Forensic Audit Report Is Not Conclusive Proof Of Evidence Of Illegality Committed By Entity: Calcutta High Court

The Calcutta High Court has observed that a forensic audit report is merely a piece of evidence in the liquidation proceeding and not conclusive proof of any illegality committed by any entity. 

The Court allowed a Writ Petition challenging the Look-Out Circulars (LOC) issued by Immigration Authorities at the request of the Bank of Baroda (BoB) and Respondent No. 6, the Serious Fraud Investigation Office (SFIO) on the grounds of a forensic audit report. The Court noted that even if LOC is issued but no cognizable offence is substantiated, the subject of such LOC cannot be detained or prevented from leaving the country per Clause 6(I) of the Office Memorandum.

The Court observed that as per Clause 6(L) of the Office Memorandum, a valid reason is required for the issuance of LOC and cannot be used as a substitute for the collection of debts.

Justice Sabyasachi Bhattacharyya observed, “The very premise of the request was a forensic audit report allegedly authored by a particular concern. The said report, at best, is a piece of evidence in the liquidation proceeding and is in no manner conclusive proof of evidence of any illegality committed by any entity. In fact, it is common experience that each and every such forensic audit report contains several disclaimers, restricting the operation of the same to the proceeding in which they are filed, as well as confined to the impression of the authors thereof on the basis of the documents which are available to them”.

The Court further noted, “In fact, Clause 6(I) of the Office Memorandum dated February 22, 2021, relied on by both parties, in no uncertain terms provides that in cases where there is no cognizable offence under IPC and other penal laws, the LOC-subject cannot be detained/arrested or prevented from leaving the country. The original agency can only request that they be informed about the arrival/departure of the subject in such cases. Hence, even if an LOC is issued but no cognizable offence under any penal law of the country is made out, the LOC-subject cannot be detained/arrested or prevented from leaving the country”.

Advocate Sabyasachi Chowdhury appeared for the Petitioner, Advocate Billwadal Bhattacharyya appeared for the State, Advocate Avishek Guha appeared for Respondent no. 2, and Advocate Victor Dutta appeared for Respondent no. 3.

The Petitioners approached the High Court by way of a Writ Petition challenging the LOC issued against them by the Immigration Authorities. These LOCs were issued based on requests made by Respondent No. 2 BoB, and Respondent No. 6 SFIO. The Petitioner contended that they attempted to travel to Nepal for business opportunities but were prevented from boarding the plane at the international airport in Kolkata without any explanation from the immigration authorities. After repeated requests, the senior officer at the airport's immigration office informed the Petitioners that the restraint was imposed based on information provided by BoB and/or SFIO. Although, no LOC was furnished for the Petitioner.

A statement from the SFIO contended that the company in question has been engaging in fraudulent activities and unlawfully siphoning funds. However, the SFIO was still investigating the matter under Section 212(4) of the Companies Act, 2013 (Act, 2013). According to the process outlined in Section 212, an investigation report must be submitted to the Central Government, after which charges can be framed by the Special Court. The SFIO presented an interim order from the National Company Law Tribunal (NCLT), establishing fraud beyond doubt and directing the petitioners. However, the Petitioners contested that this interim order, falling under Section 241(2) for cases of oppression, cannot be considered a pending criminal proceeding for a cognizable offence under Section 212 of the Act, 2013.

The Court ordered the BoB and the SFIO to submit copies of the request to issue LOCs against the Petitioners. BoB's copy revealed that the Petitioners served as Directors and guarantors for KPPL, a company that took credit facilities from the bank. During a Corporate Insolvency Resolution Process (CIRP), the borrower was ordered to be liquidated due to the absence of a resolution plan. A forensic audit revealed irregularities, including related party transactions and an interest-free deposit. The borrower was also declared fraudulent, and a CBI complaint was filed. The BoB recommended an LOC against the Directors/guarantors, including the Petitioners, to prevent them from fleeing the country.

The Court stated that a forensic audit report is merely a piece of evidence in the liquidation proceeding and not conclusive proof of any illegality committed by any entity. The Court also noted that classifying an account as fraudulent is separate from criminal or recovery proceedings, as outlined in the relevant circulars of the Reserve Bank of India (RBI). It is not considered a criminal offence. Therefore, the Court asserted that the reasons provided by BoB do not show any criminal offences by the Petitioners or any indication that their departure would harm the economic or public interest of the country.

The Court noted that the SFIO's claims of guilt were based solely on an investigation and were not supported by the law. The Court noted that punishment under Section 447 of Act, 2013 is imposed only for fraud if there is proof beyond a reasonable doubt. In this case, no evidence suggests that the Petitioners committed fraud.

The Court observed that it is necessary to examine whether the SFIO's request for an LOC was justified. However, the request only mentions Section 212(1)(c) of the Act, 2013, which refers to “public interest” without disclosing any grounds for the issuance of an LOC. Therefore, the Court held that there was no evidence that the Petitioners were not cooperating in the investigation, and thus, their personal liberty should not be curtailed without justification.

The Court noted that the question to ascertain was whether the LOC could be issued at all under the governing guidelines/Office Memorandum or any ground was made out for such issuance.

The Court noted that per Clause 6(H) of the Office Memorandum, LOC can only be used in cognizable offences under IPS or other penal laws, which was not the case here. The Court further noted that Clause 6(L) allows for LOCs to be issued in exceptional cases, such as if the person's departure would harm India's sovereignty, security, integrity, bilateral relations, strategic and/or economic interests, or if the person may commit acts of terrorism or offences against the State. However, the Court held that none of these grounds apply.

The Court held that BoB and SFIO did not give a valid reason for their request, as Clause 6(L) required. Instead, they opted to use LOC as a substitute for collecting debts. The Court emphasised that personal freedom and the right to travel internationally are fundamental rights safeguarded by the Constitution, and can only be restricted in severe situations. According to Clause 6(I) of the Office Memorandum, the LOC subject cannot be held or stopped from leaving the country if there is no definite criminal case. Therefore, the Court held that since there was no clear basis for issuing the LOC, the Petitioners could not be prohibited from travelling overseas.

Accordingly, the Court allowed the Petition and set aside the impugned LOCs.

Cause Title: Prashant Bothra and another v. Bureau of Immigrations and others

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