In Hemant Kanoria v. SREI Infrastructure Finance Limited (Through its Administrator, Mr Rajneesh Sharma), the National Company Law Tribunal, Kolkata ("NCLT") held that the Insolvency and Bankruptcy Code, 2016, ("IBC") and guidelines issued by the Reserve Bank of India ("RBI") are disjoint sets and there is no question as to which will take precedence.
Financial service providers SREI Infrastructure Finance Limited ("SIFL") and SREI Equipment Finance Limited ("SEFL") are undergoing the Corporate Insolvency Resolution Process ("CIRP") designed in accordance with the IBC's requirements. The RBI has instructed the banks to report the fraud status of the delinquent accounts in a circular titled "Master Directions on Frauds - Classification and Reporting by Commercial Banks and Selected FIs" on July 1, 2016 (Updated as of June 3, 2017) (the "RBI Circular"). The Joint Lenders' Forum ("JLF") must authorise the forensic audit within three months of that date, according to clause 8.9.5 of the RBI Circular.
On March 24, 2021, two significant creditors, Axis Bank and UCO Bank, called a JLF meeting and designated KPMG Assurance and Consulting Services LLP ("KPMG") to carry out the forensic audit. By June 24, 2021, the forensic audit was intended to be finished in accordance with RBI Circular Clause 8.9.5.
On October 8, 2021, the NCLT began the CIRP of SIFL and SEFL in response to a petition filed by the RBI and named Mr Rajneesh Sharma as an administrator of both the aforementioned firms. In accordance with his appointment, the administrator named BDO India LLP ("BDO") to conduct a transaction audit of SIFL and SEFL and investigate the vulnerable transactions in accordance with the applicable IBC regulations.
After that, Mr. Hemant Kanoria ("Applicant"), a shareholder of SIFL and SEFL and a member of the SIFL board of directors that was suspended, filed an application with the NCLT, asking for, among other things, the annulment of KPMG's appointment and a prohibition against Axis Bank and UCO Bank from conducting and moving forward with the audit process through KPMG.
In the instant case titled Hemant Kanoria v. SREI Infrastructure Finance Limited, the issue raised for clarification before the NCLT was:
Whether the NCLT has the authority to halt an audit ordered in accordance with the RBI Circular?
With regard to this issue, The NCLT noted that in light of the KPMG report now being filed, all other prayers requested by the applicant have become infructuous. Only Prayer (b), which is requesting an Order to set aside the audit process carried out by KPMG in light of the beginning of CIRP, remains to be answered.
Regarding the question of the NCLT's jurisdiction, the NCLT made the observation that, based on the authority granted by the IBC, the NCLT lacks the authority to halt an audit ordered by the RBI Circular, whose purpose is quite different.
Additionally, the NCLT noted that the RBI circulars operate in several domains and are, in a manner of saying, disconnected sets when it came to the question of whether the IBC will take precedence over the RBI instructions. Lenders would undoubtedly judge the audit report from KPMG for sufficiency or otherwise. As a result, the NCLT declared that there is no chance of a dispute between the two and that neither can win out over the other.
The NCLT categorically stated that,
"We have already held that the scope and purpose of the two audits are not the same. 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. Therefore, there can really be no objection to the two audits going on in parallel, notwithstanding the institution of CIRP against the corporate debtor."