The National Company Law Tribunal, Kolkata (NCLT), in the recent case of Reserve Bank of India v. SREI Infrastructure Finance Ltd.1, held that the Insolvency and Bankruptcy Code, 2016 (IBC) and the RBI Guidelines do not prevail over each other as they have different scope and purpose. In this article, we navigate through the facts and findings rendered in the case.
The present matter deals with an application filed under section 60(5) of the IBC seeking a restraining order on certain bankers from conducting or proceeding with an independent audit of the corporate debtor.
The Applicant in the instant case is a shareholder of SREI Infrastructure Finance Limited (SIFL) and SREI Equipment Finance Limited (SEFL) as well as a member of the suspended Board of Directors of SIFL. SIFL and SEFL are Financial Service Providers, and SEFL is a subsidiary of SIFL. Both the companies had defaulted in repayments to financial facility providers, including Axis Bank Ltd. and UCO Bank (Bankers). On 23.03.2021, KPMG Assurance and Consulting Services LLP (KPMG) was appointed by the Bankers as an auditor for SIFL, as per the circular issued by the Reserve Bank of India (RBI). SIFL and SEFL went under Corporate Insolvency Resolution Process (CIRP) from 08.10.2021, following which the Administrator appointed BDO India LLP (BDO) as the transaction auditor of SEFL and SIFL, under the IBC, to probe alleged vulnerable transactions. As per the RBI Circular, KPMG was required to complete the audit and give a report within a period of three months from the date of the Joint Lenders Forum (JLF), which was within 24.06.2021. However, KPMG continued with the audit of SIFL even after the initiation of CIRP. It was only on 22.12.2021 when the report was completed it was circulated to the Bankers.
Accordingly, it was contended by the Applicant that, despite the Applicant's written requests to stop finalizing the audit report on account of the CIRP being commenced, KPMG continued with the audit. It was also alleged that KPMG had conducted the audit without consulting the management and by sending a 'draft report', followed by a 'preliminary report' and 'final report' to the lenders behind the back of the management. Thus, it was alleged that the report seemed to be tailored to suit the requirements of the lenders, who wanted to "implicate" the ex-management of the SREI entities. It was also submitted by the Applicant that once a transactional auditor has been appointed under the IBC, a previous audit cannot continue. Thus, there cannot be a parallel forensic audit without consulting the management at the instance of the Bankers. Further, the IBC being recognized as a complete Code and having an overriding effect, the Applicant sought a restraining order against the Bankers from proceeding with the audit being conducted by KPMG. Lastly, it was also submitted by the Applicant that as he is a stakeholder of the Corporate Debtor, he has locus standi to file the application in view of Section 31 of the IBC.
While KPMG admitted that its report was incomplete, it also submitted that the same was completed on 22.12.2021 and was circulated on 28.12.2021 and 29.12.2021 to the Bankers. Further, the Bankers contended that the Applicant's prayer of not using the report by KPMG for any purposes is devoid of any legal ground, as the report is not hit by the moratorium under section 14 of the IBC. They also contended that the breach of timelines under the RBI Circular is a matter that has to be resolved between the Banks and the RBI, and thus, the Applicant cannot seek stoppage of audit on the ground.
The present matter raised the following issues to be dealt with by the NCLT:
- Whether the Applicant has locus standi to file the present application?
- Whether this NCLT has jurisdiction to decide the matter?
- Whether the IBC will prevail over the RBI guidelines?
- Whether two audits can continue parallelly and simultaneously?
On the first issue, the NCLT opined that the Applicant is admittedly one of the shareholders of SIFL and SEFL and was a member of the superseded Board of Management. While locus as a member of the superseded board may be in question, there is no question that the application is maintainable in the Applicant's capacity as a shareholder, as he is an important stakeholder in the process, and thus, would have locus.
While deliberating upon the issue of jurisdiction, the NCLT observed that the audit commissioned by the Bankers was under the aegis of the RBI circulars. As RBI has the authority of issuing binding directions, the circulars issues, too, had statutory force. Thus, it was held that the NCLT, with the powers vested under the IBC, lacks the jurisdiction to stop an audit commissioned under RBI circulars, the intent of which is altogether different.
The NCLT, on the question of whether IBC will prevail over RBI guidelines, observed that the IBC and the RBI circulars work in different fields and are two disjoint sets. As there is no possibility of conflict between the two, the question of one prevailing over the other shouldn't rise. While noting the allegation of the Applicant that the report was tailored to suit the requirements of the lenders, who wanted to "implicate" the ex-management of the SREI entities, the NCLT opined that the matter cannot be examined by the NCLT since it lacks the jurisdiction to do so. However, the applicant had the liberty to raise its concerns before an appropriate judicial forum.
Coming onto the last issue of whether the two audits can continue simultaneously, the NCLT reiterated the fact that as the scope and purpose of the two audits are not the same, there can be no objection as to whether the two audits going on in parallel, notwithstanding the institution of CIRP against the corporate debtor. Further, considering that the KPMG audit is over, there is only the audit commissioned by the administrator that may be ongoing.
The instant judgment adds to the judicial position on the scope of jurisdictional powers vested on the NCLT under Section 60(5) of the IBC. It is well-settled that Section 60(5) grants residuary jurisdiction to the NCLT to decide upon any question of law or fact solely arising out or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor. In the present matter, since the scope of the audits conducted by the Bankers and the administrator are different and mutually exclusive, it was rightly held that the NCLT did not have any jurisdiction to decide upon the matter.
1. Reserve Bank of India v. SREI Infrastructure Finance Ltd., CP (IB) No. 295/KB/2021.
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