The Information Memorandum under the Insolvency and Bankruptcy Code, 2016
Preface
This article analyses the duty of a Resolution Professional (“RP”) to prepare an Information Memorandum (“IM”) under the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). It highlights the importance of an IM in the insolvency resolution process, the responsibility of a RP to timely prepare the IM, and several challenges by such RPs while preparing an IM. The article also explores the necessary elements of an IM as prescribed under the Code, drawing insights from judicial pronouncements, and offers valuable insights for the stakeholders of the Corporate Insolvency Resolution Process (“CIRP”).
Introduction
IBC was introduced to consolidate and amend the laws relating to reorganization and insolvency resolution of Corporate Persons, Partnership Firms, and Individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.
As per the scheme of the Code, once a petition filed under section 7, 9 or 10 is admitted by the Hon’ble National Company Law Tribunal (“NCLT” or “Adjudicating Authority”), an Insolvency Professional (“IP”) is appointed who is thereafter responsible for taking control over the management of the Corporate Debtor and keeping it as a going concern. Additionally, the RP is also responsible for collating the claims from the Creditors of the Corporate Debtor and invite Resolution Plans from the Prospective Resolution Applicants, seeking to resolve the state of insolvency of the Corporate Debtor.
Hence, in order to enable the Resolution Applicants to prepare a Resolution Plan for the Corporate Debtor, the Code enshrines a duty upon the RP to prepare a document containing all relevant details of the Corporate Debtor (e.g., assets, liabilities, ongoing litigations, etc.) in order to assist such Resolution Applicants. This document which contains all the relevant information of the Corporate Debtor is called an Information Memorandum which is defined under section 5(10) of the Code as under: –
“5(10) Information Memorandum means a memorandum prepared by the Resolution Professional under sub-section (1) of section 2”.
Duty of the Resolution Professional to prepare an Information Memorandum
Under section 25(2)(g) read with Section 29 of the Code, a duty is cast upon the RP to prepare an IM in such form and manner containing such relevant information as prescribed by the Insolvency and Bankruptcy Board of India (“Board”).
Upon the appointment of a RP, section 25 of the Code stipulates that it shall be the duty of such RP to preserve and protect the assets of the Corporate Debtor and ensure that it remains a going concern. As part of its duty, the RP is also responsible to take custody of all the assets of the Corporate Debtor including all business records. Therefore, by taking possession of all such information, records and assets of the Corporate Debtor, the RP can assess the viability of business of the Corporate Debtor and manage negotiation between the Debtor and Creditors. Further, based on such negotiations, the RP shall endeavor to invite proposals to revive the business of the Corporate Debtor and such proposals can be invited not only from the Debtor and the Creditors but from every market participant as well.
At this juncture, the report of the Bankruptcy Law Reforms Committee[1] comes into picture which provides an idea with respect to the role of the RP in preparing the IM. In para 5.3.2, the report states: –
- The RP must provide the most updated information about the entity as accurately as is reasonably possible to this range of service providers.
- The information collected on the entity is used to compile an information memorandum, which is signed off by the debtor and the creditors committee, based on which solutions can be offered to resolve the insolvency.
- Once the information memorandum is created, the RP must make sure that it is readily available to whoever is interested to bid a solution for the IRP.
Additionally, the Board, through its press release[2] bearing no. IBBI/PR/2018/33 dated 20.11.2018, released a draft specimen for the RPs to refer while preparing IM of the Corporate Debtor. This specimen provides a broad perspective of what details should the RP keep in mind while preparing an IM along with any such additional information which may be relevant in respect of a particular Corporate Debtor.
What information should be included in an Information Memorandum?
Regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) provides the information which should necessarily be included in the IM by a RP. Sub-regulation 2 of regulation 36 under the CIRP Regulations provides that: –
“36. Information memorandum –
(2) [The information memorandum shall highlight the key selling propositions and contain all relevant information which serves as a comprehensive document conveying significant information about the corporate debtor including its operations, financial statements, to the prospective resolution applicant and shall contain the following details of the corporate debtor-] –
(a) [assets and liabilities [including contingent liabilities] with such description, as on the insolvency commencement date, as are generally necessary for ascertaining their values.
