The Adjudicating Authority cannot direct a forensic audit and engage which will effect object of IBC 2016

Allahabad Bank vs. Link House Industries Limited
Company Appeal (AT) (Insolvency) No. 1304 of 2019
National Company Law Appellate Tribunal (NCLAT)
Dated 22.05.2019

IT WAS HELD THAT

The Adjudicating Authority cannot direct a forensic audit and engage in a long-drawn pre-admission exercise which will have the effect of defeating the object of the ‘I&B Code,2016.

The Insolvency and Bankruptcy Code, 2016(Code/IBC) is the umbrella legislation for insolvency resolution of all entities in India—both corporate and individuals. The provisions relating to insolvency and liquidation of corporate persons came into force on December 1, 2016, while those of insolvency resolution and bankruptcy of personal guarantors to corporate debtors (CDs) came into effect on December 1, 2019. Insolvency and bankruptcy provisions for another category of individuals are yet to be notified (ason the date of this publication). The aim of codifying insolvency law is to provide for greater coherence inlaw and facilitate the application of consistent and lucid provisions to different stakeholders affected by business failure or the inability to pay debt. To this end,the Code repealed the Presidency Towns InsolvencyAct, 1909, and the Provincial Insolvency Act, 1920,and made amendments to 11 laws, including the Companies Act, 2013, the Recovery of Debts Due to banks and Financial Institutions Act, 1993, and the

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, to giveeffect to the newly codified legislation. The provisions
of the Code are being brought into force in phases.

Its foundational objectives are as follows

“An Act to consolidate and amend the lawsrelating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner formaximization of value of assets of such persons,to promote entrepreneurship, availability of creditand balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an insolvency and Bankruptcy Board of India, andfor matters connected therewith and incidental thereto.”

1. The first objective of the Code is resolution.
2. The second objective is to maximize the value of assetsof the corporate debtor” and
3. the third objective is to promote entrepreneurship, availability of credit, and balancing the interests.

The order of these objectives is sacrosanct. As a key economic reform, the Code has shifted the balance of power from the debtor/borrower to the creditor. It has instilled a significantly increased sense of fiscal and credit discipline to better preserve economic value.

SECTION 75 OF IBC,2016Where any person furnishes information in the application made under section 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than one lakh rupees, but may extend to one crore rupees.

BRIEF FACTS

1. Company Petition is filed under Section 7 by the Appellant- 'Financial Creditor' against Respondent- 'Corporate Debtor' in the appeal praying for initiation of 'Corporate Insolvency Resolution Process' on the ground that the 'Corporate Debtor' had committed default qua the financial debt that was payable in law and in fact to the 'Financial Creditor'.

2. As some objections were raised on behalf Company Appeal (AT) (Insolvency) No. 1304 of 2019 of the 'Corporate Debtors' that the 'Corporate Insolvency Resolution Process' had been initiated fraudulently and with a malicious intent to drag a solvent corporate who was willing to pay amounts that were actually due and payable legally, the Adjudicating Authority, being of the view that during the entire loan process due diligence was not carried out, appointed PWC Mr. Gaganpreet Singh Puri, Pricewater House Coopers Services LLP as Forensic Auditor to examine allegations raised by the 'Corporate Debtor' and submit an Independent Report delineating some factual aspects bearing upon utilisation of the credit facility extended by the 'Financial Creditor' to 'Corporate Debtor'.

3. The impugned orders appear to have been passed at the instance of 'Corporate Debtor' who had moved applications under Section 75 of the 'I&B Code' alleging false information having been furnished in the applications.

NCLAT OBSERVATIONS

1. The dictum of law propounded by the Hon’ble Apex Court is loud and clear. The Adjudicating Authority cannot travel beyond the letter of law and the dictum of the Hon’ble Apex Court.

2. The satisfaction in regard to occurrence of default has to be drawn by the Adjudicating Authority either from the records of the information utility or other evidence provided by the ‘Financial Creditor’.

3. The Adjudicating Authority cannot direct a forensic audit and engage in a long drawn pre-admission exercise which will have the effect of defeating the object of the ‘I&B Code’.

4. If the ‘Financial Creditor’ fails to provide evidence as required, the Adjudicating Authority shall be at liberty to take an appropriate decision.

5. If the application is incomplete, it can return the same to the ‘Financial Creditor’ for rectifying the defect. This has to be done within 7 days of the receipt of notice from the Adjudicating Authority.

6. However, the ‘I&B Code’ does not envisage a pre-admission enquiry in regard to proof of default by directing a forensic audit of the accounts of the ‘Financial Creditor’, ‘Corporate Debtor’ or any ‘financial institution’.

7. Viewed thus, the impugned order cannot be supported.

8. Application under Section 75 of the ‘I&B Code’ on behalf of the ‘Corporate Debtors’ cannot be permitted to frustrate the provisions of the ‘I&B Code’
when the matter is at the stage of admission.

9. Section 75 is a penal provision which postulates an enquiry and recording of finding in respect of culpability of the Applicant regarding commission of an offence. The same cannot be allowed to thwart the initiation of ‘Corporate Insolvency Resolution Process’ unless in a given case forgery or falsification of documents is patent and prima facie established.

CONCLUSION

As mentioned above the main purpose of IBC,2016 is to resolve insolvency of Corporate Debtor in a time bound manner. The emphasis is given on resolution and re-organisation of position of Corporate Debtor and hence the power of Adjudicating Authority is restricted, they are not supposed to breach their limit, while deciding cases.

DISCLAIMER: The case law presented here is only for sharing information with readers. In case of necessity do consult with professionals for more clarity and understanding of subject matter.