Suspended Management Cannot Order Independent Forensic Audits To Challenge CIRP Claims: NCLAT New Delhi

On Tuesday 10 March, the Principle Bench of the National Company Law Appellate Tribunal (NCLAT) at New Delhi held that a forensic audit report commissioned by suspended management is inadmissible due to bias, conflict of interest, and a breach of the Committee of Creditors (CoC) confidentiality.

A Bench comprising Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra, was hearing an appeal by the suspended management of Chandigarh Overseas Pvt. Ltd. challenging the inadmissibility of a forensic audit report they had independently commissioned during CIRP.

The Tribunal observed:

“We are not persuaded with the explanation offered by the Appellant that this report was unsigned as it was a 'Draft Report' and that they had therefore sought the permission of the Adjudicating Authority to submit a certificate from the audit firm to substantiate that they had prepared its report.”

Chandigarh Overseas was under different management before being taken over by the present suspended directors, including Tejinder Pal Setia, the appellant.

In the third CoC meeting, the Resolution Professional (RP) informed members that he had identified avoidable transactions and had appointed PNAM & Co. LLP as the transaction auditor.

Based on this audit, the RP filed an application before the NCLT for two avoidable transactions. The suspended management responded with their own application, alleging they were not given a chance to reply.

While this application was pending, the suspended management independently commissioned a forensic audit, claiming the RP had wrongly admitted claims worth Rs 114 Cr. The NCLT dismissed the application, observing that the Insolvency and Bankruptcy Code (IBC) does not permit suspended management to conduct a forensic audit on their own.

The RP argued that the privately commissioned report lacked legal validity, contained extensive disclaimers, and was not approved by the CoC. The NCLAT agreed, noting it had no auditor signature, no agency stamp, and was inherently unreliable. The Bench emphasised:

“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 further observed:

“It is an established policy strand in CIRP jurisprudence that the suspended management at best can participate and share insights with a Transaction Auditor appointed with the approval of the CoC and not control the audit process by appointing a transaction auditor at its own will with selective, cherry-picked data.”

Accordingly, the NCLAT rejected the appeal, noting that sharing information with their own auditor breached CoC confidentiality and that the appeal was an attempt by suspended management to derail an advanced-stage CIRP.