Forensic Audit, Corporate Debtors, Insolvency and Bankruptcy Code 2016, NCLT


IBC was framed with the motive of restructuring or reviving a corporate debtor. The code establishes a procedure for conducting resolution, insolvency and liquidation proceedings within specified time limits. One of these includes preferential transactions covered by IBC Section 43 and other related transactions such as undervalued transactions and extortionate credit transactions covered by IBC Sections 45 and 50 .

Every year, billions are lost due to fraud and corruption, resulting in inefficiencies, failed projects, financial challenges, organizational failures, and more. Often, fraud occurs due to poorly designed controls and weak governance. However, due to the implementation of a forensic audit under the Insolvency and Bankruptcy Code 2016, frauds are easily detected. In which, the forensic auditor conducts the review of the financial statements on the basis of any type of preferential transactions, undervalued transactions or exorbitant credit transactions, if any in the business.

Here, Preferential Transaction means:

  • When a company pays one creditor in preference to other creditors just before declaring bankruptcy.
  • Payment is made by transfer of ownership or interests in favor of a creditor. The advantage could be at the expense of the guarantor or surety as well. When such a transfer takes place while an operational or financial liability is already incumbent on the debtor company;

Undervalued transaction means:

  • When a corporate debtor enters into a transaction, the consideration that the debtor pays is valued at a higher value than the value of the asset.
  • Gift to another person.

Extortionate credit operation means:

  • When a corporate debtor makes a transaction that violates contract law.

Thus, based on all the above transactions, an audit is conducted by a forensic auditor.

Typically whenever there are large advances and account restructuring. The judicial audit is carried out by the creditor. Recently, in terms of Corporate debtor, M/s. Srei Infrastructure Finance Ltd. (SFIL) is subject to a corporate insolvency resolution process in Kolkata Bench of Hon’ble National Company Law Tribunal (NCLT) The forensic audit was carried out by KPMG, which had been appointed by the lenders.

In this case, KPMG audited the accounting books of Srei Infrastructure Finance Ltd. (SIFL) and its wholly owned subsidiary Srei Equipment Finance Limited (SEFL). According to the sources, the report revealed the rollover of loans, a longer moratorium period, lower interest rates for related borrowers and no arm’s length pricing followed for some related party transactions and possible further siphoning off of funds, etc.

However, the report was challenged by the corporate debtor’s promoter, pointing to some shortcomings in the report. In their submission, the promoter’s lawyers asked to set aside the audit process in light of the Corporate Insolvency Resolution Process (CIRP) and further asked to prevent the lenders from publishing any reports. audit file in the central large credit information repository.

However, Kolkata Bench of Hon’ble National Company Law Tribunal (NCLT) on 17.05.2022 rejected a plea filed by the founder of Srei Infrastructure Finance Ltd (SIFL), Hemant Kanoria, challenging the forensic audit carried out by KPMG. Apart from this, in the present case, the promoters also filed a contempt claim against Punjab and Sind Bank which was dismissed by the Hon’ble National Company Law Tribunal.

Thus, from the above judgment of Hon’ble Tribunal, it can be determined that the debtor company cannot be avoided from such a transaction as mentioned above.

Author: Karishma Jaiswal, Senior Partner, Maheswari & Co. Views are personal.


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