NCLT's Power To Order Forensic Audit Is Self-Ordained, No Separate Application Needed: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai on Tuesday held that the National Company Law Tribunal can direct a forensic audit on its own even if no party has filed a separate application seeking such relief.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Indevar Pandey dismissed an appeal filed by Able Automobiles Private Limited and its directors, challenging the June 30, 2022 order of the NCLT, Kochi Bench appointing an independent chartered accountant to conduct a forensic audit into the company's affairs.

Upholding the tribunal's power to act on its own assessment, the appellate tribunal observed that Rule 43 of the NCLT Rules, 2016, under which a forensic audit may be ordered, confers a self-ordained power on the tribunal.

“In that eventuality, when the provision itself doesn't contemplate filing of any specific application, that in itself can be explicitly inferred that, even if a party to the proceedings intends to invoke the aforesaid provision contained under Rule 43 of the NCLT Rules, 2016, requiring for collection of the information or any evidence there is no specific bar which has been created under law as such for any of the parties to the proceedings mandatorily requiring to file an application nor there is a corresponding or parallel bar created for the Ld. Tribunal too, to exercise its inherent power wherever, the Ld. Tribunal feels it necessary that, a discovery of certain documents are required in the interest of justice to be tested, on an anvil of evidence for its justification.”, it observed. 

The appeal arose from proceedings initiated before the NCLT, Kochi by Rekha Singhal, a shareholder of Able Automobiles Private Limited. She claimed that she held 52,500 fully paid-up equity shares, amounting to a 17.5 percent stake in the company. She alleged that her shareholding had been unlawfully altered using fraudulent documents.

She also alleged serious irregularities in the company's financial statements for the year ending March 31, 2019, including incorrect disclosure of shareholding, improper accounting treatment of funds paid by her, and anomalies in inventories and assets reflected in statutory filings. In view of these allegations, the NCLT directed a forensic audit of the company's records.

Assailing this order, the company and its directors argued before the appellate tribunal that the NCLT had no jurisdiction to direct a forensic audit in the absence of a specific application asking for such a relief.

They submitted that the direction effectively set off a “fishing and roving” inquiry. They further contended that the tribunal had not recorded any proper prima facie satisfaction before ordering the audit and that it also lacked authority to fix the auditor's remuneration.

Rejecting these contentions, the appellate tribunal held that the power to call for documents or to order an investigative audit vests in the tribunal itself and may be exercised wherever it is necessary to scrutinise records alleged to be fraudulent or fabricated.

It clarified that directing a forensic audit does not amount to collecting evidence for one side or the other, and that the audit report would be open to challenge and testing in the course of the proceedings.

Finding no defect in the NCLT order ordering forensic audit, the appellate tribunal refused to set it aside.