Black’s Law Dictionary defines the above maxim as meaning that no one ought to be troubled twice, if it appears to the court that it is for one and the same cause of action. In simple terms, once a dispute relating to a particular cause has been brought before a competent court, the same party cannot be allowed to raise the very same issue again in another proceeding.
When a company becomes insolvent, however, the same books and transactions become the subject matter of two proceedings – once in a conference room of a bank under the Master Directions (“Master Directions”)[1] issued by the Reserve Bank of India (“RBI”) and also before the Ld. National Company Law Tribunal (“NCLT”) under the Insolvency and Bankruptcy Code, 2016 (“the IBC Code”).
These days, banks are increasingly classifying accounts as fraud on the strength of audit reports obtained by Resolution Professionals during the insolvency process, rather than on an investigation under Paragraph 4.1 of the Master Directions.
I. Fraud Investigation and Transaction Audit: Two Different Exercises
While the starting point under the IBC Code is an opinion of the Resolution Professional (“RP”), followed by filing of applications before the Ld. NCLT for adjudication of preferential, undervalued, fraudulent and extortionate transactions (“PUFE transactions”) and consequently followed by prosecution proceedings, the starting point under the Master Directions is red-flagging of a loan account followed by a mandatory ‘audit’. The said audit has been mandated for investigation into the loan accounts for the purpose of classifying a loan account as ‘fraud’. The said classification of ‘fraud’ is followed by criminal complaints and prosecutions.
Paragraph 4.1[2] of the Master Directions provides that once a loan account is red-flagged, the lending bank must investigate through an external auditor who must be “qualified to conduct audit under the relevant statutes”[3]. The audit is conducted only for a single purpose to identify whether the loan account and the persons behind it should be classified as ‘fraud’, an exercise that is to be completed within one hundred and eighty days.
The IBC Code, by contrast, does not provide for conducting any audit under the IBC Code at all. It is just as a matter of practice that it has become a routine adopted by RPs to engage an auditor to form an opinion and make a determination[4] whether a company undergoing corporate insolvency resolution process (“CIRP”) has been subjected to any transaction under Sections 43, 45, 50 and 66 of the IBC Code[5].
However, neither the IBC Code nor the Master Directions prescribe the qualifications of the auditor, the standard the audit must follow or the period it must cover.
II. The Borrowed Audit
Practically, these days, once a company is admitted into insolvency under the IBC Code before the Ld. NCLT, parallelly the banks also start proceedings under the Master Directions. While the RP, to form an opinion and make a determination, outsources the ‘audit’ of books of accounts which practice is not contemplated under the IBC Code, the banks, in defiance of the procedure contemplated under the Master Directions, simply rely upon that very audit to classify the account as ‘fraud’ and start criminal proceedings.
While the violation of principles of natural justice in classifying accounts as ‘fraud’ has come up before the Courts time and again, and the Hon’ble Supreme Court has settled the law on the borrower’s right to be heard,[6] the peculiar practice wherein the banks (being part of the Committee of Creditors) receive the audit report commissioned by the RP and use the same to classify the account as fraud, without conducting the investigation mandated under the Master Directions, has so far escaped judicial scrutiny.
The said practice bypassing the procedure under the Master Directions needs immediate judicial scrutiny on account of multiple reasons, and most urgently since it involves criminal consequences. The audit for the purposes of investigation contemplated under the Master Directions stands on a completely different footing from an audit commissioned by an RP under the IBC Code. Paragraph 3[7] of the Master Directions defines a red-flagged account as one calling for an investigation “from potential fraud angle” and Paragraph 4.1 requires an investigation carried out by an auditor appointed by the bank. Therefore, what is relevant to note is that the Master Directions call for a forensic investigation to be undertaken and not merely a ‘transactional’ audit.
On the other hand, the purpose of an audit commissioned by an RP under the IBC Code is confined to examining transactions and determining whether they fall within the scope of Sections 43, 45, 50 or 66 of the IBC Code. Such an exercise is not undertaken to establish dishonest intent, trace the flow or end-use of funds, or identify and attribute liability for fraudulent conduct to individuals. This limited scope is also reflected in the professional standards governing such engagements.
