DECCAN VALUE INVESTORS L P VS DINKAR VENKATASUBRAMANIAN : INFORMATION MEMORANDUM CAN NOT BE TESTED ON “TRUE PICTURE OF RISK” OBLIGATION

The Supreme Court in Deccan Value Investors L P Vs. Dinkar Venkatasubramanian (Civil Appeal No. 2801/2020 ) has held that Information Memorandum can not be tested on “true picture of risk” obligation  but has to understood on “best effort basis”.  

FACTS OF THE CASE

CIRP has been initiated in the matter of Metalyst Forging Ltd. (Corporate Debtor)  by order of NCLT, Mumbai Bench. Deccan Value Investors L P and DVI PE (Mauritius) Ltd (Resolution Applicants) had filed application before the Adjudicating Authority for withdrawal of Resolution Plan on the ground of lack of information and fraud on the part of the Resolution Professional. The Adjudicating Authority has rejected the Application. The NCLAT reversed the decision of the NCLT. Cross appeals were filed by the parties before the Supreme Court under Section 62 of the Insolvency and Bankruptcy Code, 2016.

FINDINGS OF THE SUPREME COURT

The Supreme Court relied on the its judgment in Ebix Singapore Private Ltd Vs. Committee of Creditors of Educomp Solutions Ltd  and Another (2022 ) 2 SCC 401  wherein it has been held that Resolution Plan can not be withdrawn or modified after it is approved by Committee of Creditors. The Supreme Court noted that if Resolution Plan is permitted to be withdrawn or modified after approval by Committee of Creditors, the same will cause delay, uncertainties and complexities in Corporate Insolvency Resolution Process. The Supreme Court reiterated the view taken Ebix Singapore that Resolution Plan is creature of code and not a pure contract between two consenting parties.

The Supreme court noted that once Resolution Plan is approved by Adjudicating Authority it is binding on all stakeholders, even those who are not members of Committee of Creditors. The ground of scrutiny available before the Adjudicatory Authority for grant of approval of Resolution Plan is limited and restricted. Resolution Applicant cannot unilaterally amend/modify or withdraw the Resolution Plan post approval by Committee of Creditors.

The Resolution Applicant has taken ground that it was handicapped because of lack of information or rather fraud on the part of the Resolution Professional.  Seventy percent of revenue came from trading and not from manufacturing. Mott Macdonald Report was factually incorrect. Misleading and false statement was made with regard to the uninstalled imported components, which was kept in land of sister concern. Resolution Applicant was misled by wrong financial data as forensic audit was ongoing.

The Supreme Court observed that grounds taken by the Resolution Applicant can not be treated to be fraud on the part of the Resolution Professional. No mis-information or wrong information have been given by the Resolution Professional.

The Court noted that relevant information was available in the information memorandum and  virtual data room. Matt Macdonald Report had been submitted on the behest of erstwhile promoters/directors of the Corporate Debtor which is hedged with conditions and disclaimers. It has been cleared stated that imported press was stored in sister concern. Resolution Plan itself had references about transaction audit.

The Supreme Court observed that Resolution Plans are not submitted by lay persons. They are submitted after financial statements and data are examined by domain and financial experts.

The records of the Corporate Debtor in financial distress may suffer from  data asymmetry, debatable or wrong data. Transaction audit may take time and such data may not be available before preparation of Information Memorandum or setting up of virtual data room. Information Memorandum cannot be tested on “true picture of risk” obligation but Resolution Professional’s obligation to provide information has to be understood on “best effort’ basis.

The Supreme Court  reversed the finding of the NCLAT and also approved the Resolution Plan submitted by the Resolution Applicant.

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