Mere Forensic Audit Report Observations Cannot Extinguish Corporate Debtor's Ownership Rights: NCLT Ahmedabad

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has recently ruled that a forensic audit report alone cannot deprive a corporate debtor of ownership over money standing in its bank account. It also cannot confer any adjudicated right on a bank to disregard the Insolvency and Bankruptcy Code.

A bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma observed, “Mere observations contained in a forensic audit report do not, by themselves, extinguish ownership rights recorded in favour of the Corporate Debtor.”

“A forensic audit report, by itself, does not divest the Corporate Debtor of title over monies standing in its account nor does it confer any adjudicated right upon the Respondent Bank to disregard the mandate of the Code," it added.

The ruling came on an application originally filed by the Resolution Professional of Sintex Prefab & Infra Ltd. It was later pursued by Bank of Baroda, the lead financial creditor, on behalf of the consortium of lenders.

The application sought transfer of fixed deposits of about ₹4.46 crore, along with accrued interest, from IDBI Bank to the corporate debtor's CIRP account.

After initiation of CIRP, the RP learned about the Fixed Deposit the Corporate debtor had with IDBI Bank. However, the same was not transferred despite repeated requests.

IDBI Bank opposed the application. It contended that the fixed deposit represented part of about ₹717 crore which, according to a forensic audit report, had been diverted from Sintex Industries Ltd. to Sintex Prefab & Infra Ltd. The bank therefore argued that the fixed deposit did not constitute an asset of the corporate debtor.

The tribunal noted that the fixed deposits stood in the name of the corporate debtor. It also noted that IDBI Bank had placed a balance confirmation on record showing that the deposits continued to remain in that account.

The tribunal held that any claim arising from the alleged diversion must be pursued before a competent forum in accordance with law.

The tribunal held that any claim arising from the alleged diversion must first be decided by a competent forum. Until then, IDBI Bank could not withhold the fixed deposits.

The tribunal directed Bank to transfer the fixed deposits, along with accrued interest, within 15 days. It declined to initiate penal action, finding no specific material demonstrating a wilful and deliberate contravention.