Sanjeev Kumar Arora vs Deepak Thukral & Ors & Ors

Sh. Sanjeev Kumar Arora ...Appellant

Vs

1. Deepak Thukral ...Respondent No.1 2. M/s Lakshmi Precision Screws Limited ...Respondent No.2 3. M/s Hind Tradex Limited ...Respondent No.3

(Arising out of Order dated 21.10.2022 passed by the Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench) in CA No. 69/2019 and in Company Petition No. IB 155/Chd/Hry/2018.)

For Appellant: Mr. Arun Saxena, Mr. Rahul Kr. Singh, Mr. Amit Verma, Advocates For Respondent: Mr. Vishal Bhatnagar and Mr. Veer Pratap Singh, Advocates for RP

JUDGEMENT

Per Justice N. Seshasayee, Member (Judicial)

This Appeal is preferred by the erstwhile statutory auditor of the CD challenging

an Order passed in I.A. 69 of 2019 in CP (IB) No.155/Chd/Hry/2018 dated

21.10.2022, which the RP had taken out under Section 19, IBC, 2016. 2

2. The uncontroverted facts are:

a) On 27.02.2018, the appellant was appointed as the statutory auditor

of the CD by its Board for the year 2017 - 2018. On 15.05.2018, the

EOGM of the CD approved the appointment of the appellant as the

statutory auditor.

b) While so, barely two months thereafter, on 24.07.2018, CIRP was

initiated against the CD.

c) Pursuant to its appointment on 10.09.2018, the appellant sent an e-

mail to the RP seeking certain particulars and repeated his efforts vide

another e-mail dated 27.09.2018. On receipt of the second e-mail, on

the same date, the RP had sent a written e-mail to the appellant

wherein he had indicated that he was not obtaining any support from

the staff of the CD.

d) It is in these circumstances the 5th meeting of the COC was convened.

On 16.11.2018, the COC met and it inter alia resolved to change the

statutory auditor owing to certain issues connected with the appellant's

remuneration which the Board of the CD had originally agreed to pay

him. The COC had also sought appellant's resignation along with a NOC

for appointing a new statutory auditor. In deference to the said

resolution and request, on 21.02.2019, the appellant had tendered his

resignation.

3. Shortly before the appellant tendering the resignation, the RP/respondent

herein had filed IA 69 of 2019, the Order passed in which is the subject

matter of the present appeal for a direction to the appellant to furnish 3

certain information. In the affidavit filed in support of this application, the

RP would allege that he has been asking for a detailed inventory list

relating to the third quarter of the CD ending 31.12.2017, for which the

Appellant had prepared a Limited Review Report. Further the Appellant

was also requested to provide the documents such as management

certificate/ representations or any other working documents which must

be in his possession on the basis of which, he had given his Limited Review

Report for the third quarter ended on 31.12.2017. Curiously enough, the

RP has inter alia prayed for a direction to the appellant herein to conduct

the statutory audit for the financial year 2017-2018 in spite of the fact

that he had been removed by the COC when the only formality of

appellant's resignation remained to the completed.

4. The appellant herein in its reply before the Adjudicating Authority has

contended the following:

a) The Appellant is a Chartered Accountant (FCA) and partner of M/s

Arora & Choudhary Associates, duly appointed as Statutory Auditor of

the Corporate Debtor for FY 2017-18, and had only conducted a limited

review for the third quarter (Oct-Dec 2017) based on records produced

by management. The statutory audit could not be undertaken due to

non-availability of complete books of accounts.

b) After commencement of CIRP on 18.07.2018, management vested with

the RP, who failed to provide necessary records despite repeated

requests from the Appellant. The appellant continuously requested

financial records via emails to initiate the audit but delays were solely 4

attributable to non-cooperation and non-availability of records with the

RP and staff. The RP himself admitted, including in email dated

27.09.2018, that records were incomplete due to lack of staff support.

c) All documents and information available with the appellant have

already been shared with the RP and no material has been withheld

and allegations of non-cooperation are false and baseless. The

appellant never retained extracts or working papers beyond the limited

review, as no statutory audit was conducted and documents were

returned to management.

d) The RP has acknowledged in emails (including 12.01.2019) and CoC

minutes that the appellant has been cooperating and the present

application under Sections 19(2) and 19(3) of the IBC is malafide,

frivolous, and filed without any substantive allegation or proof.

