Section 65 penalties and CIRP costs are imposable where insolvency proceedings are initiated maliciously to circumvent statutory liabilities.

The Appellant (Operational Creditor) initiated Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor (CD) under Section 9 of the IBC, which was admitted on 25.09.2023.

The Committee of Creditors (CoC) comprised solely of the GST and State Tax Departments.

During the CIRP, the Resolution Professional (RP) faced persistent non-cooperation from the suspended management and a lack of funding from the Appellant.

Consequently, the RP filed I.A. No. 1316 of 2024 for closure of CIRP and I.A. No. 643 of 2025 seeking penalties under Section 65 of the IBC.

The Adjudicating Authority (NCLT, Ahmedabad) passed a common order on 15.12.2025, terminating the CIRP, imposing a penalty of ₹10 lakhs on the Appellant for fraudulent initiation, and directing the Appellant to pay ₹6 lakhs toward CIRP costs.

The Appellant challenged this order, arguing that the CIRP admission had attained finality and the stagnation was due to the RP's failure to invoke Section 19(2).

Section 65 of the Insolvency and Bankruptcy Code (IBC), 2016, which provides for the imposition of penalties on any person who initiates insolvency proceedings fraudulently or with malicious intent for any purpose other than the resolution of insolvency.

the Adjudicating Authority possesses residuary jurisdiction and a statutory obligation to prevent the abuse of the legal framework and may take suo-moto cognizance of such abuse at any stage of the proceedings.

The Tribunal rejected the Appellant's contention that Section 65 cannot be invoked post-admission, clarifying that the provision contains no "ring-fencing" regarding timing and can be triggered at any stage if the Authority is satisfied of malicious intent.

Regarding the fraudulent nature of the proceedings, the Tribunal noted that despite claiming a debt of ₹3.80 Cr to initiate CIRP, the Appellant failed to file a claim after the public announcement.

The Tribunal found the Appellant’s excuse of "legal ignorance" lacked credibility given their vigorous pursuit of the Section 9 application and prior legal notices.

Crucially, the Tribunal observed that the Appellant and the CD’s director were brothers and former co-directors; thus, the CIRP was strategically triggered to invoke the Section 14 moratorium to shield the CD from substantial pending recovery actions by Tax Departments.

On the matter of costs, the Tribunal held that while CIRP costs are normally borne by the CoC or CD assets, equity demands that the initiating party bear the burden when the process is abused and the CoC (comprising involuntary tax creditors) did not trigger the insolvency.

The Tribunal held that the CIRP was initiated for fraudulent purposes to circumvent tax liabilities rather than genuine resolution.

The imposition of a ₹10 lakh penalty under Section 65 and the direction for the Appellant to pay ₹6 lakhs in CIRP costs and RP fees were upheld as necessary punitive and compensatory measures to protect the integrity of the IBC framework.