The Gujarat High Court observed that lender banks must furnish copy of audit reports before classifying loan account as fraud.
The petitioners are the promoters, suspended directors and share holders of the company. Company is currently in the Corporate Insolvency Resolution Process ( CIRP ) under the provisions of Insolvency and Bankruptcy Code, 2016. It is around 04.07.2020, the company came to know about the South Indian Bank i.e. a member of the consortium banks i.e. respondent nos.3 to 19 having taken steps to notify fraud in relation to the loan account of the company.
It is the case of the petitioners that meetings were convened on 18.08.2020 and 29.09.2020 and during that period, forensic audit reports dated 11.08.2020 and 18.09.2020 were discussed. Also, issues were discussed including the issue about the account being declared as a fraud by the South Indian Bank. In the meeting dated 29.09.2020 on the basis of the forensic audit report dated 11.08.2020 and supplementary forensic audit report dated 18.09.2020, the account of the company was declared as fraud illegally.
The petitioners, have challenged the decision of the respondent lender banks taken in the meeting dated 29.09.2020 declaring the account of the company as a fraud. Contention is raised by the petitioners that while taking the decision, the petitioners have not been offered any opportunity to deal with the forensic audit report and/or the supplementary forensic audit report which otherwise, is a mandate issued by the Apex Court in the recent judgment in the case of State Bank of India and Others v. Rajesh Agarwal and Others.
It was submitted by the counsel for the petitioners that the draft forensic audit report and supplementary forensic audit report were discussed with the member banks and they were of the view that the account of the company, shall be declared as a fraud on the basis of finding and opinion of the forensic auditor.
The counsel further contended that all the member banks agreed in principle to declare the account of the company as a fraud and the main reason behind declaring the account of the company as a fraud was based on the forensic audit report and supplementary forensic audit report dated 18.09.2020 namely, (i) Breach of trust, sudden disappearance of stock etc.; (ii) Misfeasance; (iii) Embezzlement; (iv) Misappropriation of funds / Diversion of funds outside the borrowing units etc. and (v) Siphoning off funds through fake telegraphic/mail transfers.
A Single Bench of Justice Sangeeta K Vishen observed that “Undisputedly, in the present case, no such steps have been taken by the respondent lender banks and therefore, on this limited ground of violation of principles of natural justice, the decision of the respondent banks declaring the account of the company as fraud is hereby quashed and set aside. The matter is remitted and let the respondents concerned, after furnishing the copies of the forensic audit report and supplementary forensic audit report so also reasonable opportunity to the petitioners to submit the representation, complete the proceedings by passing order.”
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