NCLT Indore Permits Forensic Audit Of Corporate Debtor On An Application Made By Financial Creditor

The Bench has further held that the decision to avail the services of a Professional to run the affairs of CIRP lies with the Resolution Professional. The role of Committee of Creditors is limited to approving the fees of such Professional.

Background Facts

JSM Devcons Pvt Ltd. (“Corporate Debtor”) is a company engaged in the real estate sector and was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the Adjudicating Authority. Subsequently, Motel Rahans Pvt Ltd (“Applicant”) being one of the secured Financial Creditor of the Corporate Debtor, filed an application seeking appointment of an independent auditor to undertake transaction audit of the Corporate Debtor (under Section 43, 45, 50 & 66 of IBC), for period 2009-10 till insolvency commencement date and submit a report. The basis of such application was the apprehension of certain irregular transactions with respect to the assets of the Corporate Debtor.

Reliance was placed on the Order dated 07.09.2022 passed by the Insolvency and Bankruptcy Board of India (“IBBI”) bearing No. IBBI/DC/128/2022. In the said Order, the IBBI had stated that the decision as to whether the services of a Professional are required or not lies with the Resolution Professional. The role of Committee of Creditors (“CoC”) is limited to the determination of fees of the Professional. The operative portion is as under:

“As per Regulation 34 of CIRP Regulations, the CoC shall fix the expenses incurred by the RP and expenses so incurred shall be treated as CIRP cost. Hence, the role of the CoC is limited to approval/ratification of the fee of auditors. The duty of appointment of professionals vests with RP only. Thus, it is noted that he has abdicated his duty for appointing forensic auditor in favour of the CoC members thereby violated Section 25(2)(d) of the code.”

NCLT Verdict

The Bench opined that it is for the Resolution Professional/Interim Resolution Professional to run the affairs of CIRP and decide on the requirement of Professional services for successful completion of CIRP. However, the approval of CoC would be required on the aspect of fees payable to the Professional.

The Bench observed that a forensic audit of the Corporate Debtor can be conducted upon the request of a secured Financial Creditor, who apprehends irregularities in transactions with respect to the Corporate Debtor’s assets. However, the fees of the Auditor would be borne by the Applicant (Secured Financial Creditor). It has been held as under:

“There can be no doubt that the matter needs to be placed before the CoC for its approval. In the aforementioned order, the IBBI has already made it clear that the decision of the CoC regarding the services of Professional is limited to sanction of their fees and the rest of decision is to be taken by the RP. The present application has been moved by one of the secured financial creditor who precipitate precept certain irregularities/transactions qua the assets of the Corporate Debtor. In the wake of such apprehension, there would be no difficulty in conducting the audit of the account of the Corporate Debtor for the period referred to in the IA. In the wake, the RP is directed to appoint an auditor to conduct the forensic audit of the Corporate Debtor for the period referred to in the IA and the auditor would submit its report within four weeks thereafter. It goes without saying that the fees of the auditor would be payable by the applicant herein.”

Case Title: Motel Rahans Pvt Ltd. v JSM Devcons Pvt Ltd.

Case No.: C.P.(IB)/56(MP)2021

Counsel For the Applicant: Adv. Mr. Nipun Singhvi (IA 98/2023)

Counsel For the IRP/RP: Adv. Mr. Abhishek Naik a.w Ms. Chaya Gupta

Counsel For the Respondent/(Homebuyers): Adv. Mr. Neeraj Kumar Gupta.

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