Penal proceedings under IBC may be closed upon full restitution of funds diverted during moratorium.

The Appellants, who are suspended directors and Key Managerial Personnel (KMPs) of the Corporate Debtor (M/s. GVK Energy Ltd.), challenged an order dated 08.01.2026 passed by the NCLT, Hyderabad Bench-II.

The NCLT had directed the Interim Resolution Professional (IRP) to initiate penal action against the Appellants under Sections 68, 70, and 74 of the Insolvency and Bankruptcy Code (IBC) and ordered the Appellants to jointly and severally refund Rs. 2,28,85,216/-.

The NCLT's directions followed allegations that the said amount was diverted from the Corporate Debtor’s bank accounts on 06.05.2025 and 07.05.2025, in violation of the moratorium imposed under Section 14 of the IBC, which commenced on 06.05.2025.

During the pendency of the appeal, the Appellants remitted the entire disputed amount back to the Corporate Debtor’s account on 23.01.2026.

1. Whether the directions to initiate penal action under Sections 68, 70, and 74 of the I&B Code should be sustained in light of the Appellants refunding the diverted funds to the Corporate Debtor.

Section 14 of the IBC, which mandates a moratorium on the transfer or alienation of the Corporate Debtor’s assets upon the commencement of the Corporate Insolvency Resolution Process (CIRP).

Penal provisions under Section 68 (punishment for concealment of property), Section 70 (punishment for misconduct during CIRP), and Section 74 (punishment for contravention of moratorium) of the IBC, which provide for the initiation of criminal proceedings against defaulting directors or officials.

The Court analyzed the subsequent developments following the impugned NCLT order.

It noted that the primary grievance regarding the unauthorized diversion of funds during the moratorium period was resolved as the Appellants restored the full amount of Rs. 2,28,85,216/- to the Corporate Debtor's account.

The Respondent (IRP) informed the Court that, upon receiving the funds and consulting the Committee of Creditors (CoC), he did not contemplate pursuing any further action under the penal provisions of Sections 68, 70, and 74 of the Code.

The Court observed that since the diverted funds were recovered and the Respondent had filed a formal memo stating his intention to drop the proceedings, there was no longer a cause of action requiring judicial intervention.

The Appeal was disposed of in terms of the memo submitted by the Respondent/IRP. All interlocutory applications were closed, and the liberty granted by the NCLT to initiate action under Sections 68, 70, and 74 was effectively rendered infructuous by the Respondent's waiver.