In this regard, it is noteworthy that the Institute of Chartered Accountants of India (“ICAI”) has issued the Compendium of Forensic Accounting and Investigation Standards (“FAIS”)[8], which distinguishes forensic accounting and investigation engagements from conventional statutory audits. FAIS expressly cautions professionals against characterising such engagements as a “forensic audit” where that expression may create the impression of an independent audit opinion. Nevertheless, in practice, reports prepared by chartered accountants for RPs under insolvency proceedings are frequently and loosely described as “Forensic Audit Reports”. Some are being referred to as “Forensic cum Transaction Audit Report” and so on. What is even more concerning is that the methodology or disclaimers stated for preparation of such reports state that these have been prepared as per Standard on Related Services 4400 – Engagement to Perform Agreed Procedures regarding Financial Information (“SRS 4400”).
The said standard contemplates the performance of agreed-upon procedures determined by the engaging parties, with the professional’s role being limited to reporting factual findings arising from those procedures. Thus, while a report prepared under SRS 4400 can never be treated as a “forensic audit”, a conjoint reading of both FAIS and SRS 4400 underscores that such engagements are fundamentally fact-finding exercises and not adjudicatory inquiries directed towards proving fraud, establishing mens rea, or determining personal culpability.
Above all, an audit report commissioned by the RP cannot be treated as a conclusive proof of transactions. An audit report is merely an opinion of the author, which is based on several disclaimers and thus not a conclusive proof of its observations.[9] The audit report at best constitutes an aid for enabling an RP to examine the affairs of the company and form an independent opinion[10]. Despite this, the banks have been treating the RP’s report as an irrefutable document. A document that cannot by itself establish fraud before the Ld. NCLT should not suffice for a bank to classify the same company as fraud.
III. A Hearing Without Records
There is another important aspect which requires consideration from the borrower’s standpoint. Upon commencement of CIRP, all the records of the company are in the custody of the RP as part of the duties ascribed under Section 17 of the IBC Code.[11] Thereafter, when the bank initiates action under the Master Directions by issuing a show cause notice wherein the allegations are verbatim reproductions of the audit report of the RP, a director is asked to file a reply essentially to the audit report which he/she was unaware of and which is based on records which he/she does not have access to (and having no idea of what documents or records were provided by the RP to the auditor) and receives a hearing in form but of no substance. The Hon’ble Supreme Court’s insistence upon procedural fairness in Rajesh Agarwal (supra) assumes that the borrower receives a meaningful opportunity to answer the allegations. That assumption becomes doubtful where the allegations themselves are reproduced from an RP’s audit report and the records relied upon are no longer in the possession of the borrower.
IV. Parallel Proceedings, One Set of Transactions
Consequently, on the strength of the audit report of the RP which is coloured as a forensic audit report, the bank classifies a loan account as fraud which in turn triggers a complaint to a law enforcement agency. Parallelly, applications are filed by the RP before the Ld. NCLT for declaring transactions as fraud which in turn lead to criminal prosecution proceedings under the IBC Code and, therefore, the officers or directors of the company are subjected to multiple investigations and proceedings, including criminal proceedings, arising from the same set of transactions which, though not double jeopardy in the strict sense of Article 20(2) of the Constitution, is against the principle of Nemo debet bis vexari pro una et eadem causa. The directors of a company face a multiplicity of proceedings before the law enforcement agencies like the Central Bureau of Investigation (“CBI”), the Serious Fraud Investigation Office (“SFIO”), etc., which stem from the Master Directions, and also before the criminal Courts on complaints filed by the Insolvency and Bankruptcy Board of India (“IBBI”) on the basis of adjudications by the Ld. NCLT.
