NCLT Mumbai Urges IBBI To Conduct Training Session For Forensic Auditors Regarding Avoidance Transactions Under IBC

“The IBBI may look into the qualitative aspect of Forensic and Transaction Auditor’s Report and may consider to hold one training session so as to equip them with the basic nuances of provisions relation to Avoidance Transactions contained in the Code and the expectation of the stake-holders from them in this regard.”

The Bench while dismissing an avoidance application under Section 43 of IBC, has deprecated the casual approach of Resolution Professional and Forensic Auditor in dealing with such an important part of CIRP.

Background Facts

Pawar Electro Systems Pvt. Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT.

The Corporate Debtor had paid Rs. 91 Lakhs to Mr. Ramesh Jain towards Sales Commission. Further, M/s Intec Capital had financed machineries amounting to Rs. 3.51 Crores to the Corporate Debtor. M/s Intec Capital intimated the Resolution Professional that upon verification of fixed assets it was found that certain machines were missing.

A Transaction Audit Report was prepared by the Transaction cum Forensic Auditor. The Forensic Auditor declared the transaction of Rs. 91 Lakhs as preferential and stated that the Corporate Debtor did not provide updated fixed asset register for physical verification of purchase of Plant & Machinery. Further, post verification of documents provided by the Corporate Debtor for missing machinery, the Forensic Auditor didn’t find any anomaly in the documents and/or explanations provided by the Corporate Debtor.

The Resolution Professional filed an application under Section 43 of IBC for avoidance of alleged preferential transaction amounting to Rs. 91 Lakhs. No prayer was made regarding missing machineries.

NCLT Verdict

The Bench opined that in the Transaction Audit Report the findings of the Auditor are at variance. On one hand the Auditor concludes that Mr. Ramesh Jain was paid towards Sales Commission and the Sales Commission expenses got omitted to be accounted for, which has been characterized by the Auditor as ‘Accounting error’. On the other hand, the Auditor holds that the payment of Rs. 91 Lakhs made within look back period can be classified as Preferential Transaction. It was held that the Application as well as the Transaction Audit Report fails to demonstrate how the said Transaction was covered under Section 43 of IBC.

Further, the facts pertaining to missing machineries were irrelevant, since neither any prayer nor any case has been made out in the Application in this regard. The Resolution Professional himself is not aware of the case he is making before the Bench. Accordingly, the application has been dismissed.

The Bench deprecated the approach of the Resolution professional and Forensic Auditor for dealing with an important aspect of CIRP so casually and over non application of mind.

“Before we part with, we deplore the approach of the Resolution professional, the Applicant, as well as the Forensic and Transaction Auditor in dealing with such important aspect of CIRP so casually and without application of mind to the facts of the case.”

Further, the Bench has also urged the Insolvency and Bankruptcy Board of India (“IBBI”) to hold a training session to equip the Forensic cum Transaction Auditors with basic provisions relating to Avoidance applications under IBC and the expectation of stakeholders from them.

“The IBBI may look into the qualitative aspect of Forensic and Transaction Auditor’s Report and may consider to hold one training session so as to equip them with the basic nuances of provisions relation to Avoidance Transactions contained in the Code and the expectation of the stake-holders from them in this regard.”

Case Title: IDBI Bank Limited v Pawar Electro Systems Pvt. Ltd.

Case No.: C.P.(IB) No. 1587/MB/2019

Counsel for Applicant: Mr. P.S. Thakre, PCS.

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