e) The real dispute pertains to audit fees, where the RP arbitrarily reduced

the fee to ₹5,00,000 without basis as against ₹18,00,000 approved by

shareholders and the appellant had offered a voluntary reduction of

20% in fees, which was suppressed by the RP before the CoC. The RP

misled the CoC by not disclosing the Appellant's willingness to reduce

fees and obtained approval for change of auditor based on incomplete

and misleading facts. The issue of fee reduction was never placed before

or approved by the CoC only change of auditor was discussed.

f) The CoC meeting dated 16.11.2018 was conducted in violation of IBBI

Regulations, as no proper agenda, supporting documents or voting

process (as required under Regulation 21(3)) was followed. No valid

voting with the requisite 66% majority under Section 28(3) of the IBC 5

was conducted. Hence, any approval to change the auditor is void ab

initio.

g) The RP has exceeded his authority and misused powers under the IBC

by attempting to alter the appointment and remuneration of the

statutory auditor. The appointment and removal of a statutory auditor

are governed by Sections 139 and 140 of the Companies Act, 2013,

requiring shareholder approval and where applicable, Central

Government approval. The RP and CoC cannot override shareholder

decisions or statutory provisions under the Companies Act, 2013.

h) IBBI Circular dated 03.01.2018 mandates compliance with all

applicable laws, including the Companies Act, during CIRP and

auditor-related changes must follow due legal procedure. The MCA

Circular dated 25.10.2017 only limits shareholder rights in specific

contexts such as resolution plans and does not override general

requirements under company law.

i) The RP has no locus to seek directions under Section 19(2) read with

Section 28 for compelling audit at reduced fees or forcing resignation.

The prayer seeking direction to compel the Appellant to resign and issue

a No Objection Certificate is illegal, arbitrary and contrary to law and

constitutional principles.

j) No tribunal has the authority to compel resignation of a duly appointed

professional and removal can only occur in accordance with statutory

procedure and on grounds of misconduct. The Appellant has always

been willing to cooperate and continue audit services subject to

mutually agreed or shareholder-approved fees.

6

k) The audit fee, if undertaken during CIRP would form part of CIRP costs

and can be paid in accordance with the resolution plan or liquidation

process. The delays in statutory filings (Income Tax, ROC, SEBI) are

attributable to non-availability of records and actions of the RP, not due

to any fault or non-cooperation of the Appellant.

l) The RP has acted arbitrarily, suppressed material facts and misused

statutory provisions rendering the application liable to be dismissed

with costs.

5. When this petition was pending, the Adjudicating Authority had passed an

interim Order dated 16.10.2019 wherein it has observed that the appellant

is under an obligation to furnish the required information as referred to by

the RP and that the record placed before the Adjudicating Authority did

not indicate that the appellant had discharged its duty to that extent.

Eventually, the Adjudicating Authority had passed the following Order:

5) From the perusal of the facts narrated above, it is evident that the respondents have failed to discharge the responsibility under the Code with regard to sharing of information with the Resolution Professional. As per Section 19(1) of the Code, the Respondent is under obligation to extend all assistance and cooperation to the RP as required in managing the affairs of the company. By not responding to the notices issued during the present proceedings, the respondents have only lent strength to the contention of the Resolution Professional that such non-compliant behaviour is intentional and premeditated.

6) In view of the above discussion, we direct Mr. Sanjeev Kumar Arora-Respondent, Statutory Auditor, to cooperate and give access to all documents/details as sought by the applicant. They are 7

further directed to assist the applicant-RP in completing the statutory compliances as required to complete the audit. The respondent is further directed to provide pending information required by IRP. All the aforementioned compliances be made within two weeks from the date of this order, failing which the applicant-Resolution Professional is at liberty to approach local police on the basis of this order and local police to render all necessary assistance to Resolution Professional. In view of the above discussion, the respondent Statutory Auditor is hereby directed to share all the information, documents etc., with the Resolution Professional within 10 days of this order and take forward the pending audit work and complete the same within a period of 45 days. In case of a lack of willingness to act as Statutory Auditor on the part of the respondent, he is directed to file his resignation along with his No Objection Certificate only immediately after handing over all the required information and pending documents to the Resolution Professional.