Furthermore, the parallel proceedings under the IBC Code and the Master Directions may give rise to a piquant scenario. If the Ld. NCLT rejects an application under Section 66 (fraudulent or wrongful trading) of the IBC Code because the RP’s audit report could not establish fraud, it may have a bearing upon the proceedings initiated by the bank under the Master Directions and as a result the bank’s fraud classification may not survive.
However, the difficulty is aggravated where the bank has already filed a complaint with a law enforcement agency on the strength of the RP’s audit report, and in such a scenario the findings of the Ld. NCLT may not automatically be binding upon prosecution proceedings.
The Hon’ble Supreme Court in Radheyshyam Kejriwal v. State of West Bengal[12] recognised that where a person is exonerated on merits in adjudication proceedings, criminal prosecution on the same facts cannot be allowed to continue. Therefore, if the Ld. NCLT rejects an application under Section 66 of the IBC Code on the ground that the RP’s audit report does not establish fraud, the prosecution proceedings initiated pursuant to a criminal complaint filed by the bank based on the RP’s audit report may not survive.
V. If the Classification Falls, Does the FIR Survive?
Another aspect which begs consideration is whether, when an order classifying the loan account as fraud is set aside on the ground of being in violation of principles of natural justice, it would tantamount to dropping of the criminal complaint filed with a law enforcement agency. For the discussion at hand, it is relevant to refer to the judgment in the case of Central Bureau of Investigation v. Surendra Patwa & Ors.[13]wherein the Hon’ble Supreme Court was considering the nature and scope of administrative actions initiated in pursuance of the Master Directions vis-à-vis criminal proceedings. The Hon’ble Supreme Court held that if an FIR is registered based on an administrative action (such as the bank’s order of fraud classification), setting aside the latter on a technical or a legal premise and not on merits would not ipso facto nullify the former. A similar view has also been taken by the Hon’ble High Court of Delhi in Rangoli International Pvt Ltd & Ors. v. Central Bureau of Investigation & Ors.[14]
The Hon’ble Courts in Surendra Patwa (supra) and in Rangoli International Pvt Ltd. (supra) have not considered that under the Master Directions, an order classifying a loan account as fraud forms the sole basis of filing a complaint with a law enforcement agency. A bank cannot directly approach the CBI as the same is not an independent action that can be taken by a bank, and it is solely dependent upon a subsisting order passed under the Master Directions. If the underlying order of fraud classification itself is set aside, a bank cannot proceed to file a complaint against a company or its director as no cause of action exists.
If the reasoning of the Hon’ble Supreme Court in Surendra Patwa (supra) is adopted, it would result in a situation where a bank would be able to file a complaint without passing any order classifying a loan as fraud and would enable it to directly file a complaint before the concerned law enforcement agency. In that case, the declaration of account as a ‘fraud’ as a pre-requisite is not required at all.
VI. Can an Account Be Classified as Fraud During CIRP?
Another crucial aspect of the Master Directions which requires considerable attention is the interplay between the Master Directions and the IBC Code. The Master Directions under Paragraph 4.5 provide for treatment of accounts under Resolution. Paragraph 4.5 of the Master Directions begins with ‘In case an entity classified as fraud has subsequently undergone a resolution either under IBC or …’ On a plain reading of Paragraph 4.5 it appears that the Master Directions contemplate the following sequence of events – classification first, CIRP later.
However, the Master Directions are silent on classifying as fraud the loan account of an entity already under CIRP, and the structure of Paragraph 4.5 arguably suggests that the Master Directions were drafted on the assumption that fraud classification would ordinarily precede commencement of CIRP. The RBI may well have taken into consideration that once a company is admitted into CIRP a fair classification becomes impossible. The entire management stands suspended; as per Section 17 of the IBC Code, the records of the company are in the custody of the RP and the erstwhile directors, in the absence of any records of the company, are severely prejudiced as no effective reply to the show cause notices can be filed. Paragraph 4.5 read with Paragraph 2.1.1 is also an indication that the Master Directions envisage fraud classification being completed before admission and leave the period after the admission into CIRP to the IBC Code’s own machinery under Sections 43 to 66. Contrary to the above, the Ld. NCLT, Mumbai Bench[15], has held that classification as fraud under the Master Directions during CIRP falls outside the Section 14 moratorium under the IBC Code.
