NCLT’s Power To Order Forensic Audit Is Self-Ordained, No Separate Application Needed: NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Chennai Bench, has held that the National Company Law Tribunal (NCLT) is empowered to direct a forensic audit on its own assessment of the case and that no separate application by any party is required for invoking such power. Upholding an order passed by the NCLT, Kochi Bench, the appellate tribunal clarified that the authority to order a forensic audit flows directly from Rule 43 of the NCLT Rules, 2016 and is inherent to the tribunal’s adjudicatory function.
The Bench comprising Justice Sharad Kumar Sharma, Judicial Member, and Indevar Pandey, Technical Member, was hearing an appeal filed by Able Automobiles Private Limited and its directors. The appeal challenged the order dated June 30, 2022, by which the NCLT, Kochi had appointed an independent chartered accountant to conduct a forensic audit into the affairs of the company.
The proceedings before the NCLT were initiated by Rekha Singhal, a shareholder of Able Automobiles Private Limited. She claimed that she held 52,500 fully paid-up equity shares, constituting a 17.5 percent stake in the company. According to her, her shareholding had been unlawfully altered and diluted through the use of fraudulent and fabricated documents. She also alleged serious irregularities in the company’s financial statements for the year ending March 31, 2019, including incorrect disclosure of shareholding, improper accounting treatment of funds paid by her, and anomalies in the inventory and assets reflected in statutory filings.
In view of the nature of the allegations and the materials placed on record, the NCLT, Kochi, formed an opinion that a forensic examination of the company’s records was necessary to ascertain the truth. Accordingly, it directed an independent chartered accountant to conduct a forensic audit of the company’s affairs.
Assailing this order before the NCLAT, the company and its directors argued that the NCLT had exceeded its jurisdiction by directing a forensic audit in the absence of any specific application seeking such relief. They contended that the tribunal could not suo motu order a forensic audit and that the impugned direction amounted to permitting a “fishing and roving enquiry.” It was also argued that the NCLT had not recorded any proper prima facie satisfaction before ordering the audit and that it lacked the authority to appoint the auditor and fix his remuneration.
Rejecting these submissions, the NCLAT examined the scope of Rule 43 of the NCLT Rules, 2016, which empowers the tribunal to call for information, documents, and evidence. The appellate tribunal held that the provision does not contemplate the filing of any specific application as a precondition for exercise of such power. It observed that the absence of any such requirement clearly indicates that the tribunal itself can invoke the provision whenever it considers it necessary in the interest of justice.
The Bench observed: “When the provision itself doesn’t contemplate filing of any specific application, that in itself can be explicitly inferred that… there is no specific bar which has been created under law as such for any of the parties to the proceedings mandatorily requiring to file an application nor there is a corresponding or parallel bar created for the Ld. Tribunal too, to exercise its inherent power wherever, the Ld. Tribunal feels it necessary that, a discovery of certain documents are required in the interest of justice.”
The NCLAT further clarified that directing a forensic audit does not amount to collecting evidence in favour of one party or against the other. It held that a forensic audit is only a fact-finding exercise intended to assist the tribunal in testing the veracity of serious allegations of fraud, fabrication, or financial irregularities. The audit report, the tribunal noted, would be subject to scrutiny and could be challenged and tested by all parties during the course of the proceedings.
On the allegation that the NCLT had embarked upon a fishing enquiry, the appellate tribunal held that where serious and specific allegations of fraud and manipulation of records are raised, the tribunal is justified in ordering a forensic audit to examine the correctness of statutory filings and financial statements. It emphasised that such a direction cannot be characterised as arbitrary or without jurisdiction.
The NCLAT also rejected the contention that the NCLT lacked the authority to appoint an auditor or fix remuneration, holding that such ancillary directions are incidental to the exercise of power under Rule 43 and are necessary for effective implementation of the audit.
Finding no illegality or jurisdictional error in the impugned order, the appellate tribunal held that the NCLT had rightly exercised its discretion in directing a forensic audit of the company’s affairs. It concluded that the power to order such an audit is inherent and self-ordained, and does not depend on the filing of a separate application by any party. Accordingly, the NCLAT dismissed the appeal and refused to interfere with the NCLT’s order directing a forensic audit, thereby reaffirming the tribunal’s wide powers to ensure discovery of truth and effective adjudication in company law proceedings.
Appearance
For Appellants: Advocate Judy James
For Respondents: Advocates Dr. KS. Ravichandran, PCS and S Manjula Devi
Cause Title: Able Automobiles Private Limited and Ors v. Smt Rekha Singhal and Ors
Case No: Company Appeal (AT) (CH) No.60/2022
Coram: Justice Sharad Kumar Sharma, Judicial Member, Indevar Pandey, Technical Member
