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IBC & RBI circulars do not have primacy over each other

Citation : Reserve Bank of India vs SREI Infrastructure Finance Limited, CP (IB) No.295/KB/2022 and Hemant Kanoria vs Srei Infrastructure Finance Limited, Through its Administrator, Mr Rajneesh Sharma, IA (IB) No.75/KB/2022

Date of Judgment/Order : 17 May 2022

Court/Tribunal : The National Company Law Tribunal, Kolkata

Corum : Rajasekhar V.K. Member (Judicial) and Balraj Joshi Member (Technical)

Background

SIFL and SEFL are under Corporate Insolvency Resolution Process (“CIRP”) from 08 October 2021, and Mr Rajneesh Sharma was appointed as the Administrator of SIFL and SEFL.

Axis Bank Limited and UCO Bank appointed KPMG as auditor for SIFL on 23 March 2021. 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”) meeting authorising the same. In the present case, the Core Committee Meeting was held on 24 March 2021. Thus, KPMG was required to complete the audit within 24 June 2021. However, KPMG continued with the audit of SIFL even after the initiation of CIRP. Following the initiation of CIRP against SEFL and SIFL, the Administrator appointed BDO India LLP (“BDO”) as the transaction auditor of SEFL and SIFL under the Code on 02 November 2021 to probe vulnerable transactions.

The Applicants filed application objecting that the Insolvency Code had an overriding effect and once a transactional auditor has been appointed under the Code, a previous audit cannot continue.

Judgment

The Hon. NCLT opined that the trial of offences by a Special Court in terms of section 236 of the Code would be restricted to offences under the Code, as laid down by sub-section (1) thereof. Fraud by a banking official, for instance, would not be an offence under the IBC, but under other laws. The scope, purpose and objective of the audit under the RBI is not only to look into the transactions from the perspective of the corporate debtor now functioning under an independent professional, but also to unearth criminality, if any, on the part of bank officials too. Therefore, to say that the KPMG audit should either be stopped, rescinded or otherwise consigned to the bin, is not something that commends itself to us.

Therefore, we hold that this Adjudicating Authority, with the powers vested under the Insolvency & Bankruptcy Code, 2016, lacks the jurisdiction to stop an audit commissioned under RBI circulars, the intent of which is altogether different.

Therefore, the Code and the RBI circulars work in different fields and are, in a manner of speaking, disjoint sets. The adequacy or otherwise of KPMG’s audit report would no doubt be determined by the lenders. We do not see any possibility of conflict between the two. There is no question of one prevailing over the other.

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