Forensics in IBC 2016 – A Perspective

There have been numerous challenges that the human race has faced in the ages gone by; none bigger than the one we find ourselves in at the moment– The Covid 19 disease which looks to threaten not only the human race but also its economy and sustainability. What makes it even more intriguing and challenging is the fact that it has occurred across the world at the same time and has brought the entire world on its knees.

The Indian economy was already reeling under a huge pressure and this outbreak has only worsened the crises. Though the law makers have enacted numerous laws and regulations over the past decade in an attempt to get the economy back in shape; the recent events are threatening to completely negate all that. One of the major laws that were enacted in not so distant past was the Insolvency and Bankruptcy Code, 2016 (“IBC” or “ Code”) which intened to consolidate a plethora of existing laws and regulations dealing with insolvency and bankruptcy proceedings which were expensive and time-consuming, thereby giving an impetus to banks to recover bad loans vide a quicker process.

Amongst the various reasons for bad loans or Non-Performing Assets (NPAs), the most glaring one has been frauds, besides lax lending norms, inadequate analysis of borrowers’ financial status, willful defaults, ineffective recovery tribunals etc. An underlying fraud has also been unearthed in various cases that have been taken up by the NCLT in the past few years under IBC.

Under IBC, proceedings are being dealt with in a time-bound manner to maximise the value of assets and enhance investor confidence by providing a framework to handle business failures. The entire process of IBC is now steered by a qualified Insolvency Professional (IP) who is appointed by the adjudicating authority i.e. National Company Law Tribunal (NCLT). The IP oversees everything related to the case and has a range of responsibilities whereby he assumes the role of the entity’s CEO when it comes to taking decisions, since the Board of Directors are suspended during the insolvency process.

Given the nature of work, it is critical for the IP to be equipped with investigative skills and be supported by forensic experts so that a fair assessment of the status of the Company can be made. Forensic techniques such as data analytics, computer and mobile data analysis, market intelligence, social media filtering etc. can provide the right kind of information to IPs, which then helps him to figure out potential issues or red flags, in order to protect the interest of stakeholders.

Forensic experts can also help insolvency professionals and other stakeholders, including the NCLT in tracing the end use of funds; identifying undisclosed conflicts of interest; and inflated financial statements through round tripping or preferential interest created by the borrower through fraudulent transactions.

Need for conducting a forensic audit under IBC

The IPs who are handling corporate cases under IBC have identified several fraudulent transactions. According to news reports in 2018, these transactions are from 100 plus companies worth above Rs 40K crore. These cases have helped bring frauds involving shipping of funds, transactions with related parties and fictitious people, to the forefront. Out of the 12 big cases that were passed on to the NCLT by the RBI, there has been a fraud instance in at least 10 of these cases.

IBC permits IPs to hire accountants, legal counsels or forensic experts to help in corporate insolvency resolution process (CIRP) and in the process, the IP is required to file an application for fraudulent cases, as part of Section 66 of the Code to the Adjudicating Authority.

Forensic Services under IBC

Some of the services that a forensic expert can provide under the IBC have been enumerated below.

Forensic claims review and adjudication
Under Section 18 and 35 of the Code, the forensic expert can help the IP in realisation of assets, finances and operations to determine the financial position of the corporate debtor. They can also help with the adjudication process using the right methodologies, like claims collation and administration process. A forensic review of the claims is essential to determine the authenticity of the proof of claims.

Ongoing monitoring of operations
Forensic experts can help IPs examine ongoing transactions during insolvency resolution proceedings. This can help in the identification of potential red flags that include diversion, or siphoning of funds, fraudulent or wrongful transactions, or any such issue that seems suspicious in nature. Where no IP is appointed, the forensic expert can also monitor assets of the corporate debtor, until a professional is appointed by the CoC.

Due diligence on bidders
In insolvency cases, forensic experts can assist in conducting due diligence of bidders, to assist IPs and the committee of creditors. With great experience in assessing reputation, integrity and ownership structure of companies, forensic experts are adept at handling such cases with information available in the public domain as well as information procured through their channels available to them.

Monitoring of insolvency resolution plan
Forensic experts can help IPs or the NCLT as an independent expert, to monitor the compliance with the agreed resolution plan. This includes monitoring business transactions and payments to determine the use of funds and to identify any suspicious activity or siphoning of funds. Further, they also review the terms of the resolution plan to check if the relevant stakeholders have complied with it or not.

Forensic review of specific transactions
Under Sections 43 to 51 and Section 66 of the IBC, IPs or liquidators have to file avoidance of specified transactions with the adjudicating authority. This includes the review of specific transactions, either preferential, undervalued or extortionate in nature. Techniques such as data analytics, document review, and other tools available with the forensic experts are used to investigate these transactions that are usually hidden within complex layers.

Tracing of assets
Forensic experts use a range of tools and resources to analyse financial systems and at the same time reconstruct records in order to investigate undisclosed assets. This exercise involves the verification of asset ownership, checking the family tree of disclosed and undisclosed entities and structures, as well as finding proof of assets that represents fraud or any other crime.

Liquidation analysis and support
Liquidators can realise maximum value from the estate in various ways with the help of forensic experts. They help in setting up a robust and compliant liquidation process and assist in the review of financial and accounting records. They can also review the bidding process for transparent and competitive evaluation to optimize liquidation proceeds.

Over the past few years, the demand for use of expert forensic services has grown, especially to clean up the bad debt mess. The need for such experts is now becoming imperative and a necessity rather than an optional requirement to pave way for sanitising the way corporates and various stakeholders have been conducting businesses.
According to certain reports, the forensic business linked to IBC has more than doubled and the numbers are only rising. This bodes well for the business scenario as a whole in India and would go a long way in nation building as well.

Puneet is a Fellow Chartered Accountant with over 20 years of work experience. Having Qualified as a Charterted Accountant in 2002, he has worked with various organisations of repute- Deloitte Haskins & Sells, KPMG and Mazars India prior to becoming a part of NMSA.

He is also a Certified Fraud Examiner from the Association of Certified Fraud Examiners (ACFE), USA.

Puneet comes with rich experience in the field of audits, financial due diligence and forensics to various mid-sized and large companies (Indian as well as trans-nationals) across various sectors.

In addition to heading the Audit/Assurance and Forensic practices, he also oversees the Indirect Tax/GST practice at the organization.

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