2025 (3) TMI 853 - HC - IBC

Challenge to forensic report prepared by the Respondent No. 2-BDO India LLP a Chartered Accountant s Firm - petitioner was not aware of any such final Forensic Audit Report (FAR) nor was a copy provided to him - principles of natural justice - HELD THAT - It is deemed fair and proper to permit the Respondent No.1-Bank of India to withdraw the show-cause notice based on the FAR dated 9th August 2023 with liberty to initiate fresh proceedings against the Petitioner. The Respondent No.1-Bank of India is at liberty to issue fresh show-cause notice to the Petitioner and the Petitioner is at liberty to raise all objections and contentions including an objection to the partiality of the FAR dated 15th September 2023 in his reply to the show-cause notice. Conclusion - The show-cause notice dated 17th August 2023 is quashed and set aside and stands withdrawn by the Respondent No.1-Bank of India. All consequential proceedings/action pursuant to the show-cause notice taken by the Bank also stand withdrawn and cancelled. The same shall be communicated by the Bank to the Petitioner within 72 hours from the date of uploading of this order. Petition disposed off.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

Whether the forensic audit report (FAR) dated 9th August 2023, prepared by Respondent No. 2, should be set aside due to alleged inconsistencies and incomplete information.
Whether the show-cause notice dated 17th August 2023, issued by Respondent No. 1 based on the interim FAR, should be quashed.
The implications of withdrawing the show-cause notice and the potential for initiating fresh proceedings against the Petitioner.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Forensic Audit Report dated 9th August 2023

Relevant legal framework and precedents: The forensic audit was conducted under the aegis of the Corporate Insolvency Resolution Process (CIRP). The legal framework governing forensic audits in such contexts includes compliance with the Reserve Bank of India's Master Circular and relevant Supreme Court decisions.
Court's interpretation and reasoning: The Court acknowledged the Petitioner's contention that the FAR was based on incomplete information due to the unavailability of all relevant documents, as the company was under CIRP and the Resolution Professional was in possession of the documents.
Key evidence and findings: The Court noted the Petitioner's argument that the FAR was tentative and potentially biased, but did not make a determination on these claims, leaving them open for future proceedings.
Application of law to facts: The Court did not quash the FAR itself but focused on the procedural fairness of the subsequent actions taken based on the FAR.
Treatment of competing arguments: The Court balanced the interests of the Petitioner and the Respondent No. 1 by allowing the withdrawal of the show-cause notice while permitting the Bank to initiate fresh proceedings.
Conclusions: The Court did not set aside the FAR but allowed for the possibility of its re-evaluation in future proceedings.

2. Quashing of the Show-Cause Notice dated 17th August 2023

Relevant legal framework and precedents: The issuance and withdrawal of show-cause notices must comply with procedural fairness and due process as outlined in the Reserve Bank of India's Master Circular and relevant case law.
Court's interpretation and reasoning: The Court found it appropriate to quash the show-cause notice due to its reliance on an interim FAR, which was not final and potentially incomplete.
Key evidence and findings: Respondent No. 1 expressed willingness to withdraw the notice and initiate fresh proceedings, acknowledging the interim nature of the FAR.
Application of law to facts: The Court applied principles of procedural fairness, allowing the withdrawal of the notice and ensuring that any future actions comply with legal standards.
Treatment of competing arguments: The Court provided a balanced resolution by allowing Respondent No. 1 to withdraw the notice and reinitiate proceedings while preserving the Petitioner's right to contest the FAR.
Conclusions: The show-cause notice was quashed, and all actions based on it were withdrawn, with liberty granted to initiate fresh proceedings.

SIGNIFICANT HOLDINGS

Verbatim quotes of crucial legal reasoning: "We deem it only fair and proper to permit the Respondent No.1-Bank of India to withdraw the show-cause notice based on the FAR dated 9th August 2023 with liberty to initiate fresh proceedings against the Petitioner."
Core principles established: The judgment underscores the necessity of basing show-cause notices on final and complete reports to ensure procedural fairness. It also highlights the importance of allowing parties to contest the findings of forensic audits in appropriate forums.
Final determinations on each issue: The show-cause notice dated 17th August 2023 was quashed and withdrawn. The FAR dated 9th August 2023 was not set aside, but its findings remain open to challenge in future proceedings. Respondent No. 1 was granted liberty to initiate fresh proceedings in compliance with legal standards.

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