51% required for initiating forensic audit of corporate debtor: NCLT

Varun Marwah

The Hyderabad Bench of NCLT has ordered a forensic audit for Viceroy Hotels, which runs JW Marriot and the Courtyard in Hyderabad.

Asset Reconstruction Co (India) Ltd (Arcil) had initiated insolvency against Viceroy in March, 2018. In December, 2018, the NCLT granted a 90-day extension for consideration of resolution plans. Arcil along with several other financial creditors had insisted on conducting a forensic audit in relation to several transactions of Viceroy. The forensic audit was demanded for transactions including investments in Viceroy Hotel Bangalore and disclosures pertaining to corporate guarantees. The Bengaluru property was transferred to Viceroy Bangalore Hotels Pvt Ltd, in which JP Morgan India Property Mauritius II picked up a significant stake.

It appears that the RP was against such audit and tried to avoid it.

Another major contentious issue was the inclusion of Mahal Hotel’s claims worth Rs. 318.67 crore by the Resolution Professional. Mahal Hotel had given advances to Viceroy to acquire the latter’s Chennai hotel property.  The deal, inked in 2011, didn’t fructify. The property was subsequently sold to Ceebros Hotels for INR 480 crore. Arcil had alleged that Mahal was hurriedly included among financial creditors even though its dues were operational in nature and it was done with a purpose to bring down Arcil’s voting share in the CoC to below 50%.

Section 21(8) of the IBC provides that all decisions of the CoC shall be taken by a vote of not less than 51% and Section 28(3) provides that for matters enumerated in Section 28(1), the voting requirement will be 66%.

During the 5th CoC meeting, one of the items for consideration was the question of the forensic audit. 59.21% of the CoC voted in favour of the forensic audit, however, the Resolution Professional declined to go ahead with it. He claimed that the requisite 66% vote was not achieved and the audit could not be conducted. He relied on Section 28(1)(m) which requires 66% for, making “changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor.

The NCLT had to determine whether conducting a forensic audit would, in fact, be considered as one of the items which require the enhanced voting threshold of 66%. The Bench concluded that conducting a forensic audit of the corporate debtor does not amount to ‘changing terms of statutory auditors’ and requires only 51% vote from the CoC.

Senior Advocate R. Raghunandan Rao appeared for ARCIL, the Financial Creditor, briefed byKochhar & Co., Hyderabad (represented by Mr. Shabbeer Ahmed and Ms. P.V. Aruna Kumari)

(Read the order)

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