Penal Provisions Under IBC Require Proof Of Wilful Conduct: NCLT Indore

The Indore Bench of the National Company Law Tribunal (NCLT) on 20 March, held that Sections 70, 72, and 74 of the Insolvency and Bankruptcy Code, 2016, cannot be invoked without clear and cogent evidence of wilful intent or fraudulent conduct.

A Bench comprising Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta rejected an application seeking penal action against the erstwhile management of K.S. Oils Ltd.

The Bench observed:

“It is observed that the imposition of penalty or punishment under Sections 70, 72 and 74 entails serious consequences, including criminal liability, and therefore requires strict compliance with legal standards.”

The Resolution Professional (now Liquidator) had alleged that the Respondents failed to provide complete details of the Corporate Debtor's financial affairs and continued to operate certain bank accounts after commencement of CIRP, in violation of Section 14. While 58 accounts were initially disclosed, a forensic audit later revealed 64 accounts, including undisclosed ones with substantial transactions.

The Tribunal clarified that the duty of cooperation under Section 19 of the IBC is mandatory and cannot be avoided on the ground that information could be obtained from other sources. It found that the Respondents had not fully complied with this obligation. It held:

“In the present case, the material placed on record is not sufficient to conclusively establish wilful intent or fraudulent conduct warranting invocation of penal provisions.”

However, the Bench ruled that mere unauthorised transactions during CIRP are insufficient to invoke Sections 70, 72, and 74 without clear proof of wilful intent.

It also declined to grant recovery relief, observing that such claims must be pursued through proper avoidance proceedings under the IBC and cannot be summarily enforced.

Accordingly, the NCLT rejected the Resolution Professional's request for penal action and recovery, while affirming the obligation of cooperation under the IBC.