.
  3. Rejected Claim and Lack of Reasons:
    • One creditor disputes the rejection of their claim by the liquidator, citing a lack of justification for the decision.
  4. Bank Account Establishment:
    • The liquidator establishes a separate bank account in the name of the corporate entity for liquidation purposes.
  5. Salary Payment and Unsold Machinery:
    • An employee urgently requests a cash payment of their salary amounting to Rs. 20,000.
    • Despite extensive efforts, the liquidator struggles to sell an old machinery valued at Rs. 50,000, with consultants and brokers indicating its low marketability. However, a creditor expresses willingness to accept the machinery as part of their claim settlement.

In navigating these complexities, the liquidator must adhere to legal requirements and seek appropriate guidance to ensure fair and efficient resolution throughout the voluntary liquidation process. He seeks your answwer to following questions: –

CSM 4 – Part III Case Study

Raj Shekhar’s bankruptcy process commenced on 1st April 2024 after the unsuccessful resolution of his insolvency proceedings initiated on 1st August 2023. The Bankruptcy Trustee issued a public notice on 4th April 2024, with the deadline for claim filing set for 25th April 2024.

He possesses the following assets under his and his family’s ownership:

  •   A 2 BHK property in NOIDA acquired in 2001 for Rs. 11 lakhs.
  • A 3BHK residence in Mumbai purchased in 2015 for Rs. 50 lakhs.
  • A 2 BHK dwelling in Gurgaon under his wife Alka’s name, assessed at Rs. 66 lakhs.
  • A jointly-owned flat in Indore with his wife, booked for Rs. 27 lakhs.
  • A laptop valued at Rs. 52,000.
  • A Honda City utilized for office purposes, valued at Rs. 8.50 lakhs.
  • A Wagon R utilized for personal use, valued at Rs. 4 lakhs.
  • An Enfield Motorcycle used for leisure activities, valued at Rs. 2.50 lakhs.
  • Leased office space in Munirka with a monthly rent of Rs. 25,000.
  • A diamond ring procured for Rs. 1.50 lakhs.
  • Gold jewelry valued at Rs. 15 lakhs.
  • Gold jewelry under his wife’s name, including a Mangal sutra, valued at Rs. 22 lakhs.
  • Ornaments for his home temple amounting to Rs. 3 lakhs.
  • An iPad worth Rs. 45,000.
  • Watches valued at Rs. 1.50 lakhs.
  • Office books valued at Rs. 1.20 lakhs.
  • Home furniture worth Rs. 2.50 lakhs and office furniture worth Rs. 1 lakh.
  • Life insurance policies in various names totaling Rs. 225 lakhs.
  • Children’s bicycle valued at Rs. 5000.
  • Shares in companies worth Rs. 3.5 lakhs.
  • Mutual fund investments worth Rs. 2 lakhs.
  • Public Provident Fund (PPF) investments totaling Rs. 3 lakhs.
  • Assets belonging to his second sister residing abroad, valued at Rs. 5 lakhs.

His liabilities include:

  • Business sundry liabilities amounting to Rs. 15 lakhs.
  • GST liability totaling Rs. 2 lakhs.
  • Unpaid electricity bills of Rs. 50,000.
  • Outstanding traffic challan of Rs. 3,000.
  • Maintenance payment to his ex-wife at Rs. 50,000 per month, pending for the last six months.
  • Personal loans from friends totaling Rs. 45 lakhs.
  • Loan from his brother-in-law amounting to Rs. 3 lakhs.
  • Loan against Honda City from a bank worth Rs. 5 lakhs.
  • Student loan taken for his sister’s son, amounting to Rs. 10 lakhs.
  • Damages of Rs. 55,000 awarded by the court due to water leakage from his Mumbai flat.
  • Business loan of Rs. 75 lakhs.
  • Outstanding credit card dues of Rs. 1.60 lakhs.
  • Income tax liability of Rs. 10 lakhs.
  • School fees for his two children, unpaid for three months, at Rs. 20,000 per month each.
  • Outstanding dues at a local grocery store totaling Rs. 32,000.

 

Case Study on Business and General Laws

Avanti Roadways Pvt. Ltd., incorporated under the Companies Act, 2013, operates from its registered office situated at Plot No.1, First Floor, East Chamber, Gwalior, Madhya Pradesh. The company is structured with an authorized capital of INR 5,00,000, which is fully issued, subscribed, and paid-up. The core activities of the company are focused on constructing residential and commercial buildings and educational institutions.

