“Explore the necessity of Committee of Creditors’ approval for the appointment of Transaction/Forensic Auditor under Section 18 of the Insolvency and Bankruptcy Code, 2016. Understand the role of Forensic Auditors in identifying PUFE Transactions and ensuring compliance with IBC regulations. Learn about the timeframes and procedures involved in appointing a Forensic Auditor, and the Resolution Professional’s responsibilities in obtaining approval for associated costs from the Committee of Creditors. Stay informed about key considerations and legal perspectives for effective insolvency resolution.”
Whether approval of Committee of Creditor is necessary for appointment of Transaction/Forensic Auditor?
Under Section 18 of Insolvency and Bankruptcy Code, 2016 (‘IBC’), the Insolvency Professional is required to review the Assets and Liabilities of the Corporate Debtors. The Insolvency Professional shall collect all information relating to the assets, the financial position of the Corporate Debtor, including information relating to-
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the date of initiation date; and
(iv)such other matter as may be specified.
Now, the question is arising whether is it mandatory to appoint a transaction auditor (forensic auditor) for an Insolvency Resolution matter? Please note that the IBC does not put any obligation on Insolvency Professional to appoint a Forensic Auditor. To review the Assets and Liabilities of the Corporate Debtors, the Insolvency Professional appoints a Transaction Auditor, with a focus to identify the PUFE Transactions (Preferential, Undervalued, Fraudulent or Extortionate) covered under section 43, 45, 50 or 66 of the IBC if any. The Insolvency Professional gets held up with all the daily routine activities of the Corporate Debtors and therefore it is very difficult for him to deep dive in each and every transaction carried out in the last two years.
The role of Forensic Auditor is very crucial and therefore required in every sphere of business. The Forensic Auditor can identify the fund diversion, siphoning of funds and other related activities, which may be carried out by the management of the Company. Apart from this, with the support of Forensic Audit Report, the Committee of Creditors can identify and declare the Promoters / Directors of the Corporate Debtor Company, as “Willful Defaulter”.
Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) requires the resolution professional to form an opinion on transactions covered under sections 43, 45, 50 and 66 by 75th day, make determination on such transactions by 115th day, and file an application before the Adjudicating Authority by 135th day of the insolvency commencement date.
Regulation 35A. Preferential and other transactions
(1) On or before the seventy fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under Sections 43,45,50 or 66.
(2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date,
(3) Where the resolution professional makes a determination under sub-regulation 2, he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date.
Regulation 35A prescribed a period during which Resolution Professional has to
– form an opinion whether corporate debtor has been subjected to any transaction covered under Section 43,45, 50or 66; and
– the period during which he shall make a determination; and
– a period of one hundred thirty-fifth day of insolvency commencement date during which he shall apply to the Adjudicating Authority.
The expression used in Regulation 35A “shall form an opinion” “shall make a determination” and he “shall apply to the Adjudicating Authority”
Now, further question is arising whether the appointment of Forensic Auditor is required any approval of the Committee of Creditors? It is to be noted that the Forensic Auditor is appointed by the Insolvency professional is just for an expert opinion on the matter. Hence, the ultimate responsibility to report to the Adjudication Authority remains on the Resolution Professional. There is no need of any approval from Committee of creditor regarding the appointment of Forensic Auditor.
However, it is also to be noted that Regulation 34 of CIRP Regulations provides that the Committee shall fix the expenses to be incurred on or by the Resolution Professional and the expenses shall constitute insolvency resolution professional cost. The Explanation to Regulation 34 of CIRP Regulations provides that for the purpose of this regulation, “expenses” include the fee to be paid to the resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the resolution professional.
In view of the above, it is clear that it is prerogative of Resolution Professional to appoint Forensic Auditor but the cost to be incurred i.e. fee to be paid to Forensic Auditor is to be approved or ratified by the Committee of Creditor. In practical, there are many situations wherein the Resolution Professional put the proposal of appointment of Forensic Auditor and request Committee of Creditors to approve the cost to be incurred for appointing a Forensic Auditor, but members of the Committee refuse, fail and neglect to approve the same. In these circumstances, the Forensic Auditor is not appointed, since recalcitrance and total disinterest of the member of Committee in this regard, rendered it practically impossible to appoint a Forensic Auditor.
For the above situation, it is important to note that if Resolution Professional has framed his opinion for audit, he should appoint the Forensic Auditor within the time frame provided under the IBC otherwise, it would be a contravention of Section 25(2)(d) and (j) of the IBC read with clauses 1,2,3,5,10 and 14 of the Code of Conduct as specified in the First Schedule of IP Regulations.
Remark- In view of the above, it is advisable for the Resolution Professional
- to first frame the opinion for audit under any transaction covered under Sections 43,45,50 or 66 of IBC;
- put the proposal before the Committee of Creditors for approving the budget of audit;
- invite Expression of Interest by transaction auditor with quotations;
- short listing the EOI by Resolution Professional and
- engagement letter.
For the further question, in case the budget is not approved by the member of Committee, the Resolution Professional should appoint Forensic Auditor, otherwise it would be a breach of his duties under (j) of the IBC which mention to file application for avoidance of transactions before Adjudicating Authority. The ultimate responsibility to report to the Adjudication Authority always remains on the Resolution Professional.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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