Moreover, Paragraph 4.5 has a direct bearing on the directors of the company. Under the Master Directions, the liability of directors is derivative of the company, and the director is made vicariously liable under the Master Directions and made answerable because the company is declared as a fraud. As Paragraph 4.5 contemplates fraud classification only before admission into CIRP, the company cannot be classified as fraud during CIRP and, therefore, there is no principal offender to whom a director’s liability can be attached. A director may not be classified as fraud merely by the designation he/she holds when the Master Directions themselves do not permit the company to be classified.
VII. Conclusion
Therefore, the conflict between the Master Directions and the IBC Code lies in a procedural gap which neither the RBI nor the IBBI has reconciled, and the same cannot be left to litigation. In our view, the RBI ought to clarify that the account of an entity under CIRP cannot be classified as fraud on the strength of an audit report commissioned by the RP, and that the bank must conduct its own investigation under Paragraph 4.1. The IBBI ought to require the RP to provide the erstwhile directors access to the records relied upon, so that an effective reply to the show cause notice can be filed. Even the ICAI ought to come out with clarifications on what is a transaction audit, a forensic audit and a forensic investigation, and the qualifications required to conduct each. Till then, the officers or directors of a company under CIRP shall continue to be vexed twice on the strength of a single audit report?
*Abhishek Garg, Advocate-on-Record, Supreme Court of India, Managing Partner, AGS Legal,
**Yash Gaiha – Principal Associate, AGS Legal
***Naman Mehta – Associate, AGS Legal
[1]Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions dated 15.07.2024
[2]Paragraph 4.1 – of Paragraph 4: “Credit facility / Loan account classified as Red-flagged Account and Reporting of Fraud” of Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions
[3]Footnote 14 – Paragraph 4.1 of the Master Directions on Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions
[4] Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016
[5]Section 43 – Preferential transactions and relevant time
Section 45 – Avoidance of undervalued transactions
Section 50 – Extortionate credit transactions.
Section 66 – Fraudulent or wrongful trading.
[6]State Bank of India v. Rajesh Agarwal [(2023) 6 SCC 1] – Hon’ble Supreme Court
[7] Paragraph 3 – Early Detection of Frauds – Framework for Early Warning Signals (EWS) and Red Flagging of Accounts (RFA)
[8] Effective from 1 July 2023
[9] Ratul Puri v. Punjab National Bank [(2024) 1 HCC (Del) 608] & Punjab National Bank v. Nita Puri [2025 SCC OnLine Del 5352] – Hon’ble High Court of Delhi. Also see: Prashant Bothra v. Union of India [2023 SCC OnLine Cal 2023] – Hon’ble High Court of Calcutta
[10] Shri Ramchandra Dallaram Chaudhary Liquidator of Vijay Timbers Industries Pvt Ltd v. Gulabchand Jain & Anr.
[IA/505 (AHM)/2021] in CP(IB) No. 342 of 2018 – Ld. National Company Law Tribunal, Ahmedabad; order dated 13.07.2026
[11] Section 17 – Management of affairs of corporate debtor by interim resolution professional
[12] Radheyshyam Kejriwal v. State of West Bengal and Another [(2011) 3 SCC 581] – Hon’ble Supreme Court
[13] Central Bureau of Investigation v. Surendra Patwa & Ors. [2025 SCC OnLine SC 934] – Hon’ble Supreme Court
[14] Rangoli International Pvt Ltd & Ors. v. Central Bureau of Investigation & Ors. [CRL. M.C. 350/2025] – Hon’ble High Court of Delhi
[15] Union Bank of India v. Rolta India Limited [I.A. (IBC) 3028 (MB) 2025 in CP(IB)/530(MB) 2020]; order dated 08.07.2025