Can NCLT Approve a Resolution Plan Without a Transaction Audit Report?

In the fast-paced world of corporate insolvency under India's Insolvency and Bankruptcy Code, 2016 (IBC), stakeholders often grapple with procedural hurdles. A common question arises: Without the Transaction Audit Report, can the Resolution Plan be approved by NCLT? This issue touches on the roles of the Resolution Professional (RP), Committee of Creditors (CoC), and the National Company Law Tribunal (NCLT). Understanding this can prevent delays in the Corporate Insolvency Resolution Process (CIRP) and ensure compliance with statutory mandates.

This blog delves into the legal framework, pivotal case laws, and practical insights, drawing from authoritative judgments. While transaction audits promote transparency, their absence doesn't necessarily derail NCLT approval—provided core IBC requirements are met.

The Role of Transaction Audit Report in CIRP

The transaction audit report, often a forensic audit, scrutinizes pre-CIRP transactions for legality, fairness, and potential avoidance under Sections 43, 45, or 66 of the IBC. It equips the RP and CoC with insights into preferential, undervalued, or extortionate transactions. However, it is primarily for the RP and CoC to assess legality and fairness prior to approval. It serves as an internal document to ensure compliance and transparency2025 Supreme(Online)(NCLT) 495.

Notably, the IBC does not explicitly mandate its submission to NCLT for plan approval. In practice:- RPs conduct these audits during CIRP to inform CoC deliberations.- Reports may flag issues leading to avoidance applications, but these are separate from plan approval under Section 30.

For instance, in a Bhushan Steel Ltd. scenario, the forensic auditor (Deloitte) submitted the report after filing of the resolution plan but before its approval2023 Supreme(Online)(Del) 18116. This highlights that timing isn't rigidly tied to NCLT's approval stage.

NCLT's Jurisdiction Under Section 31(1) IBC

NCLT's role is supervisory, not substitutive. Under Section 31(1) of the IBC, it verifies if the resolution plan—as approved by the CoC—complies with statutory requirements, including viability, feasibility, and legality2021 0 Supreme(SC) 753 2019 0 Supreme(SC) 1271.

Key limitations:- NCLT cannot substitute its discretion for the commercial/business judgment of the CoC or interfere on grounds of fairness unless statutory violations exist 2019 0 Supreme(SC) 1271 2021 0 Supreme(SC) 753.- Approval hinges on Section 30(2) criteria, not internal audits.

Thus, the approval of a resolution plan by the CoC, even in the absence of the transaction audit report, is permissible provided the plan complies with statutory criteria2021 0 Supreme(SC) 753 2019 0 Supreme(SC) 1271. Forensic reports are for internal use of the RP and CoC and are not a mandatory prerequisite unless law demands otherwise.

Legal Precedents Supporting Approval Without Audit

Judicial precedents reinforce this position. In one case, the forensic audit report was submitted after the resolution plan was approved, and no orders were passed on the avoidance application before the plan's approval2020 0 Supreme(Del) 1461. NCLT proceeded with approval, underscoring that audit absence doesn't bar the process.

Further, NCLT has approved plans post-CoC nods without delving into audit details. For example:- In Ricoh India Limited, NCLT approved the resolution plan submitted by Kalpraj after CoC's commercial wisdom prevailed 2021 0 Supreme(SC) 141.- Similarly, in another matter, NCLT approved the resolution plan made by two organisations under Section 31(1), with CoC including banks like Vijaya Bank 2020 0 Supreme(Cal) 664.

The Supreme Court and NCLAT emphasize CoC's primacy. Decision of CoC dated is a decision, which has been taken in exercise of its ‘commercial wisdom’ and which is duly approved by NCLT, will prevail2021 0 Supreme(SC) 141. NCLAT cannot interfere unless statutory breaches occur.

Insights from Related Judgments

Other cases provide contextual depth:- Bhushan Steel Ltd.: Post-filing audit didn't halt proceedings; creditors provided details to resolution applicants 2023 Supreme(Online)(Del) 18116.- Guwahati Bench: NCLT approved N. Dhar's plan after CoC deliberation on viability, feasibility, and financial matrix, without audit as a blocker 2021 0 Supreme(Gau) 155.- In wilful defaulter challenges, NCLT approvals post-resolution plans prompted reviews, but didn't invalidate CoC decisions 2020 0 Supreme(Cal) 664.

These illustrate that audits, while valuable for due diligence, don't precondition NCLT approval. Even where audits surfaced later, plans stood if CoC-approved.

Practical Implications for Stakeholders

For RPs, CoC members, and applicants:1. Prioritize Section 30(2) compliance: Fair distribution, creditor treatment, management changes.2. Use audits internally; submit avoidance applications separately if needed.3. Document CoC deliberations to defend against challenges.

In Essar Steel contexts, reconciled accounts and post-plan audits didn't unwind approvals 2021 0 Supreme(Bom) 128. Likewise, FIR quashing in insolvency matters affirmed RP immunity when acting per NCLT/CoC directions 2021 0 Supreme(Gau) 155.

Conclusion and Key Takeaways

Generally, the resolution plan can be approved by the NCLT without the transaction audit report, provided it meets all statutory requirements and has CoC approval. The audit enhances transparency but isn't a mandatory condition under current IBC framework. NCLT focuses on statutory compliance, not re-assessing CoC's commercial wisdom.

Key Takeaways:- CoC's commercial wisdom is paramount—audit gaps don't override it 2021 0 Supreme(SC) 753.- Audits are internal tools, not NCLT prerequisites 2025 Supreme(Online)(NCLT) 495.- Ensure plan viability and legality per Sections 30(2) and 31.- Recommendation: Treat audits as due diligence aids; their absence won't invalidate approved plans.

This post provides general insights based on public judgments and is not legal advice. Consult qualified professionals for case-specific guidance. Laws and interpretations may evolve.