McNally Bharat Engineering Company Ltd, the troubled spot within Brij Mohan Khaitan’s business empire, may go bust unless the lenders to the company agree to a debt recast plan put forward by the company’s management.

Auditors to the embattled firm in their report to the annual financial statement noted that there is “material uncertainty which cast a significant doubt on the group’s (McNally and its subsidiaries) ability to continue as a going concern”.

The group has incurred a consolidated net loss of Rs 783.2 crore in 2018-19 and the current liabilities exceed the current assets by Rs 460.52 crore, auditors Deloitte Haskins & Sells LLP and V Singhi & Associates said in their report, adding that McNally Bharat and one of its subsidiaries defaulted in repayment of loans and meeting financial and non-financial liabilities, including statutory liabilities.

An acute liquidity crisis will ensue if the company fails to remain a going concern, raising question of its operation in the long run. In such cases, no assets or loans can be shown as long term and it may require stakeholders to file for bankruptcy.

“The ability of the group to continue as a going concern is solely dependent on the acceptance of the debt restructuring proposal, which is not wholly within the control of the group,” the auditors reported.

The auditors are of the opinion that the loss for the year and accumulated deficit would have been higher by Rs 579.4 crore. The group recognised deferred tax assets to this tune but the accounting did not conform to the Indian accounting standards concerning income tax.

The report also questioned the fair value gain of Rs 874.82 crore in “other equity” on deferment of payment of amounts received from some companies (of the promoter group) on conversion of those amounts into interest-free long-term loans.

“We are unable to obtain sufficient and appropriate audit evidence to substantiate the contractual validity of the transaction and the accounting treatment in the standalone results,” the report said.

The company had converted the advance received from the promoter group of Rs 985.92 crore into interest-free long-term loans and inter-corporate deposits repayable in five equal instalments commencing after 20 years. McNally recognised the fair value gain of Rs 874.82 crore from the transactions and only considered Rs 111.10 crore as long-term borrowings.

McNally made no adjustments to the carrying value of the assets and liabilities in the balance sheet as the group said it was hopeful that the “restructuring proposal will be approved shortly”.

The auditors’ report of McNally partly explains why the Khaitans are trying to monetise assets by selling tea gardens of McLeod Russel and the battery business of Eveready, industry sources said.

“Considering the material uncertainty related to the going concern that exists in the group, the threshold of reasonable certainty for recognising the deferred tax assets according to Ind AS 12 Income Tax has not been met,” auditors said.