Explanation: ‘Description’ includes the details such as date of acquisition, cost of acquisition, remaining useful life, identification number, depreciation charged, book value, [geographical coordinates of fixed assets] and any other relevant details.]
(b) the latest annual financial statements;
(c) audited financial statements of the corporate debtor for the last two financial years and provisional financial statements for the current financial year made up to a date not earlier than fourteen days from the date of the application;
(d) a list of creditors containing the names of creditors, the amounts claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims;
(e) particulars of a debt due from or to the corporate debtor with respect to related parties;
(f) details of guarantees that have been given in relation to the debts of the corporate debtor by other persons, specifying which of the guarantors is a related party;
(g) the names and addresses of the members or partners holding at least one per cent stake in the corporate debtor along with the size of stake;
(h) details of all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities;
(i) the number of workers and employees and liabilities of the corporate debtor towards them;
(j) [company overview including snapshot of business performance, key contracts, key investment highlights and other factors which bring out the value as a going concern over and above the assets of the corporate debtor such as brought forward losses in the income tax returns, input credit of GST, key employees, key customers, supply chain linkages, utility connections and other pre-existing facilities
(k) Details of business evolution, industry overview and key growth drivers in case of a corporate debtor having book value of total assets exceeding one hundred crores rupees as per the last available financial statements]
(l) other information, which the resolution professional deems relevant to the committee.”
Hence, from Regulation 36 of the CIRP Regulations, it comes to light that an IM is a comprehensive document that seeks to provide key elements of the Corporate Debtor to the Prospective Resolution Applicant in order to enable them to gauge the viability of business of the Corporate Debtor and thereafter, submit Resolution Plan to resolve the state of insolvency of the Corporate Debtor. Further, this regulation needs to be read in light of the explanation provided under sub-section 2 of the section 29 of the Code wherein it explains that the Information Memorandum must contain all the “relevant information” which may be required by the Resolution Applicant to prepare a Resolution Plan for the Corporate Debtor.
The Hon’ble Supreme Court of India, in the matter of Ebix Singapore Private Limited Vs. CoC of Educomp Solutions Limited & Anr[3] and in the matter of Kundan Care Products Limited Vs. Mr Amit Gupta and Ors[4], dealt with the duty of the RP to provide accurate information of the Corporate Debtor and made the following observation: –
“189. Under the IBC, there is a duty upon the RP to collect as much information about the Corporate Debtor as is accurately possible to do. When such information is communicated through an IM to the Resolution Applicant, the RP must be careful to clarify when its information is not comprehensive and what factors may cause a change.”
Similarly, the Hon’ble National Company Law Appellate Tribunal (“NCLAT”), in the matter of Kushal Ltd. Vs. Kartik Baldwa[5] dealt with the allegations upon the RP wherein the Appellant stated that the Resolution Professional failed to disclose the ongoing assessment proceedings under the Income Tax Act, 1961 which were pending during the preparation of the IM and also alleged that the IM depicted a higher production capacity of the Corporate Debtor while the actual production capacity was comparatively low. The Hon’ble NCLAT while dealing with non-disclosure of ongoing assessment in the IM observed as under: –
“Another contention of the Appellants is that, pending tax proceedings are not disclosed in the Information Memorandum by CIRP, in fact, the CIRP disclosed the tax liability and the appellants at Point No. 51 of the resolution plan agreed as follows:
“51. “Taxes” or “Tax” shall means any and all present and future, direct or indirect, claims for tax, levy, impost, duty, cess, statutory dues or other charge of a similar nature (including any penalty or Interest payable in connection with any failure to pay or any delay in paying any of the same) including on gross receipts, sales, turnover, value addition, use, consumption,, property, service, franchise, capital, occupation, license, excise, documents (such as stamp duties) and customs and other taxes, duties, assessments, or fees, however imposed, withheld, levied, or assessed by any Governmental Authority.”
