National Company Law Tribunal Rules Forensic Reports Alone Cannot Prove Fraudulent Trading Under IBC Law

In a significant ruling, the National Company Law Tribunal (NCLT) Ahmedabad has clarified the evidentiary value of forensic audits in insolvency proceedings. The bench, comprising Judicial Member Mrs. Chitra Hankare and Technical Member Dr. Velamur G Venkata Chalapathy, held that a forensic audit report cannot, by itself, substantiate allegations of fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016.

The Context of the Dispute

The application was filed by the liquidator of Vijay Timber Industries Private Limited, seeking to hold former directors liable for alleged fraudulent transactions totaling Rs 959.26 lakh. The case emerged after the corporate debtor entered the Corporate Insolvency Resolution Process (CIRP) in February 2020. The liquidator heavily relied upon a report prepared by M/s Pipara & Co. Chartered Accountant LLP, which flagged various journal entries, write-offs of sundry debtors, and asset discrepancies as potentially fraudulent.

Arguments from the Liquidator and Respondents

The liquidator contended that the forensic report provided clear evidence of financial mismanagement and siphoning of assets intended to defraud creditors. In contrast, the respondent directors argued that all challenged transactions were legitimate accounting adjustments, such as the write-off of decade-old irrecoverable debts and the recognition of asset impairment. They further asserted that the liquidator failed to demonstrate actual fraudulent intent, citing earlier cooperation with all professional inquiries.

The Tribunal’s Legal Analysis

The NCLT’s analysis centered on Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The Tribunal emphasized that a Resolution Professional (RP) has a statutory duty to independently examine transactions and form an opinion before approaching the court.

The bench noted that the forensic report in question contained explicit disclaimers identifying itself as an "investigative aid" and explicitly stating it did not constitute legal or expert opinion. By relying solely on this document without conducting an independent statutory evaluation, the liquidator failed to meet the procedural mandate of the IBC.

Key Observations

Reflecting on the limitations of external audits, the Tribunal observed:

“The forensic audit report can at best constitute an investigative aid for enabling the Resolution Professional to examine the affairs of the Corporate Debtor and form an independent opinion under Regulation 35A.”

The bench further added:

“The report, by itself, cannot substitute the statutory satisfaction required to be arrived at by the Resolution Professional nor can it be treated as conclusive proof of fraudulent trading under Section 66 of the Code.”

Additionally, the court remarked:

“The Resolution Professional/Liquidator has not complied with the mandatory procedure contemplated under Regulation 35A of the CIRP Regulations before invoking Section 66 of the IBC.”

Implications of the Decision

The application was ultimately rejected. This order serves as a critical precedent for insolvency professionals, reinforcing that the duties imposed by the IBC cannot be delegated or outsourced to external audit firms. It mandates that RPs must exercise their own professional judgment and perform independent due diligence before levelling serious allegations of fraud. Practitioners must now ensure their filings are backed by independent analysis, as judicial forums are increasingly scrutinizing the "independent satisfaction" required under the law.