Forensic Audit Obligations of the Resolution Professional Under IBC

A resolution professional conducting a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 must examine the corporate debtor's transactions for preferential, undervalued, extortionate and fraudulent dealings under Sections 43 to 66 of the Code, and commission a forensic audit where that examination reveals signs of fraud. Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires this opinion within sixty days of the process commencing. Since a July 2025 amendment, forensic findings must also be disclosed in the Information Memorandum. This article sets out the resolution professional's statutory obligations, the applicable lookback periods, and the consequences of failing to investigate.

Statutory Basis: Section 25, Section 18, and the IBBI Regulations

The RP's investigative mandate begins with Section 18 of the IBC, which lists the duties of the interim resolution professional (IRP), including the duty to collect and collate all information relating to the assets, finances, and operations of the corporate debtor for determining the financial position of the corporate debtor. Section 25 extends and expands these obligations for the full RP, requiring the RP to preserve and protect the assets of the corporate debtor, manage its affairs and operations, and prepare the Information Memorandum (IM) under Section 29.

Section 43 to Section 51 of the IBC (the avoidance transaction provisions) further define the scope of forensic investigation. Section 43 deals with preferential transactions, Section 45 with undervalued transactions, Section 49 with extortionate credit transactions, and Section 66 with fraudulent trading or wrongful trading. The RP is obligated to examine the transactions of the corporate debtor and, where avoidable transactions are identified, to apply to the NCLT for appropriate orders. This examination is, in practice, a forensic exercise.

What Is the Difference Between a Transaction Audit and a Forensic Audit?

The IBBI distinguishes between a transaction audit and a forensic audit, though the two are related. A transaction audit is a structured review of the financial transactions of the corporate debtor for a defined lookback period (typically two to five years) to identify preferential, undervalued, or extortionate transactions under Sections 43 to 51 of the IBC. Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires the RP to form an opinion on avoidable transactions within sixty days of the CIRP commencement date, and to make a preferential/undervalued transaction application to the NCLT where warranted.

A forensic audit is a broader, evidentiary-grade investigation (typically conducted by a registered forensic accountant or an accounting firm with forensic capability) aimed at identifying financial fraud, asset siphoning, round-tripping, related-party abuse, or management misconduct. While the IBC does not use the term 'forensic audit' explicitly, it is the standard instrument employed by RPs to investigate fraud-related concerns that may support applications under Section 66 (fraudulent or wrongful trading) or referrals to investigative agencies.

The July 2025 IBBI Amendment: Forensic Findings in the Information Memorandum

The July 2025 amendment to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 introduced a significant disclosure obligation: forensic audit findings must now be disclosed in the Information Memorandum. This change reflects a policy decision to shift forensic information upstream in the CIRP timeline, placing it before resolution applicants at the stage of evaluating and submitting resolution plans, rather than allowing it to surface only in post-approval litigation.

The practical implications are considerable. Resolution applicants can no longer be shielded from adverse forensic findings by the sequence of the CIRP process. Forensic findings disclosed in the IM will inform the applicant's due diligence, affect the valuation of the corporate debtor, and potentially alter the structure of the resolution plan. For RPs, timely completion of the forensic audit (before the IM is circulated) has become a mandatory process milestone, not an optional addendum.

Which Transactions Fall Within the RP's Lookback Period?

The lookback periods under the IBC's avoidance provisions vary by transaction type. The following table summarises the key timelines:

Transaction Type	IBC Section	Lookback Period (from insolvency commencement date)
Preferential Transactions (related parties)	Section 43	2 years
Preferential Transactions (others)	Section 43	1 year
Undervalued Transactions (related parties)	Section 45	2 years
Undervalued Transactions (others)	Section 45	1 year
Extortionate Credit Transactions	Section 50	2 years
Fraudulent Trading	Section 66(1)	Anytime during CIRP or preceding it
Wrongful Trading	Section 66(2)	Before insolvency commencement

Section 66: Fraudulent and Wrongful Trading Applications

Section 66 of the IBC empowers the RP to make an application to the NCLT where the business of the corporate debtor has been carried on with intent to defraud creditors (fraudulent trading under Section 66(1)), or where the management continued to incur debt knowing there was no reasonable prospect of avoiding insolvency (wrongful trading under Section 66(2)). The NCLT may hold the persons responsible personally liable to make such contribution to the assets of the corporate debtor as it thinks fit.

Forensic audit findings are the primary evidentiary basis for Section 66 applications. Without a forensic report documenting the fraudulent conduct (with supporting documentation, transaction trails, and expert analysis) an RP's Section 66 application is unlikely to meet the NCLT's evidential threshold. This makes the quality and rigour of the forensic investigation directly relevant to whether the RP fulfils this statutory duty.

RP Liability for Failure to Investigate: Regulatory and Legal Consequences

The IBBI has disciplinary jurisdiction over resolution professionals and insolvency professionals. An RP who fails to conduct adequate forensic examination, fails to identify avoidable transactions, or neglects to file applications under Sections 43 to 51 or Section 66 in cases where the evidence warranted such action, exposes itself to disciplinary proceedings under the IBBI (Insolvency Professionals) Regulations, 2016. The IBBI has initiated and concluded proceedings against RPs for negligence in this domain.

Separately, an RP that fails to disclose forensic findings in the Information Memorandum (now a mandatory requirement under the 2025 amendments) may face challenge to the validity of the CIRP process. Resolution applicants who submit plans without knowledge of adverse forensic findings may seek to revisit or rescind those plans, and creditors who approved plans on incomplete information may challenge the RP's discharge of duty before the NCLT.

Frequently Asked Questions

Is the RP required to conduct a forensic audit in every CIRP?

