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PREPARATION OF INFORMATION MEMORANDUM DURING CORPORATE INSOLVENCY RESOLUTION PROCESS

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PREPARATION OF INFORMATION MEMORANDUM DURING CORPORATE INSOLVENCY RESOLUTION PROCESS
By: Mr. M. GOVINDARAJAN
January 27, 2021
All Articles by: Mr. M. GOVINDARAJAN       View Profile
  • Contents

Information memorandum

An Information Memorandum is a comprehensive description of all aspects of the business and the fundraising proposal. It is intended to provide all the information needed by an investor to make a fully informed decision in a positive and appealing way.  It is something which represents a resume of the company or corporate entity which is seeking investment from the prospective investors, be it the angel investors or the private equity investors or the venture capitalists.

In the corporate insolvency resolution process information memorandum is the basic document which contains all aspects of the corporate debtor that will enable the resolution applicants to prepare resolution plan in accordance with the information contained in the information memorandum and submit the same to the resolution professional.

Section 5(10) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) defines the expression as a memorandum prepared by resolution professional under sub-section (1) of section 29.

Preparation of information memorandum

It is the resolution professional to prepare the information memorandum. Section 25(2)(g) of the Code provides that  the resolution professional shall prepare the information memorandum in accordance with section 29.

Section 29(1) of the Code provides that the resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan.

The expression ‘relevant information’ is defined by the Explanation to section 29 of the Code as the information required by the resolution applicant to make the resolution plan for the corporate debtor, which shall include the financial position of the corporate debtor, all information related to disputes by or against the corporate debtor and any other matter pertaining to the corporate debtor as may be specified.

Contents of information memorandum

Regulation 36(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that the information memorandum shall contain the following details of the corporate debtor-

  • Assets and liabilities with such description, as on the insolvency commencement date, as are generally necessary for ascertaining their values.  The term ‘description’ includes the details such as date of acquisition, cost of acquisition, remaining useful life, identification number, depreciation charged, book value, and any other relevant details.
  •  The latest annual financial statements;
  • 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;
  • 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;
  •  Particulars of a debt due from or to the corporate debtor with respect to related parties;
  • 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;
  •  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;
  • Details of all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities;
  • The number of workers and employees and liabilities of the corporate debtor towards them;
  • Other information, which the resolution professional deems relevant to the committee.

Furnishing of information memorandum

A member of the committee of creditors may request the resolution professional for further information of the nature described in this Regulation and the resolution professional shall provide such information to all members within reasonable time if such information has a bearing on the resolution plan.

Confidentiality of the information

The resolution professional shall share the information memorandum after receiving an undertaking from a member of the committee to the effect that such member or resolution applicant shall maintain confidentiality of the information and shall not use such information to cause an undue gain or undue loss to itself or any other person.  All the law related to confidentiality and insider trading shall be complied with.  The intellectual property right of the corporate debtor shall be protected.  The information shall not be shared to anu third party without obtaining this type of undertaking.

Access to information memorandum

Section 29(2) of the Code provides that the resolution professional shall provide to the resolution applicant access to all relevant information in physical and electronic form, provided such resolution 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 it may have access to; and
  • not to share relevant information with third parties unless clauses (a) and (b) of this sub-section are complied with.

Time limit

The resolution professional shall submit the information memorandum in electronic form to each member of the committee within two weeks of his appointment, but not later than fifty-fourth day from the insolvency commencement date, whichever is earlier.

Public domain

For the question as to how can one get to know whether an information memorandum has been prepared or not and how to get access to it, the Board advised that data may be placed on the public domain that may help follow the progress of a case.

Failure to prepare information memorandum

Failure to obtain the requisite documents for preparation of Information Memorandum by the Resolution Professional as stated under Section 25(2)(g) and Section 29(1) of the Code read along with Regulation 36 of Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 will ultimately led to the liquidation of the corporate debtor.  The Insolvency and Bankruptcy Board of India will take disciplinary action against such Resolution professional for such contravention.  There will be prima facie violation section 25(2)(g), Section 29(1), Section 208(2)(a) and Section 208(2)(e) of the Code, Regulation 36 of Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016, regulation 7(2)(h) of Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 read with clause 13 and 14 of the Code of Conduct under regulation 7(2) thereof.

