A new ruling on forensic audits just gave banks more power to corner stubborn borrowers

• On Feb 7th, the NCLT ordered a forensic audit against Viceroy Hotels, the owner of two JW Marriott hotels in Hyderabad.
  
• In doing so, the NCLT established a significant precedent for future cases: a 51% vote by a company’s Committee of Creditors is enough to initiate a forensic audit.
  
• Asset Reconstruction Co (Arcil) had taken Viceroy Hotels to court over unpaid dues and wanted to initiated a forensic audit against the company.

The Hyderabad bench of the National Company Law Tribunal (NCLT), a special body set up under the Companies Act in 2013 to oversee insolvency disputes, has ordered a forensic audit against Viceroy Hotels, the owner of two JW Marriott hotels in Hyderabad, following pressure from Asset Reconstruction Co (India) Ltd (Arcil).

In doing so, the NCLT established a significant precedent for future cases: a 51% vote by a company’s Committee of Creditors is enough to initiate a forensic audit.

Arcil had taken Viceroy Hotels to court over unpaid dues of around ₹5.3 billion and had asked for an audit of several transactions.

A forensic audit is an exhaustive review of a company’s financial accounts and fraudulent transactions and can be used as evidence in a court when prosecuting a defaulter.

The NCLT specifically cited a section under the Insolvency and Bankruptcy Code - 21(8) - which provides for a 51% approval in certain cases.

The resolution professional handling the Viceroy Hotels case had originally declined the audit, explaining that a 66% approval by its creditors would be required as per Sec 28 (3) of the code, which relates to changes in the appointment or the terms of contract of auditors of the defaulting company. Only 59.2% of the creditors had voted in favour.

The NCLT then had to determine whether a forensic audit required a 66% vote or not. It concluded that a forensic audit did not equate to “changing the terms of auditors” and hence, didn’t require a 66% approval.

By clarifying this, the NCLT’s ruling will make it a lot easier for creditors to initiate forensic audits against large loan defaulters.


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