There is no categorical obligation to conduct a full forensic audit in every case. The RP is required under Regulation 35A to form an opinion on avoidable transactions within sixty days of CIRP commencement and to seek expert assistance if needed. A forensic audit is typically warranted where the preliminary review of financial records reveals suspicious transactions, related-party irregularities, asset siphoning, or missing documentation. Post the July 2025 amendment, forensic findings, where conducted, must be disclosed in the Information Memorandum.

Who bears the cost of the forensic audit?

Forensic audit costs, when incurred during the CIRP, form part of the insolvency resolution process costs and rank first in priority under Section 53(1)(a) of the IBC. They are paid from the assets of the corporate debtor or, in cases where the Committee of Creditors approves such expenditure, may be funded by creditors on an interim basis pending the completion of the process.

What is the consequence if avoidable transactions are identified but the RP does not file an application?

If the RP identifies avoidable transactions but does not file the requisite applications under Sections 43, 45, or 66, the RP may face disciplinary action from the IBBI. The CoC can direct the RP to file such applications. Creditors may also independently approach the NCLT under Section 60(5) to seek orders compelling the RP to act. In liquidation, the liquidator takes over the responsibility of pursuing avoidance applications.

Can a resolution applicant refuse to proceed if forensic findings reveal serious fraud?

A resolution applicant may include conditions in its resolution plan regarding the outcome of pending forensic investigations or litigation. However, once a resolution plan is submitted to and approved by the CoC and NCLT, it is binding. The 2025 amendment requiring disclosure of forensic findings in the IM addresses this by ensuring applicants have material forensic information before submitting plans, reducing the scope for post-approval disputes on this ground.

What is Regulation 35A and what does it require?

Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires the RP to form an opinion, within sixty days of the CIRP commencement date, on whether avoidable transactions exist under Sections 43, 45, 50, and 66. If the RP's opinion is that such transactions may exist, it must seek the assistance of an insolvency professional or other expert to examine the transactions, and then make applications to the NCLT as warranted. The regulation sets a mandatory timeline and outcome obligation: it is not discretionary.

What is round-tripping in a forensic audit?

Round-tripping refers to funds being transferred out of the corporate debtor to a related or shell entity and subsequently returned in a different form, often disguised as investment or loan proceeds. A forensic auditor traces these circular fund flows through bank statements and related-party ledgers to establish whether a transaction was genuine or designed to disguise asset diversion.

Who appoints the forensic auditor during a CIRP?

The resolution professional, with the approval of the Committee of Creditors, ordinarily appoints the forensic auditor, since the audit fee is charged to the insolvency resolution process costs and requires the Committee's sanction for expenditure of this kind. The auditor is typically a registered forensic accountant or accounting firm with dedicated forensic capability, independent of the corporate debtor's statutory auditor.

Does a forensic audit finding automatically prove fraud before the NCLT?

No. A forensic audit produces evidentiary material such as transaction trails and expert analysis, but the National Company Law Tribunal still has to be satisfied, on the resolution professional's application under Section 66, that the business was carried on with intent to defraud creditors or that wrongful trading occurred. The forensic report supports the application; it does not substitute for the Tribunal's finding.

Can the Committee of Creditors direct the resolution professional to conduct a forensic audit?

Yes. Although Regulation 35A places the initial opinion-forming duty on the resolution professional, the Committee of Creditors frequently directs a forensic audit where creditors have independent reason to suspect irregularities, and typically approves the associated cost. A resolution professional who resists a reasonable Committee direction to investigate risks being seen as failing the duty of proper examination.

Can the promoters or related parties named in a forensic audit report challenge its findings before the NCLT?

Yes. When the resolution professional files an application under Section 43, Section 45, or Section 66 of the Insolvency and Bankruptcy Code, 2016 based on forensic findings, the persons alleged to be involved are made respondents to that application and have the opportunity to contest the evidence before the NCLT decides it. A forensic audit report is evidentiary material supporting the RP's case, not a conclusive finding of fraud in itself, so due process before the Tribunal remains available to those named.

Can a forensic audit report be relied upon in criminal proceedings against former promoters, separate from the NCLT process?

Yes. Forensic findings identifying fraud, asset diversion, or round-tripping are commonly shared with, or form the basis of complaints to, investigating agencies, and can support prosecution independent of the resolution professional's civil application under Section 66 of the Insolvency and Bankruptcy Code, 2016. The NCLT's determination under Section 66 and any criminal prosecution proceed on separate tracks with separate evidentiary standards, so an outcome in one does not automatically determine the other.

If the CIRP converts into liquidation, does a pending Section 66 application against the corporate debtor's former management survive?

Yes. Avoidance and fraudulent trading applications already filed, or supported by the evidence gathered during the corporate insolvency resolution process, do not lapse merely because the process converts to liquidation. The liquidator, who takes over the functions the resolution professional previously performed, continues to pursue these applications, since recovering value diverted through preferential, undervalued, extortionate, or fraudulent transactions for the estate remains a live objective regardless of whether the corporate debtor is eventually revived or wound up.

Does the appointment of a forensic auditor require a specific professional qualification under IBBI regulations?

The IBBI regulations do not prescribe a single mandatory certification for forensic auditors in the way they do for registered valuers. In practice, resolution professionals and the Committee of Creditors appoint chartered accountants or accounting firms with dedicated forensic and fraud-investigation experience, and the Committee's approval of the appointment, along with its sanction of the associated fee, functions as the principal check on the auditor's competence rather than a formal credentialing requirement under the Regulations.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice at Mumbai-based solicitor firm Vikrant D. Shetty & Associates, Advocates & Solicitors. The firm advises financial creditors, operational creditors, and corporate debtors in proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and represents parties in domestic and international commercial arbitrations seated in India and abroad, including enforcement and challenge proceedings before the Bombay High Court.

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This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.