Statutory Auditor Not Part Of Company Management, Cannot Be Compelled To Assist RP Under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that a statutory auditor, as an independent professional and not part of a company's management, cannot be compelled under Section 19 of the Insolvency and Bankruptcy Code to assist a resolution professional in the same manner as company personnel.

“A statutory auditor is a professional who by the very nature of the audit to be undertaken cannot be associated with the company whose affairs he is to audit. On the contrary, a statutory auditor is only required to hold a mirror vis-à-vis the performance of a company, more particularly its financial health to the stakeholders of the Company... It is plainly difficult to hold that the appellant, who was appointed as a statutory auditor only couple of months before the CD was admitted to CIRP and was also removed soon thereafter, be termed as one who is associated with the management of the CD,” the tribunal held.

The ruling came as the appellate tribunal set aside an October 21, 2022 order of the Chandigarh Bench of the National Company Law Tribunal directing former Lakshmi Precision Screws Ltd. statutory auditor Sanjeev Kumar Arora to hand over documents and assist the resolution professional.

The bench of Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka allowed Arora's appeal against the tribunal's order.

Arora was appointed as the company's statutory auditor in February 2018, and shareholders approved the appointment in May 2018. Insolvency proceedings against Lakshmi Precision Screws began in July 2018.

The tribunal noted that Arora had sought records from the resolution professional after his appointment to undertake the statutory audit, but the resolution professional had indicated in an email that he was not receiving support from the company's staff.

In November 2018, the committee of creditors resolved to replace Arora over issues concerning his remuneration and sought his resignation along with a no-objection certificate to appoint a new auditor. Arora resigned in February 2019.

Before his resignation, the resolution professional had moved the Chandigarh Bench of the National Company Law Tribunal seeking directions requiring Arora to furnish documents connected to his limited review for the quarter ending December 2017, provide supporting records, and complete the statutory audit for 2017-18.

In October 2022, the Chandigarh Bench directed Arora to cooperate with the resolution professional, provide access to all documents sought, assist in completing statutory compliances, and complete the pending audit work within 45 days. It also allowed the resolution professional to seek police assistance in case of non-compliance.

Arora challenged the order, contending that he was an independent statutory auditor and not a person associated with the company's management. He also argued that he was not the custodian of the company's records, said he had already shared documents available with him, and no longer had access to the company's records after his resignation.

The resolution professional argued that Arora was required to provide inventory details, working papers, and documents relied upon for his limited review and could not avoid his obligation to cooperate. It was also argued that his failure to promptly resign and issue a no-objection certificate had delayed the appointment of a replacement auditor.

Examining the scope of Section 19 of the Insolvency and Bankruptcy Code, the appellate tribunal said the obligation to assist a resolution professional is limited to company personnel, directors, promoters, and others associated with the management of the corporate debtor.

“To sum up this idea, under Sec.19(1), an IRP or a RP, as the case may be, may insist only those personnel of the CD which includes its directors, and/or any other person who were associated with the management of the corporate debtor to assist or to cooperate with the him in his effort in managing the CD for running it as a going concern and for the protection of CD's properties. There cannot be any other way of constructing the ambit of Sec. 19(1) IBC," the bench said.

The tribunal also held that a person cannot be compelled to provide documents that are not in their possession, noting that Arora had denied retaining the requested records and that the resolution professional's own auditor had acknowledged receiving documents from him.

“After all, no person can part with something that he does not possess,” the bench said.

The tribunal also questioned why the litigation was being pursued when the insolvency resolution process had already substantially progressed without the disputed information.

It noted that an information memorandum had already been prepared, expressions of interest invited, and a resolution plan approved by the committee of creditors before liquidation was eventually ordered.

“The whole exercise appears as an utter waste of judicial time, as the liquidation has been ordered but only after the Adjudicating Authority had rejected the resolution plan as approved by the CoC,” the tribunal observed.

Holding that the Chandigarh Bench had failed to properly examine the statutory auditor's role, whether the requested documents were actually available with him, and the acknowledgment by the resolution professional's own auditor that documents had been received, the appellate tribunal set aside the order.