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JC - Legal Updates - Parallel audit under RBI circular and the Insolvency and Bankruptcy Code – NCLT Kolkata

Legal Updates

30 May 2022

Parallel audit under RBI circular and the Insolvency and Bankruptcy Code – NCLT Kolkata

The National Company Law Tribunal, Kolkata (“NCLT/Adjudicating Authority”) in the matter of Reserve Bank of India v SREI Infrastructure Finance Limited, CP (IB) No.295/KB/2021 has held the audit under the RBI circular and the audit under the IBC operate in different fields and are for different purposes. There is no conflict or repugnancy to attract the non-obstante clause in section 236 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

On 01.07.2016 the RBI had issued a 'Master Direction of Fraud' circular wherein Banks were directed to report the fraud status of the accounts in default within 3 months.

KPMG Assurance and Consulting Services LLP ("KPMG") was appointed by Axis Bank and UCO Bank being the lenders, to conduct the forensic audit of SIFL and SREI Infrastructure Finance Limited (“SEFL”).

In the meantime, the NCLT ordered for commencement of Corporate Insolvency resolution process (“CIRP”) of SIFL and SEFL. BDO India LLP ("BDO") was appointed as the transaction auditor of SEFL and SIFL under the IBC to probe vulnerable transactions.

Thereafter an application was filed by the ex-promoter, shareholder and ex chairman-cum-managing director of SIFL and a shareholder of SEFL, aggrieved by the fact that the KPMG continued audit even after the initiation of CIRP. It was argued that;-

(a)      KPMG conducted an audit without consulting the management.

(b)      Once a transactional auditor has been appointed under the Code, a previous audit cannot continue.

(c)      There cannot be a parallel forensic audit without consulting the management at the instance of the bankers.

(d)      by virtue of Section 238 of IBC, the IBC will have precedence over the RBI Circular

KPMG contended that the delay in submission of the report is for the RBI to deal with and has no connection with the CIRP.

Axis Bank and UCO Bank submitted that KPMG report is not hit by the moratorium under Section 14 of IBC as it is not pertaining to civil action against the Corporate Debtor.

The Adjudicating Authority opined that the KPMG audit under RBI Circular was to verify the financial statements of SIFL and SEFL from the year 2016 in order to determine if there was any fraud whereas, the audit under IBC was to verify the financial books of SIFL and SEFL for preceding two years from the date of CIRP.

It was held by NCLT that IBCand the RBI circulars work in different fields and are, in a manner of speaking, disjoint sets and thus there is no question of one prevailing over the other.


For any further information, please contact Mr. Shubhabrata Chakraborti (shubhabrata.chakraborti@jclex.com) or Mr. Dhruv Malik (dhruv.malik@jclex.com).