The Disciplinary Committee of the Insolvency and Bankruptcy Board of India initiated disciplinary action against one Resolution Professional.  One among the charges is non preparation of information memorandum.  The said Resolution Professional was issued with a show cause notice.  The allegation contained in the show cause notice is for contravention of the provisions of the Code and regulations thereof for non preparation of information memorandum.

In the present case, the office premises of the Corporate Debtor were sealed and were under the control of Chennai Metropolitan Development Authority (CMDA).  On an application filed by the Resolution Professional viz., Mr. Arumugam, Adjudicating Authority vide order dated 11th July, 2020 directed the ex-directors to make an application to CMDA to enable the Resolution Professional to take possession of all the documents and records. It requested CMDA to cooperate with the Resolution Professional to retrieve the records from office of the corporate debtor which was sealed by CMDA.

In compliance with the said order of Adjudicating Authority, CMDA vide its letter dated 14th August, 2018 informed the Resolution Professional that CMDA proposed to de-seal the building for one day to allow him to take the required documents, books of accounts and records on 17th  August, 2018 at 11.00 am.  Since the Resolution Professional did not turn on that day, CMDA again offered opportunity on 04.10.2018. 

The show cause notice alleged that the resolution professional failed to perform his duties and also failed to obtain the requisite documents for preparation of Information Memorandum.  The resolution professional submitted that the Adjudicating Authority had exculpated him of any blame for the failure of the corporate insolvency resolution process.  The Adjudicating Authority further observed that the resolution professional has made efforts to access the records of the corporate debtor, however, the same could not be done due to non-cooperation of promoter directors of corporate debtor  as well as because the registered office of the corporate debtor was locked by third party, i.e., CMDA.  The same conclusion has been reached by National Company Law Appellate Tribunal in its order dated 28th May 2019.

The resolution professional submitted that the property was not de-sealed on 17th August, 2018 and that the officials of CMDA told the resolution professional about the de-sealing when he approached them in their office. He submitted that it was de-sealed only once, i.e., on 24th August, 2018 and that CMDA’s letter dated 21st August, 2018 conveying de-sealing of property of the CD on 24th August, 2018 was received by the resolution professional on 25th August, 2018, and this is the reason as to why he could not be present for the de-sealing of the property.  Therefore he cannot be faulted for non-preparation of the Information Memorandum.

Regarding to the issue of non preparation of information memorandum the Disciplinary Committee observed that-

  • The Ex-directors of the corporate debtor did not cooperate with the interim resolution professional/resolution professional from the very inception of the corporate insolvency resolution process.
  • the non-cooperative attitude of the Ex-directors led the resolution professional to file 9 applications before the Adjudicating Authority under section 19 of the Code during the corporate insolvency resolution process wherein it was directed by the Adjudicating Authority that the ex-directors would cooperate with the resolution professional and an undertaking to that effect was also given by the ex-directors to the Adjudicating Authority.
  • The Adjudicating Authority observed that although the resolution professional had made efforts to get access to the records of the corporate debtor, however, he could not lay his hands on the same due to non-cooperation of the ex-directors of the corporate debtor and sealing of the registered office of the corporate debtor by the third party CMDA.
  • The registered office of the corporate debtor was not de-sealed on 17th  August, 2018 and when the resolution professional approached the office of CMDA he was informed that the de-sealing had been deferred.
  • The letter dated 21st t August, 2018 intimating the date of de-sealing was received by the resolution professional on 25th August, 2018 and was not able to be present for the de-sealing on 24th August, 2018.

The Disciplinary Committee observed that the submissions made by the resolution professional in non preparation of information memorandum are justifiable.  Therefore no action was taken against him for this charges alleged in the show cause notice vide its order dated 05.01.2021.

 

By: Mr. M. GOVINDARAJAN - January 27, 2021

 

 

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