Mere Divergence Between Interim, Final Forensic Audit Reports Does Not Establish Unreliability: NCLT Indore

The National Company Law Tribunal (NCLT) at Indore has ruled that a mere divergence between a forensic auditor's interim and final reports, without any demonstrable infirmity, is not enough to disregard the final report or appoint an alternate auditor.

The bench of Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta ruled, “Mere divergence between a preliminary draft and a final report, explained by a materially expanded record, does not by itself establish unreliability.”

The ruling came on an application by Vitol S.A. seeking rejection of KPMG's Final Forensic Report and appointment of an alternate forensic auditor in the liquidation proceedings of Asian Natural Resources (India) Ltd, formerly known as Bhatia International Ltd.

Asian Natural Resources (India) Ltd. entered liquidation in 2018 after insolvency proceedings initiated by IDBI Bank. Vitol, described in the order as the company's largest creditor, has a claim exceeding Rs 536 crore against the liquidation estate. It had alleged that the company's assets were siphoned off and fraudulently hived off to defeat execution of its London arbitral award.

The Bombay High Court, in orders passed in 2015 and 2016, had recorded findings that Bhatia International's coal trading business, valued at Rs 180 crore, was fraudulently hived off to its sister concern, Bhatia Global Trading Ltd, for an undervalued or illusory consideration under a purported Business Transfer Agreement. The high court had also described the transaction as a sham.

An arrest warrant was issued against promoter Surinder Singh Bhatia in October 2015 after he failed to appear and answer questions concerning the alleged siphoning of Bhatia International's assets. A court commissioner was subsequently appointed to record his cross-examination.

The Liquidator appointed KPMG as a forensic auditor in July 2018 after calling for Expressions of Interest and obtaining the Committee of Creditors' approval. The tribunal subsequently permitted the Liquidator to investigate transactions from April 1, 2008 to May 23, 2017. The NCLAT upheld that order in November 2022.

KPMG's Interim Draft Forensic Report, dated September 30, 2020, made preliminary findings of fraud in several transactions. Its Final Forensic Report, dated August 3, 2023, concluded that no evidence was found to suggest that the transactions were fraudulent.

Vitol challenged the Final Report, calling it an unexplained volte-face from KPMG's interim findings. It contended that the Final Report had effectively restricted the review to six years despite the tribunal having permitted investigation from 2008 onwards. Vitol also argued that the report failed to engage with the Bombay High Court's findings concerning the coal trading transaction.

The Liquidator disputed this characterisation. He relied on KPMG's subsequent clarification that the audit had, in substance, covered the period from April 1, 2008, and argued that the difference between the interim and final reports was explained by the fuller material made available later.

Vitol sought the appointment of a fresh forensic auditor and offered to bear the cost, capped at Rs 17.5 lakh.

KPMG had clarified that its Interim Report was preliminary, based only on information available up to September 2020, and expressly subject to revision upon receipt of further information. The Final Report was prepared after additional material was furnished and took that fuller record into account.

The suspended management also maintained that the Interim Report had been prepared without documents relating to transactions beyond the two-year period from the insolvency commencement date. It contended that the additional documents were furnished only after the tribunal permitted the Liquidator to investigate transactions from April 1, 2008 onwards.

The tribunal found that KPMG's audit was validly constituted and conducted under its supervision. It noted that its May 2020 order had permitted the Liquidator to investigate transactions from April 1, 2008 to May 23, 2017, and that the order was later upheld by the NCLAT.

The bench observed, “An audit so constituted, mandated and supervised cannot, in our view, be treated as inherently unreliable, still less as the product of a process lacking institutional legitimacy, merely on account of its divergence from an interim draft.”

The tribunal noted that the Interim Report was expressly preliminary and based on information available at that stage, while additional material was furnished later.

“In these circumstances, it would be inappropriate to treat identity of outcome between the Interim Report (admittedly based on an incomplete record) and the Final Report (based on the complete record, furnished only after prolonged resistance by the Suspended Management) as the expected or necessary state of affairs, such that any departure therefrom must be regarded with suspicion,” the bench observed.

The tribunal held that a change in conclusion after receiving a materially fuller record could ordinarily indicate that the auditor had reconsidered the matter in light of the additional material. It found that the explanation for the difference between the two reports was supported by KPMG's clarification and the material on record.

Vitol also relied on authorities holding that a forensic audit report is only a piece of evidence and is not conclusive proof of illegality. The tribunal accepted that proposition, but held that a Final Report could not be treated as presumptively unreliable merely because a stakeholder disagreed with its conclusions.

The bench held that Vitol had not identified any demonstrable infirmity in the material placed before KPMG, its methodology or the internal consistency of its findings that went to the root of the Final Report.

“What would be required to displace a report of this nature is some demonstrable infirmity — whether in the material placed before the auditor, in the methodology applied, or in the internal consistency of its findings — and not merely the fact that its conclusions are unfavourable to the Applicant's case,” the bench observed.

The tribunal also considered an Advisory Note by Nicholas Good of Evelyn Partners LLP, relied upon by Vitol to challenge KPMG's Final Report. It noted that the document stated that it was not an expert witness report and was based solely on material supplied by Vitol without independent verification. The bench noted that this diminished the weight it could attach to the Advisory Note for the purposes of the application.

The tribunal found no material casting doubt on KPMG's independence. It noted that KPMG had been engaged through a competitive process with the approval of the Committee of Creditors.

“If forensic audits were liable to be reopened, and fresh auditors appointed, each time their conclusions did not accord with a particular stakeholder's expectation, the liquidation process would be rendered interminable, defeating the object of time-bound resolution under the Code,” the bench observed.

The tribunal clarified that dismissal did not give the KPMG Final Report conclusive or unquestionable finality. It held that the report could still be weighed along with the Bombay High Court's findings and other material in appropriate proceedings, including IA 287 of 2018 concerning personal contribution by the erstwhile promoters and suspended management.

The tribunal held that Vitol's application, seeking rejection of the Final Report and appointment of a substitute auditor on the sole ground of divergence between the interim and final reports, did not disclose sufficient cause for such relief.

The application was accordingly dismissed and disposed of.