Appointment of forensic / transaction auditors in Corporate Insolvency Resolution Process under IBC

We are at almost end of 3 years from introduction to Insolvency and Bankruptcy Code, 2016. Still there is a lot of dilemma when it comes to appointment of Transaction / Forensic Auditor. Some of the question that come across are whether it is compulsory to appoint a transaction/forensic Auditor? Whether CoC decided who is to be appointed? When should one appoint an auditor? What shall be the reporting structure? What is the Process for appointment of A Transaction / Forensic Auditor.

Is it mandatory to appoint a transaction auditor for an Insolvency Resolution matter?

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. 

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” and thereby take necessary steps.

The IRP has to get hold of all the daily routine activities of the CD and therefore it is very difficult to deep dive in each and every transaction carried out in the last two years. Though the IBC itself doesn’t put an obligation on IRP to appoint a Forensic Auditor but, for getting through the transactions in details, IRP appoints a Forensic / Transaction Auditor, with a focus to detect PUFE Transactions.

At what juncture in the process, is it required to appoint a transaction auditor?

As per IBC

Insolvency and Bankruptcy Code doesn’t define anything as to when a Transaction Auditor is to be appointed. In fact, as per section 20(2)(a), Insolvency Resolution Professional has an authority to appoint some professional as and when required, it doesn’t say that transaction auditor is to be compulsorily appointed.

Practical Scenario

On practical front, it is not possible for Insolvency Professional to take over the management activities immediately. Along with regular activities of the Corporate Debtor’s going concern, the Resolution Professional has to dig out into the past for getting into details of all the transaction carried out.

Does the CoC have a say in identifying a forensic auditor?

As per Section 20(2)(A) IRP has the rights to appoint a professional, Since IRP is the one who is appointing the Forensic Auditor, he holds the right of identifying, appointing, controlling, reporting, etc. Assign roles and responsibilities

Which means CoC has no role with the Forensic Auditor. CoC directly can no where communicate with Forensic Auditor. Auditor shall report IRP then IRP has to report to the CoC, if he feels like doing the same. As per code, IRP is bound to inform only NCLT.

Forensic Auditor can be a Legal Evidence in NCLT.

What is the Process flow for appointing a transaction auditor in a matter?

Appointment Processes and Documents

Click the Below link to read the EOI & Engagement Letter by Transaction Auditor

Sample EOI
Sample Engagement Letter

What is the timeline for submission of Forensic Audit Report?

As per Insolvency and Bankruptcy Code, 2016 the Resolution Professional has to form an opinion about the Corporate Debtor whether there are any PUFE Transactions within the Stipulated time. If any, MA to be filed with NCLT requesting reversal of such transactions with proper evidences of the same. Timeline for forming an opinion against the Corporate Debtor is T + 75 days, Wherein T stands for date of Initiation of CIRP Process. So, the importance of the Report will be at peak only if it is received within T + 75 days. However, in case of non-availability of data or some other reason, RP  can ask for an extension from NCLT.

Please feel free to write to us on info@apmh.in / mehul@apmh.in for any further queries on the above blog.