IBC AND RBI Guidelines Are 'Disjoint Sets', "There Is No Question Of One Prevailing Over The Other": NCLT Kolkata Dismisses Application Filed By SREI Ex Promoter Hemant Kanoria

The National Company Law Tribunal ("NCLT"), Kolkata Bench, comprising of Shri Rajasekhar V.K. (Judicial Member) and Shri Balraj Joshi (Technical Member), while adjudicating an application filed in Reserve Bank of India v SREI Infrastructure Finance Ltd., has 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. The NCLT does not have jurisdiction to adjudicate upon an audit conducted under RBI guidelines. The application was filed by Ex-Promoter of SREI Infrastructure Finance Ltd. ("SIFL"), Mr. Hemant Kanoria, challenging the KPMG Audit which was conducted under RBI guidelines. The order was passed on 17.05.2022. Background Facts SIFL and SREI Equipment Finance Ltd. ("SEFL") are Financial Service Providers and SEFL is a subsidiary of SIFL. These companies had defaulted in repayments to financial facility providers including Axis Bank Ltd. and UCO Bank. On 01.07.2016 the RBI had issued a 'Master Direction of Fraud' circular wherein Banks were directed to report the fraud status of the accounts in default. First a meeting of the Joint Lenders Forum ("JLF") was to be convened and thereafter a forensic audit of the defaulter was to be concluded within 3 months from the date of JLF meeting. Following which, a complaint could be referred to CBI if any fraud is detected. Accordingly, Axis Bank and UCO Bank had convened a meeting of the JLF on 24.03.2021 and KPMG Assurance and Consulting Services LLP ("KPMG") was appointed to conduct the forensic audit of SIFL. As per the said RBI Circular, KPMG was obligated to conclude the audit within 24.06.2021, i.e. within 3 months of the JLF meeting. In 2021, the RBI had filed a petition before NCLT, Kolkata Bench ("Adjudicating Authority"), under Section 227 and 239(zk) of the IBC for initiating Corporate Insolvency Resolution Process ("CIRP") against SIFL and SEFL, for defaulting on repayments to various Financial Creditors including UCO Bank and Axis Bank. On 08.10.2021, the Adjudicating Authority had initiated CIRP and appointed an Administrator for both the companies. The Administrator appointed BDO India LLP ("BDO") as the transaction auditor of SEFL and SIFL under the IBC on 02.11.2021 to probe vulnerable transactions. KPMG could not complete its report within 3 months' time. The report was completed on 22.12.2021 and circulated it to Axis Bank and UCO Bank on 28.12.2021 and 29.12.2021. Application Filed By Mr. Hemant Kanoria An application bearing IA (IB) No.75/KB/2022 was filed by Mr. Hemant Kanoria ("Applicant"), who is the Ex-Promoter, Shareholder and Ex Chairman-cum-Managing Director of SIFL and a shareholder of SEFL, before the Adjudicating Authority seeking setting aside the appointment of KPMG as the auditor and restraining Axis Bank and UCO Bank from proceeding with the process of audit through KPMG. Contentions Of The Applicant The Applicant contended that KPMG had continued the audit of SIFL even after the initiation of CIRP, despite Applicant's written requests to stop the finalising the audit report in view of CIRP commencement. It was submitted that the KPMG audit arises out of insolvency and is connected with insolvency, because the CIRP is RBI-driven. KPMG had conducted the audit without consulting the management and thereafter a 'draft report', followed by a 'preliminary report' and a 'final report' was circulated to lenders behind the back of the management. The Applicant alleged that the report was tailored to suit the requirements of the lenders, who wanted to "implicate" the ex-management of the SREI entities. Further, KPMG has accepted that the reports were incomplete. It was submitted that as BDO had been appointed as a transactional auditor under the IBC, therefore a previous parallel audit cannot continue. It was further contended that by virtue of Section 238 of IBC, which provides for overriding effect of IBC over other laws, IBC will have precedence over the RBI Circular. Therefore, the transactional audit being conducted under IBC should get precedence. The Applicant submitted that it has locus standi to file the application in view of Section 31 of the IBC, as he is a stakeholder of the Corporate Debtor. Contentions Of KPMG KPMG submitted that its report was completed on 22.12.2021 with the participation of the suspended management and was circulated on 28.12.2021 and 29.12.2021 to Axis Bank and UCO Bank. It was submitted that the delay in submission of the report is for the RBI to deal with and has no connection with the CIRP. The cause of action of the Applicant was against the Banks and not KPMG as the latter is only incidental to the cause. Further, the application had become infructuous as the investigation by KPMG was over and report had been submitted. Contentions Of Axis Bank And UCO Bank The Banks contended ...

IBC AND RBI Guidelines Are 'Disjoint Sets', "There Is No Question Of One Prevailing Over The Other": NCLT Kolkata Dismisses Application Filed By SREI Ex Promoter Hemant Kanoria

Pallavi Mishra

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