Arguments

6. The learned Counsel for the appellant submitted:

a) the RP requires the appellant to furnish particulars of the latter's

limited review, its worksheets etc. but the appellant had already

handed over the same to the auditor appointed by the RP and this was

acknowledged him could be seen from the appellant's e-mail dated

10.01.2019 and the reply mail dated 12.01.2019.

b) Secondly, the appellant is a statutory auditor, an external agency and

was not the custodian of the records of the CD.

8

c) Thirdly, the appellant had resigned and has no access to any of the

records of the CD nor is he in possession of any such documents.

d) Fourthly and significantly, today the CIRP stands concluded with the

Adjudicating Authority rejecting the plan and ordering liquidation of

the CD.

7. Per contra, the learned counsel for the respondent argued:

a) the appellant, in his capacity as the Statutory Auditor, is required to

furnish the particulars relating to the limited review including inventory

details and supporting working papers, which he has failed to provide

despite repeated requests made through various email communications

dated 12.01.2019, 19.01.2019 and 23.01.2019.

b) Secondly, it was submitted that the appellant cannot evade his

statutory obligation of cooperation under Section 19 of the IBC, 2016

and contend that he does not possess the documents sought, as the

same is contrary to established auditing standards including SRE

2410, which mandate due diligence and maintenance of working

papers.

c) Thirdly, despite approval of the CoC for replacing the appellant as the

statutory auditor of the CD, the RP was unable to appoint a new auditor

due to the failure of the appellant to timely resign and furnish a No

Objection Certificate. It has to be seen in the context of serious

discrepancies discovered in inventory during the CIRP, necessitating

production of records relied upon by the appellant in his limited review

report, which the appellant had failed to provide. 9

Discussion and decision

8. Principally, we are not impressed why the respondent is harping on his

resistance to this appeal, on the merit of his defense apart. Today, the fact

remains that a resolution plan of a certain resolution applicant had been

approved by the CoC. That might have been rejected by the Adjudicating

Authority and liquidation was ordered is a different issue, but so far as the

COC - RP combination goes, they apparently had done what is required to

be done for a successful insolvency resolution process, and there its

responsibility stops. What purpose has the RP in seeking the information

now? At least it has not deterred the same RP from preparing its

information memorandum and the CoC approving a plan based on it.

9.1 If Sec. 19 of IBC is turned to, it only mandates the corporate debtor, its

promoters or any other person associated with the management of the CD

to extend all assistance and cooperation to the interim resolution

professional as may be required by him in managing the affairs of the

corporate debtor. Sec.19(1) which is relevant now, reads as below:

"Section 19: Personnel to extend cooperation to interim resolution professional.

1) The personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor shall extend all assistance and cooperation to the interim resolution professional as may be required by him in managing the affairs of the corporate debtor."

10 If this provision is keenly observed, Sec.19 does not on its face state

anything specifically about any need to deliver information, but broadly

state, (a) who are required to assist or cooperate with the RP; and (b) the

purpose for which such assistance or cooperation may be insisted by the

IRP or the RP.

9.2 Turning to the first aspect, what is the nature of assistance or cooperation

which are required to be rendered to the IRP? Sec.19(1) does not specify

them, but indicate that such assistance or cooperation as may be

necessary for the IRP/RP for managing the affairs of the corporate debtor.

If Sec.20(1) is turned to, it states that the "interim resolution professional

shall make every endeavour to protect and preserve the value of the property

of the corporate debtor and manage the operation of the corporate debtor as

a going concern." This idea is further reinforced in sec.23(1) where the

Code says, "..the resolution professional shall conduct the entire corporate

insolvency resolution process and manage the affairs of the corporate debtor

during the corporate insolvency resolution period." The only apparent

difference between Sec.20(1) and 23(1) is that the former is associated with

the duty of the IRP whereas the latter relates to that of the RP. But the

objective is identical: to run the affairs of the CD as a going concern and

to protect its properties. Therefore, the assistance which the RP may insist

within the meaning of Sec.19(1) can relate only to such information which

may be considered necessary by the RP for running the CD as a going

concern and for the protection of its properties.

