Resolution Professional's Reliance on Forensic Audit Report Found Insufficient Without Independent Analysis
In a significant ruling, the National Company Law Tribunal (NCLT) Ahmedabad Bench, comprising Mrs. Chitra Hankare and Dr. Velamur G Venkata Chalapathy, has dismissed an application filed under Section 66 of the Insolvency and Bankruptcy Code, 2016, by the Liquidator of Vijay Timber Industries Private Limited. The application sought recovery of Rs. 959.26 Lakhs, alleging fraudulent trading by the Corporate Debtor.
The Tribunal emphasized the mandatory requirement for the Resolution Professional to independently form an opinion under Regulation 35A of the CIRP Regulations before filing an application under Section 66. The bench observed that the Liquidator had relied solely on a forensic audit report without conducting an independent analysis, which is insufficient to establish fraudulent intent.
The forensic audit, conducted by M/s Pipara & Co, highlighted several alleged discrepancies, including unexplained reductions in closing stock, write-offs of sundry debtors, and questionable transactions with related parties. However, the Tribunal noted that the forensic report itself contained limitations and was intended only as an investigative aid, not as conclusive proof of fraudulent activities.
In their defense, the respondents provided explanations for the alleged discrepancies, such as the deterioration of old stock and accounting adjustments for irrecoverable debts. They contended that the forensic audit report's findings were based on incomplete information and that the Resolution Professional had failed to independently verify the claims.
The Tribunal held that the burden of proof for establishing fraudulent trading lies with the applicant, which was not met in this case. Consequently, the application was deemed devoid of merit and was rejected.
This judgment underscores the critical role of the Resolution Professional in forming an independent opinion rather than solely relying on audit reports, thus reinforcing the procedural safeguards within the insolvency framework.
Bottom line:-
Insolvency and Bankruptcy Code, 2016 Section 66 application alleging fraudulent trading - Resolution Professional must independently form statutory opinion and determination under Regulation 35A of CIRP Regulations; reliance solely on forensic audit report without independent analysis is insufficient.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Section 66, Regulation 35A of CIRP Regulations
