the "death penalty" is a penalty used in the "interlude C6 Server", as u can see, when u die u wont drop anything (or at least the droping rates are lowered).
when u die, instead of drop an item u will have the "death penalty" and his effect will be stats decreasing also is simply a loss of experience (as well as a chance to drop your items depending on the circumstances). i believe it is something around 10% at lower levels, and then it is lowered to around 4%? (i think?) once you get higher.
regarding the drop system when PK in a Interlude C6 has changed:
-You don't drop on death when you are white (non-pk), no matter wether PvP or PvM
-You DO drop when you are red (PK) and over 5 PKs BUT the chance got reduced
-You have a chance to get a debuff when you die (since I don't really PvP actively I dunno if it also applies for PvP)
-The debuff lasts forever unless you cure it with a scroll
-Scrolls can only be used by white players, red players have to go to a black judge I think and can get their penalty removed there.
-The debuff stacks, so if you die 3 times in a row and get the debuff 3 times in a row it will have a much stronger effect than when you died the first time.
In interlude the exp loss is also supposed to be lowered for players over lvl 76, below 76 it is supposed to stay the same from what I have read.