11

9.3 The next aspect is, whom an IRP or the RP may insist to assist him or

cooperate with him? Here, Sec.19(1) thoughtfully employs the phrase,

"..the personnel of the corporate debtor, its promotors, or any other person

associated with the management of the corporate debtor shall extend all

assistance .." This would imply that unless a person is associated with

the management of the CD prior to the admission of the CD to CIRP, it

might be difficult to hold that such person would be under an obligation

to assist the RP under Sec.19 IBC.

9.4 To sum up this idea, under Sec.19(1), an IRP or a RP, as the case may be,

may insist only those personnel of the CD which includes its directors,

and/or any other person who were associated with the management of the

corporate debtor to assist or to cooperate with the him in his effort in

managing the CD for running it as a going concern and for the protection

of CD's properties. There cannot be any other way of constructing the

ambit of Sec.19(1) IBC.

9.5 Turning to sharing of information which an IRP or the RP often seeks

under Sec.19, it is surely an aspect of assistance or cooperation which

Sec.19(1) underscores, but then it is qualified by three aspects: (a) such

information can relate only to those which are required for managing the

affairs of the CD as a going concern or for protection of its properties; (b)

the person from such information is sought must have been associated

with the management of the CD before the CD was admitted to CIRP; and

(c) most critically, such information as sought must be in the custody of

such person from who it is sought, or it should have at least been shown 12

that the person concerned had access to those information. After all, no

person can part with something that he does not possess.

10. Turning to the present case, we observe the following aspects in the context

of the law as we have stated in the previous paragraphs:

a) Does the appellant, a former statutory auditor of the CD, can be

considered as a person who was associated with the management of

the CD before the CD was admitted to CIRP, no matter whether the

information so sought was necessary to manage the CD as a going

concern? A statutory auditor is a professional who by the very nature

of the audit to be undertaken cannot be associated with the company

whose affairs he is to audit. On the contrary, a statutory auditor is

only required to hold a mirror vis-à-vis the performance of a company,

more particularly its financial health to the stakeholders of the

Company. How then to term a statutory auditor as one who is

associated with the management of the CD, or to equate him or her to

the one who were actually in the management of the company? It is

plainly difficult to hold that the appellant, who was appointed as a

statutory audit only couple of months before the CD was admitted to

CIRP and was also removed soon thereafter, be termed as one who is

associated with the management of the CD. The RP appeared to have a

faulty start to his endeavour to gather information.

b) Irrespective of the same, has the appellant any of the information

required by the RP? In the instant case, admittedly the appellant vide

its e-mail dated 10.01.2019 has informed the RP that the records are 13

with the CD. And, in another WhatsApp communication dated

23.02.2019, the RP has shared the file pertaining to the CD with the

auditor of the RP, the receipt whereof was duly acknowledged. When

the appellant has denied the availability of the documents with him,

unless it is established beyond doubt that the appellant, it will be futile

to issue a direction to the appellant to part with the documents or

information that he may not possess. The RP herein quotes certain

procedure which the ICAI has evolved for statutory auditors to follow.

It does not imply that the appellant necessarily possesses the

information/documents which the RP requires. It requires separate

proof.

c) Thirdly, how the information now required is relevant for keeping the

CD as a going concern. In this case, without the information required,

Information Memorandum has been prepared, EOI issued, plans

received, and indeed the CoC of the CD had approved a plan. That it

was not later not approved by the Adjudicating Authority is a different

matter, but it does inform us that a plan could be approved by the CoC

without the information sought from the appellant. And, today, the CD

is ordered to be liquidated. Where then is the need for managing the

CD by the RP? The RP appears to pointlessly litigating.

11. To conclude, we consider that the Order passed by the learned

Adjudicating Authority cannot be sustained for, (a) it has not taken note

of the role of the Statutory auditor and his role in the management of the

CD; (b) without ascertaining whether the information sought was available 14

with the appellant; (c) without examining the statement of the RP's auditor

acknowledging the receipt of the documents from the appellant. And

today, the whole exercise appears as an utter waste of judicial time as the

liquidation has been ordered but only after the Adjudicating Authority had

rejected the resolution plan as approved by the CoC.

12. The appeal is accordingly allowed, and the order of the Adjudicating

Authority dated 21.10.2022 in I.A./ CA No. 69/2019 in C.P. No. IB

155/Chd/Hry/2018 is hereby set aside.

[Justice N. Seshasayee] Member (Judicial)

[Arun Baroka] Member (Technical) rs/beena