The Registrar of Companies in Gwalior, citing non-compliance with the statutory requirement to file Annual Returns and Financial Statements for the fiscal years 2014-15 through 2017-18, initiated proceedings under Section 248(1) of the Companies Act, 2013, read with Rule 7 and Rule 9 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016. Consequently, a notice of intent to remove the company’s name from the register was issued. In response to this notification, the company filed an appeal with the National Company Law Tribunal (NCLT) in Gwalior under Section 252 of the Companies Act, 2013, asserting that it continued to engage actively in business operations throughout the period in question. The company admitted oversight in the non-filing of the required documents, attributing it to lapses by the management.

During the period under review, the company was involved in several significant projects, including constructing a multi-functional educational complex under a government contract, which involved intricate compliance with environmental regulations and state educational mandates. This project, along with other private commercial ventures, significantly contributed to its revenue streams, though it complicated the operational and regulatory reporting requirements.

As part of its defense, Avanti Roadways Pvt. Ltd. demonstrated through detailed documentation—including contracts, invoices, and bank statements—that it was operational and financially active during the years for which filings were not completed. Following the notice from the Registrar, the company undertook substantial revisions to its management structures, enhancing its regulatory compliance processes to include automated systems for tracking and reporting essential corporate activities and statutory filings.

The appeal by Avanti Roadways Pvt. Ltd. is pending before the NCLT, where the company seeks not only to contest the Registrar’s decision but also to establish a precedent for considering operational continuity and factual business engagement in decisions related to statutory compliance enforcement.

Case Study: The Case of Rajesh Kumar and the Corporate Insolvency Resolution Process

Background: Rajesh Kumar, an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (IBBI), faced disciplinary action following a Show Cause Notice (SCN) by the IBBI. This action originated from procedural issues during the Corporate Insolvency Resolution Process (CIRP) of M/s Indore Developers Private Limited, where he was appointed as the Resolution Professional (RP).

Legal Framework: This case is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), specifically focusing on the duties and responsibilities of an insolvency professional overseeing the CIRP. Kumar was accused of providing unequal treatment to certain decree-holding homebuyers in the resolution plan, potentially breaching several sections of the IBC and related regulations.

Investigation and Proceedings: Following a complaint from a homebuyer, the IBBI launched an investigation into Kumar’s conduct during the CIRP. After receiving the investigation report, the IBBI issued a SCN, which was later handled by its Disciplinary Committee (DC) for resolution. Kumar defended his conduct through various submissions and a personal hearing, arguing that his decisions were aligned with legal precedents and the decisions of the Committee of Creditors (CoC).

Findings and Contraventions: The DC identified discrepancies in Kumar’s management of the claims of decree-holding homebuyers. Despite legal opinions indicating that these claims should be treated as those of financial creditors, they were categorized differently in the resolution plan submitted to the CoC. This action raised concerns about Kumar’s adherence to the statutory requirements and the broader principles of fairness and transparency in the CIRP. Kumar also admitted the claim of the aforesaid decree holders as “Creditors in class” based on the said legal opinions. However, it is observed that despite having admitted the claims of these decree holders as “Creditors in class”, he has treated the claim of the said decree holders as “Other Creditors” in the resolution plan placed before the CoC, instead of “Creditors in Class”.

Legal Issues and Analysis: The main legal issue involved the interpretation and application of sections 30(2)(e) and (f) of the IBC concerning the treatment of creditors in a resolution plan. Kumar’s handling of these claims brought up questions regarding the compliance with these statutory provisions and the fundamental principles of equitable treatment of creditors.

Arguments by Kumar: Kumar submitted that he had admitted the claim of the decree holders under the category of creditors in a class based on the legal opinion. However, the resolution applicant has provided a specific treatment to all such creditors which was then approved by the CoC and the AA. As elaborated above, (a) this was in line with the applicable law at the relevant time; (b) the resolution applicant has the discretion to provide the treatment for the stakeholders including the decree holders; (c} the resolution plan has been approved by the committee of creditors in its commercial wisdom which is paramount; (d) the resolution plan has been approved by the AA. He submitted that he has not ‘deprived the decree holders from their legal rights and claims as homebuyers’, he has conducted the CIRP in terms of the Code and the treatment to be provided to the stakeholders is beyond his ambit. 

 

The DC upholds his contravention of section 30(2)(e), 30(2)(f), 208(2) (a) & (e) of the Code, regulation 39(2) of the CIRP Regulations, regulations 7(2) (a) & (h) of the IP Regulations read with clauses 1, 3 and 14 of the Code of Conduct.

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