Suspended Management Cannot Run Parallel Audits: NCLAT Rejects Privately Commissioned Forensic Report in CIRP

Suspended Management Cannot Run Parallel Audits: NCLAT Rejects Privately Commissioned Forensic Report in CIRP

Introduction

The National Company Law Appellate Tribunal (NCLAT) has held that suspended management of a corporate debtor cannot independently commission a forensic audit during the Corporate Insolvency Resolution Process (CIRP) to challenge claims admitted by the Resolution Professional.

A Bench comprising Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra ruled that a forensic audit report commissioned by suspended management is inherently unreliable due to bias, conflict of interest, and breach of confidentiality of the Committee of Creditors (CoC).

Factual Background

The case arose from the CIRP of Chandigarh Overseas Pvt. Ltd., where the suspended management, led by Tejinder Pal Setia, challenged the admissibility of claims admitted by the Resolution Professional (RP). During the third meeting of the Committee of Creditors, the RP informed members that he had identified certain avoidable transactions and appointed PNAM & Co. LLP as the transaction auditor to examine the matter. Based on the findings of the transaction audit, the RP filed an application before the adjudicating authority seeking relief in respect of two avoidable transactions. The suspended management alleged that they were not given an opportunity to respond adequately and subsequently commissioned their own independent forensic audit, claiming that the RP had wrongly admitted claims amounting to approximately ₹114 crore.

Procedural Background

The suspended management filed an application before the National Company Law Tribunal challenging the claims admitted by the RP and relied on the forensic audit report commissioned by them. The NCLT rejected the application, holding that the Insolvency and Bankruptcy Code does not permit suspended management to independently commission forensic audits during the CIRP. Aggrieved by the decision, the suspended management approached the NCLAT challenging the rejection of their application and the inadmissibility of the audit report.

Issues

1. Whether suspended management of a corporate debtor can independently commission a forensic audit during CIRP to challenge claims admitted by the Resolution Professional.

2. Whether a privately commissioned forensic audit report by an interested party can be treated as reliable evidence in insolvency proceedings.

3. Whether such actions violate the confidentiality obligations associated with the Committee of Creditors.

Contentions of the Parties

The appellants contended that the Resolution Professional had incorrectly admitted claims amounting to ₹114 crore and that the forensic audit commissioned by them exposed these discrepancies. They argued that the audit report should be considered by the tribunal as evidence to reassess the admitted claims.

The Resolution Professional argued that the audit report lacked legal validity because it had been commissioned by an interested party. The RP further pointed out that the report contained extensive disclaimers, was unsigned, lacked the auditor’s official stamp, and had not been approved by the Committee of Creditors.

It was also argued that the suspended management had accessed confidential information relating to the CIRP and shared it with their privately appointed auditor, thereby breaching CoC confidentiality obligations.

Reasoning and Analysis

The NCLAT held that for an audit report to be reliable and admissible, it must be prepared by an independent and unbiased auditor. A report commissioned by suspended management, who have a direct interest in the outcome of the insolvency proceedings, inherently suffers from conflict of interest and bias. The tribunal also noted several deficiencies in the report, including the absence of an auditor’s signature and the lack of an official stamp from the audit firm. The explanation offered by the appellants that the report was merely a draft was found to be unconvincing.

The Bench emphasised that the role of suspended management in the CIRP is limited. While they may participate in proceedings and provide insights or information when required, they cannot independently control or influence the audit process by appointing auditors of their own choosing. The tribunal further held that sharing CIRP-related information with a privately appointed auditor breached the confidentiality framework governing the Committee of Creditors. Accordingly, the tribunal concluded that the appeal was an attempt by the suspended management to interfere with or derail the insolvency resolution process at an advanced stage.

Decision

The NCLAT dismissed the appeal and upheld the order of the NCLT rejecting the forensic audit report commissioned by the suspended management of Chandigarh Overseas Pvt. Ltd.

In this case the appellant was represented by Mr. Paras Mithal, Mr. Prabhar Mithal and Mr. Arjun Katyal, Advocates. Meanwhile the respondent was represented by Mr. Atul V. Sood, Advocate for RP.