As the appellants themselves agreed to pay the future liability of taxes, non-disclosure of any pending cases as to assessment is not a ground. On the other hand, CIRP is under obligation to disclose pending cases but not the assessments. Hence, non-disclosure is not a ground to conclude that the CIRP made any misrepresentation.”
Further, while dealing with the second contention, the Hon’ble NCLAT took into account the observations made by the Hon’ble Supreme Court in the aforementioned judgements and made the following observations on “Relevant Information” to be provided by the RP: –
“In the explanation annexed to Section 29, the word ‘relevant information’ is explained. It means the information required by the resolution applicant to make the resolution plan for the Corporate Debtor which shall include financial position of the Corporate Debtor. All information relating to dispute against the Corporate Debtor on any other matter pertaining to the Corporate Debtor as may be specified. Therefore, the word ‘relevant information’ referred in Section 29 (1) of IBC is only an information required by the resolution applicant i.e., appellants herein to make resolution plan for the Corporate Debtor. Here, the Resolution Professional disclosed the information based on the report of MITCON available and he is not an expert to make an assessment of the production capacity of the industry, therefore, he only disclosed those details regarding production capacity based on earlier report submitted by MITCON, such information is relevant for the purpose of making a resolution plan for the Corporate Debtor by the Resolution Applicant.
Thus, the Resolution Professional disclosed relevant information enabling the resolution applicants/ appellants to make appropriate application by submitting resolution plan for the Corporate Debtor. Such act would not amount to fraudulent misrepresentation.”
Therefore, after perusing the aforementioned judgements passed by the Hon’ble Supreme Court of India as well as the Hon’ble NCLAT, it becomes clear that although the RP shall strive to provide the most accurate information related to the Corporate Debtor as available with him, he is not expected to make an assessment of the information and reports referred to in the Information Memorandum.
Period prescribed under the Code for issuing Information Memorandum
Under Regulation 36(1) of the CIRP Regulations, the RP is required to submit the IM to each member of the CoC, on or before ninety-fifth day from the Insolvency Commencement date. Therefore, keeping in view purpose of the Code, i.e., to resolve the state of insolvency of the Corporate Debtor in a time bound manner, the Code stipulates the aforementioned timeline for issuing the IM to the members of the CoC so as to ensure that ample time is provided to the CoC as well as the Resolution Applicant for assessing the viability of the business of Corporate Debtor and thereafter submit a Resolution Plan.
Hence, in an ideal situation, where the RP is appointed in the first meeting of the CoC i.e., T+30, such RP shall submit the IM with the members of the CoC on or before ninety-fifth day from the Insolvency Commencement Date. However, in another situation where the resolution to appoint RP could not be passed in the first meeting of the CoC, Regulation 17(3) provides that the IRP shall continue to perform the functions as a deemed RP from the forty-first day from Insolvency Commencement Date till the appointment of a RP, in which case, such IRP/Deemed RP shall be responsible to submit the IM to the members of the CoC, until the appointment of a RP, within the stipulated limit of ninety-fifth day from the Insolvency Commencement Date.
It is noteworthy to mention here that the RP is enjoined with the duty of preparation of an IM and this, it must do within the stipulated time as prescribed under the Code. In some situations, the RP may face a challenge from the suspended management of the Corporate Debtor and may face difficulty in taking possession over the records and assets of the Company. In these situations, although the Code provides a remedy in the form of an Application under section 19(2) for seeking directions to the suspended management to cooperate with the RP however, despite this, the RP shall proceed to prepare an information memorandum after obtaining details of the Corporate Debtor from the records which are compulsorily filed by the Company under the Companies Act.
