IBC BASIC FORENSIC AUDIT ASPECTS IN INSOLVENCY AND CODE BANKRUPTCY 2016

BASIC FORENSIC AUDIT ASPECTS IN INSOLVENCY AND CODE BANKRUPTCY 2016

BASIC FORENSIC AUDIT ASPECTS IN INSOLVENCY AND CODE BANKRUPTCY 2016

BASIC FORENSIC AUDIT ASPECTS IN INSOLVENCY AND CODE BANKRUPTCY 2016

PURPOSE OF FORENSIC AUDIT INSOLVENCY AND BANKRUPTCY CODE

 1. Events describing, if any,

  •  Financial Statements with inconsistencies / Red Flags,
  •  The misuse/diversion of bank funds;
  •  Overvaluation of current/fixed assets and their non-existence;
  •  Documentation breach;
  •  To misinterpret the financial statements sent from time to time to various banks in compliance with the terms of the loan agreements;
  •  Suppression and/or partial information of facts to the lenders on matters which have implications in lenders’ decision making.

2. Movements of unsecured loans within the defined period.

3. Comprehensive checking of receivables (to verify the validity of debtors/advances and to report on their recoverability and probability of failure, if any, including the age of receivables and the proof of receivables).

4. Examination of bank accounts for both deposits and deposit entries.

5. Outstanding statutory payments

6. Reasons for the DP decline in the account

7. Transactional analysis as per Sections 43, 45, 50, and 66 as per IBC 2016.

IMPORTANCE TRANSACTION TO BE COVERED IN THE FORENSIC AUDIT AND INSOLVENCY RESOLUTION & LIQUIDATION

An essential duty on the part of the RP is to file an application before the NCLT (Adjudicating Authority) to prevent transactions mentioned in the CODE (Section 25(2)(j)).

For this purpose, the RP must press for the Forensic Audit of the Accounts of the Corporate Debtor (CD) of the relevant time period to identify fraudulent activity that is not in the interest of the company and is carried out with a motive other than the interest of the CD. The CODE itself defines purchases in the following sections.

  1. Preferential transactions (Section 43)
  2. Avoidance of undervalued transactions (Section 45 & 46).
  3. Transactions defrauding creditors (Section 49)
  4. Extortionate Credit transactions (Section 50), and
  5. Transactions (Section 66) to defraud creditors or for any fraudulent purposes.

Transactions specifically being looked at by the forensic experts

•Preferential transactions and relevant time [Section 43]
•Avoidance of undervalued transactions [Section 45]
•Transactions defrauding creditors [Section 49]
•Extortionate credit transactions [Section 50]
•Fraudulent trading or wrongful trading [Section 66]

Preferential transactions and relevant time [Section 43]

•Liquidator or the resolution professional to apply to NCLT for avoidance of preferential transactions;
•Corporate Debtor shall be deemed to have given a preference, if:
qthere is a transfer of property or an interest thereof for the benefit of a creditor or a surety or a guarantor;
qsuch transfer has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets u/s 53
 
•Exceptions: a preference shall not include the following transfers:
1)transfer made in the ordinary course of the business;
2)any transfer creating a security interest in property acquired by the corporate debtor to the extent that such security interest secures new value;
3)any transfer made in pursuance of the order of a court
•Relevant Time:
1)given to a related party = period of 2 years preceding the insolvency commencement date;
2)given to a person other than a related party = period of 1 year preceding the insolvency commencement date
 

Avoidance of undervalued transactions [Section 45]

•Liquidator or resolution professional to apply to NCLT to:

1)declare undervalued transactions as void; and

2)reverse the effect of such transaction

3)A transaction shall be considered undervalued where the corporate debtor:

•makes a gift to a person; or;

•enters into a transaction with a person which involves the transfer of one or more assets for a consideration the value of which is significantly less and such transaction has not taken place in the ordinary course of business of the corporate debtor.

Transactions defrauding creditors [Section 49]

•Where NCLT is satisfied that undervalued transaction was deliberately entered into by such corporate debtor:

1)for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or

2)in order to adversely affect the interests of such a person in relation to the claim the NCLT may, then, make following order(s):

a)restoring the position as it existed before such transaction;

b)protecting the interests of persons who are victims of such transactions

Extortionate credit transactions [Section 50]

•A transaction shall be considered an extortionate credit transaction u/s 50(2) where the terms:

1)require the corporate debtor to make exorbitant payments in respect of the credit provided; or

2)are unconscionable under the principles of law relating to contracts - Regulation 11 of Insolvency and Bankruptcy Board Of India (Liquidation Process) Regulations, 2016.

