Suspended Management Cannot Commission Independent Forensic Audit During CIRP: NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal, New Delhi has held that a forensic or transaction audit commissioned independently by the suspended management of a corporate debtor during the Corporate Insolvency Resolution Process (CIRP) cannot be relied upon, as such reports suffer from inherent bias, conflict of interest and breach of confidentiality of the Committee of Creditors (CoC). The Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) dismissed the appeal filed by the suspended management of Chandigarh Overseas Pvt. Ltd., holding that the report commissioned by them lacked legal sanctity and credibility.
The appeal arose from an order passed by the National Company Law Tribunal, Chandigarh Bench, which had dismissed an application filed by the suspended management seeking to place on record a forensic audit report prepared by a private audit firm and to rely on the findings of that report to challenge the claims admitted by the Resolution Professional during the CIRP.
Chandigarh Overseas Pvt. Ltd. had been admitted into CIRP on 27 February 2023. The Resolution Professional subsequently constituted the Committee of Creditors and admitted claims submitted by various creditors. During the third meeting of the CoC held on 15 October 2023, the Resolution Professional informed the members that, upon analysing financial records, he had formed an opinion regarding the existence of avoidable transactions. For this purpose, PNAM & Co. LLP was appointed as a transaction auditor to examine such transactions. Based on the report of the transaction auditor, the Resolution Professional filed avoidance applications before the Adjudicating Authority.
The suspended management objected to the conduct of the transaction audit and contended that the Resolution Professional had initiated the avoidance proceedings without giving them an opportunity to respond. While their application challenging the audit process was pending before the NCLT, the suspended management independently commissioned another audit through Baker Tilly ASA India LLP and relied upon the findings of that report to allege that the Resolution Professional had wrongly admitted claims amounting to approximately ₹114 crore.
Based on the privately commissioned report, another member of the suspended management filed an application before the NCLT seeking directions to place the earlier transaction audit report in abeyance and to rely upon the findings of the newly commissioned forensic audit. The Adjudicating Authority rejected the application, holding that there is no provision under the Insolvency and Bankruptcy Code permitting suspended management to conduct a forensic audit on its own during the CIRP.
Challenging this decision before the appellate tribunal, the appellant argued that the Resolution Professional had admitted several claims without proper verification and that the independent forensic audit revealed serious discrepancies. It was contended that certain claims had been admitted without proof of debt, while other claims were duplicated or wrongly admitted despite being fully settled. The appellant therefore urged that the findings of the audit report commissioned by Baker Tilly should be taken into account and the claims admitted by the Resolution Professional should be re-examined.
The Resolution Professional opposed the appeal and argued that the audit report relied upon by the suspended management had no legal validity. It was pointed out that the report had not been commissioned with the approval of the CoC and was prepared by a firm engaged directly by the suspended management. The Resolution Professional further submitted that the report lacked authenticity as it did not contain the signature or stamp of the auditing entity and was filled with extensive disclaimers.
After examining the report and the material placed on record, the appellate tribunal found that the audit report relied upon by the appellant did not contain the name or signature of the forensic auditor and lacked the stamp or particulars of the auditing agency. The tribunal noted that the report carried only the signature of the individual who had filed the application and therefore raised serious doubts about its authenticity and ownership.
The tribunal also rejected the explanation offered by the appellant that the report was unsigned because it was only a draft report and that they had sought permission from the Adjudicating Authority to submit a certificate from the audit firm later. The Bench observed that the Adjudicating Authority could not be expected to rely upon a draft report that was replete with disclaimers and lacked the basic requirements of a credible audit document.
The appellate tribunal further held that the very act of commissioning a forensic audit by the suspended management during CIRP undermines the independence of the audit process. It observed that for an audit report to be reliable, the audit must be conducted by an independent and unbiased party appointed through the appropriate process.
In this context, the tribunal observed that “for an audit report to be held reliable and dependable, the audit must be conducted by independent and unbiased parties. On the other hand, a report commissioned by the suspended management is akin to a report commissioned by an interested party and suffers from conflict of interest and bias which clearly undermines the integrity of the report and renders it vulnerable of being a one-sided, doctored report.”
The tribunal also emphasised that the suspended management is not authorised to share confidential information obtained during the CIRP with an auditor appointed by them. Sharing such information with a privately engaged auditor would amount to a breach of the confidentiality obligations attached to the commercial decisions of the CoC.
The Bench further noted that the role of the suspended management during CIRP is limited. While they may participate in the process and provide information or insights when required, they cannot take control of the audit process by appointing their own transaction auditor and selectively providing data.
Observing that the resolution plan in the case had already been approved by the CoC with more than 99% voting share and was awaiting approval of the Adjudicating Authority, the tribunal held that the appeal appeared to be an attempt by the suspended management to reopen issues relating to admission of claims and thereby delay the resolution process.
In view of these findings, the appellate tribunal concluded that the Adjudicating Authority had rightly refused to take cognisance of the forensic audit report commissioned by the suspended management and had correctly dismissed the application filed by them. Accordingly, the NCLAT found no merit in the appeal, upheld the order of the NCLT and dismissed the appeal, holding that the impugned order did not suffer from any legal infirmity.
Cause Title: Tejinder Pal Setia v Sh. Arvind Kumar
Case Number: Company Appeal (AT) (Insolvency) No. 1348 of 2025
Coram: Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member)