It will not be out of place to mention here that the Hon’ble NCLAT in Bimalesh Bhardwaj Vs. Value Infratech India Pvt. Ltd.[6] directed the Board to investigate the conduct of the Resolution Professional by taking note of the fact that the RP resorted to ingenious way of circumventing his responsibility, including that of preparing an IM and ordered: –
“26. From the minutes of second meeting of the CoC, it is clear that the Resolution Professional has resorted to very novel and ingenious way of circumventing the duties imposed upon him in the IBC for preparation of information memorandum, exclusion of time to extend CIRP period and inviting Expression of Interest for Resolution Plan for the Corporate Debtor….
27. Thus we find that the CoC was not constituted in accordance with the provisions of IBC. In the matter, the CIRP was not pursued with fairness and due diligence by the Resolution Professional and the resolution for liquidation of the Corporate Debtor was taken in a meeting with an improper voting share ascribed to Respondent No. 4 and taken in unseemly haste. These are actions of omissions and commissions, which we cannot absolve the Resolution Professional from his conduct should be investigated by Insolvency and Bankruptcy Board of India and action as appropriate may be taken against the present Resolution Professional.”
Important compliances by the Resolution Professional for issuing Information Memorandum
1. While preparing an IM under the Code, the RP is required to follow certain timelines stipulated under the CIRP Regulations and further comply with other provisions of the Code to ensure that the information of the Corporate Debtor, which may contain important business records, Intellectual Property, or other material information cannot be misused by the competitors. Hence, sub-section (2) of section 29 states that the RP shall provide access to all the relevant information of the Corporate Debtor to the Resolution Applicant after such Applicant undertakes to: –
- Comply with provisions of law for the time being in force relating to confidentiality and insider trading;
- To protect any intellectual property of the Corporate Debtor if may have access to;
- Not to share relevant information with third parties unless clauses (a) and (b) of this sub-section 2 of section 29 are complied with.
Additionally, sub-regulation (4) of Regulation 36 provides further clarity that the RP shall share the IM with the members of the Committee of Creditors (“CoC”) as well as the Resolution Applicant only after receiving an undertaking from such member or the Resolution Applicant to the effect that the information provided in the IM shall not be used by such person to cause undue gain or undue loss to itself or any other person and comply with the section 29(2) of the Code.
2. Compliance under Regulation 40B (1) of the CIRP Regulation requires the RP to make certain disclosure on the website designated by the Board, on the occurrence of certain events, in such form along with enclosures as may be specified and required. Therefore, within 7 days of issuing IM to the members of CoC under regulation 36, the RP is required to submit a disclosure in Form CIRP – 3 on the website designated by the Board.
3. Additionally, there may be certain occasions when the RP is unable to issue the IM within time prescribed under the CIRP Regulations. These occasions may arise due to non-submission of undertaking by the members of the CoC which is required prior to the issuance of the IM. In such circumstances, where IM is not issued within 51 days from the date of public announcement, the RP shall file a disclosure in Form CIRP 7 as provided under Regulation 40B (1A) of the CIRP Regulations.
Conclusion
The information memorandum is a comprehensive document that provides significant details about a corporate debtor to prospective resolution applicants. It includes information such as the corporate debtor’s assets, liabilities (including contingent liabilities), financial statements, list of creditors, related party debts, guarantees given by others, stakeholder details, litigation and investigations, worker and employee details, and other relevant information, hence, the stakeholders of CIRP shall ensure timely preparation of the Information Memorandum to ensure successful resolution of the Corporate Debtor.
Reference
[1] The reports of the Bankruptcy Law Reforms Committee | https://ibbi.gov.in/BLRCReportVol1_04112015.pdf
[2] IBBI press release no. IBBI/PR/2018/33 | https://ibbi.gov.in/webadmin/pdf/press/2018/Nov/PR-Specimen-compressed.pdf
[3] Civil Appeal No. 3224 of 2020
[4] Civil Appeal No. 3560 of 2020
[5] Company Appeal (AT) (INS.) No. 678 of 2022
[6] Company Appeal (AT) (Ins.) No. 112 of 2021
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