3)The liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the NCLT if the terms of such transaction required exorbitant payments to be made by the corporate debtor

Fraudulent trading or  wrongful trading [Section 66]

•If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent:

–to defraud creditors of the corporate debtor or

–for any fraudulent purpose

            the NCLT may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

Persons not eligible to be resolution applicant [Section 29A]

a)un-discharged insolvent;

b)wilful defaulter;

c)classified as NPA as per guidelines of the RBI;

d)convicted for any offence punishable with imprisonment for 2 years or more;

e)is disqualified to act as a director under Co. Act;

f)is prohibited by SEBI from trading in securities or accessing the securities markets;

g)has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by NCLT;

h)has executed an enforceable guarantee in favour of a creditor in respect of a corporate debtor under CIRP

Disclaimer: The content of this post isn't considered to be professional or legal advice, We aren't responsible for any damages arising from your access to the location content & must not be relied on or used as a substitute for legal advice from a lawyer professional in your jurisdiction. CARajput is among India's big digital compliance services platform which committed to helping people have started & developed their businesses. We had started with the goal of creating it easier for start-ups to start out their business. Our main aim is to assist the businessman with applicable laws & regulations compliance and providing support at each & every level to make sure the business stays compliant and growing continuously. For any query, help or feedback you may in touch on singh@carajput.com or Call or what’s-up on 9-555-555-480

Share This Post

Related Articles

Related Videos


Insolvency & Bankruptcy Code, 2016 | Issues & Concerns| How it is form

Insolvency & Bankruptcy Code, Act 2016 | Issues & Concerns| How it is form 

Published On: Jan 23, 2022 | By: RJA


Meaning of Pre Pack Insolvency | Benefits of pre packs | Pre Pack Insolvency

Meaning of Pre Pack Insolvency | Benefits of pre-packs | Pre Pack Insolvency 

 

Published On: Jan 31, 2022 | By: RJA


Fast Track Insolvency: Fast-Track Insolvency Resolution Procedure | What is Fast Track process?

Fast Track Insolvency: Fast-Track Insolvency Resolution Procedure | What is Fast Track process?

Published On: Jan 12, 2022 | By: RJA


What is Personal Guarantor? | What is the meaning of Personal Guarantor?

What is Personal Guarantor? | What are meaning Of Personal Guarantor? | Insolvency Process against Personal Gaurantor to Corporate Debtor.

Published On: Nov 14, 2021 | By: RJA

Need help?

Request a call
from a RJA
Business Advisor.

LET'S TALK

Private Limited Company

Popular Categories

Browse Blogs

Recent Posts

Documents to be maintenance by NGO or Trust as per New Rule 17AA

Documents to be maintenance by NGO or Trust as per New Rule 17AA

LTC is only allowed for travel with in India - SC

LTC is only allowed for travel with in India - SC

IBC case law - SC, NCLT & NCLAT Rulings on Resolution Plans

IBC case law - SC, NCLT & NCLAT Rulings on Resolution Plans

What are the key factors to an effective Section 29A Due Diligence

What are the key factors to an effective Section 29A Due Diligence

GST applicability on compensation, liquidated damages, & penalties for contract violations etc

GST applicability on compensation, liquidated damages, & penalties for contract violations etc

Connect with a RJA Advisor

Fields marked with an * are required

Enquire Us

Please send us your query and we feel very happy helping you

Testimonials

  • Thank you very much for all your help in setting up my new company and clearing up all outstanding business in my sole trader accounts. For the first time in years I have peace of mind regards my business accounts. Your workforce are a credit to you, the girls at reception are so helpful and Chris has been brilliant. It is very much appreciated.

    A US consultancy group

  • Rajput Jain & Associates. are a tremendous value added to me as an executive and a busy parent. It just makes sense to delegate my tax file to them -- they are proactive, extremely service oriented, and most importantly, I am completely confident they are finding every dollar of tax savings available to me.

    A Leading Service Provider

  • We use Rajput Jain & Associates for all our accounting, Corporation tax, VAT and other compliance needs. The service is professional, courteous and prompt. I would recommend Rajput Jain & Associates to any company requiring a comprehensive accounting and tax service.

    A Leading Consultancy Firm in Dubai

Money Back Guarantee

Not happy with the service? You can request a refund at anytime within 30 days!

24/7 Support

Get support through phone, email, mobile app or live chat - 24/7, 365 days.

EMI Payment

Easily pay online with EMI payments, credit or debit card, net banking, PayPal and more.

Get In Touch--

Rajput Jain & Associates

Add: P-60, Connaught Circus, Connaught Place, New Delhi-110001

Email: singh@carajput.com

Phone: 9555555480

Legal Disclaimer--

The information contained on this website merely provides details of our firm to persons who have shown interest in knowing more about us and is not intended to solicit work or advertise our capabilities in any manner. The information provided on this website is general in nature and should not be used as a basis of decision-making without further professional advice. The third party site links are only provided for ready reference of the users and CA Rajput Jain & Associates neither controls their content nor undertakes any responsibility regarding them.

© 2016 Rajput Jain & Associates. All Rights Reserved | Sitemap

Call Email