Case Title: Reserve Bank of India v SREI Infrastructure Finance Limited

The National Company Law Tribunal has observed that the guidelines issued by Reserve Bank of India and those under the Insolvency and Bankruptcy Code are for different purposes and are in the nature of two disjointed sets. Therefore, no question arises about giving preference to one over another. 

The facts, in brief, are that (SIFL and SREI Equipment Finance Ltd. SEFL) are Financial Service Providers and SEFL is a subsidiary of SIFL. They defaulted in repayments to financial facility providers including Axis Bank Ltd. and UCO Bank. Subsequently, a circular titled 'Master Direction of Fraud' was issued by RBI wherein the Banks were directed to report the fraud status of the accounts in default. 

The procedure prescribed to evaluate these defaulter accounts was that first, a meeting of the Joint Lenders Forum was to be convened and thereafter a forensic audit of the defaulter was to be concluded within 3 months from the date of the JLF meeting. 

This was to be followed by a complaint that could be referred to CBI if any fraud is detected.

To comply with the above-mentioned circular, Axis Bank and UCO Bank engaged KPMG to conduct the forensic audit of SIF which they were mandated to complete within 3 months of their appointment post the JLF meeting. 

However, it couldn’t conclude the report within the prescribed time and meanwhile, the RBI proceeded to file an application before the Adjudicating Authority to initiate CIRP against SEFL and SFL which was accepted and CIRP was initiated against both Companies and an Administrator was also appointed. 

It was the contention of the Companies that the appointment of KPMG as the auditor may be set aside, and Axis and UCO Banks may be restrained from conducting the audit since the RBI has already moved the CIRP application which has been accepted and after the Administrator has already been appointed a parallel audit cannot be conducted. It was also contended that by the virtue of section 238 IBC provisions will be given preference over any other law. 

However, the Hon’ble Tribunal observed that “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.”

The Tribunal also categorically held that since the scope and purpose of the two audits are not the same, parallel audits are not a problem in this case. It was further observed that “The ultimate purpose of the audit commissioned by the Administrator should subserve the resolution of insolvency of the corporate debtor. The purpose of the audit under RBI circulars is not the same.”