Section 65 IBC: Fraudulent or Malicious Initiation of CIRP

Insolvency proceedings are powerful. Admission suspends the board, triggers a moratorium and can end in liquidation, so the Code can be misused: by creditors to coerce payment of disputed bills, by promoters to obtain a moratorium through a friendly creditor, or by speculators to recover investments. Section 65 penalises initiation of proceedings fraudulently or with malicious intent, and the 2026 Amendment added penalties for frivolous or vexatious proceedings. This note explains these provisions, the forms of abuse they target and how tribunals respond.

1. Section 65

• Section 65(1). If any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than the resolution of insolvency or liquidation, the Adjudicating Authority may impose a penalty of not less than one lakh rupees, which may extend to one crore rupees.
• Section 65(2). The same penalty applies to a person who initiates voluntary liquidation proceedings with the intent to defraud any person.
• Pre-packaged process. Added in 2021, the same penalty applies to a person who initiates the pre-packaged insolvency resolution process fraudulently or with malicious intent for a purpose other than insolvency resolution, or with intent to defraud any person; the 2026 Amendment substituted this provision, revising its wording, with effect from 26 May 2026.
• Who imposes. The NCLT, on an application by an aggrieved person or on its own consideration of the record, after giving the person an opportunity to be heard.

Figure 1: Fraudulent and malicious initiation

2. The Core Idea: Purpose Other than Resolution

• Resolution, not recovery. The Code exists to resolve insolvency, and the Supreme Court has repeatedly said that it is not a recovery mechanism (Swiss Ribbons, 2019; Mobilox, 2017); an application is abusive when its real aim is something else, such as forcing payment or blocking another remedy.
• Not every recovery motive is malice. A creditor who files because it has not been paid is not acting maliciously merely because it would prefer payment to insolvency; the section targets fraud or ill will, not the ordinary wish to be paid.
• Proof. Fraud and malice must be shown from the circumstances, such as the relationship between the parties, the timing of the application and the genuineness of the debt.

3. Common Forms of Abuse

Figure 2: Warning signs of an abusive application

• Collusive filings. A creditor related to the promoters files under section 7, or the company files under section 10, to obtain a moratorium against secured creditors or to steer the process; in Phoenix ARC v Spade Financial (2021), the Supreme Court refused to treat collusive transactions as financial debt (Topic 7)
• Coercive recovery. An operational creditor uses section 9 to press a disputed bill; Mobilox (2017) requires rejection where a plausible pre-existing dispute exists (Topic 13)
• Speculative investors. An allottee with buy-back or assured return rights uses section 7 to recover money rather than to obtain a home; Pioneer Urban (2019) pointed to section 65 as a safeguard, and Mansi Brar Fernandes (2025) requires the NCLT to screen out such applicants (Topic 8)
• Defrauding creditors through voluntary liquidation. Shareholders of an insolvent company declare solvency to wind it up and defeat creditors, which section 65(2) penalises.

4. The 2026 Additions

Figure 3: Penalty provisions for abusive proceedings

• Section 64A. Empowers the NCLT to impose a penalty of one lakh rupees up to two crore rupees on a person who initiates frivolous or vexatious proceedings under Part II.
• Section 183A. A corresponding penalty for frivolous or vexatious proceedings under Part III, before the Debt Recovery Tribunal or NCLT.
• Wider net. Unlike section 65, these provisions do not require proof of fraud or malice; it is enough that the proceeding is frivolous, meaning without substance, or vexatious, meaning brought to harass.

5. How Tribunals Respond

• Rejection. An application found to be collusive, malicious or an abuse of process is dismissed, and costs may be imposed.
• Penalty. A penalty under section 65 or 64A may be imposed in addition, either in the same order or in separate proceedings.
• After admission. If abuse is discovered after admission, the order may be set aside on appeal, and the NCLT may act under its inherent powers in Rule 11 of the NCLT Rules, 2016.
• Other consequences. Penalties under the Code do not bar civil or criminal action under other laws for fraud, forgery or false statements.

6. Frequently Asked Questions

Is filing under section 9 to get paid a malicious initiation?

Not by itself. An operational creditor is entitled to apply when an undisputed debt is unpaid. It becomes abusive where the creditor presses a genuinely disputed claim or acts with an ulterior motive, which is why Mobilox requires rejection of applications where a plausible dispute exists.

How does section 64A differ from section 65?

Section 65 requires fraud or malicious intent and caps the penalty at one crore rupees. Section 64A, added in 2026, applies to frivolous or vexatious proceedings without proof of intent, with a penalty of up to two crore rupees.

Who can be penalised under section 65?

Any person who initiates the proceedings, whether a financial creditor, an operational creditor, the corporate debtor or its corporate applicant, or the shareholders in a voluntary liquidation.

Can a promoter use a friendly creditor to obtain a moratorium?

Such a filing is collusive. The NCLT will dismiss it if the arrangement is exposed, the debt may be disregarded as not genuine financial debt, as in Phoenix ARC (2021), and the persons responsible face a penalty under section 65.

Does a penalty under section 65 end the matter?

No. The penalty is in addition to dismissal of the application and costs, and it does not bar civil or criminal proceedings under other laws for fraud, forgery or false statements.

7. Related Topics

• Topic 13: Sections 8 and 9. Pre-existing disputes.
• Topic 51: Fraudulent and Wrongful Trading. Section 66.
• Topic 76: Offences and Penalties after 2026. The wider penalty framework.