As per the Insolvency and Bankruptcy Code, 2016 and the relevant regulations, an Information Memorandum under IBC is a comprehensive document drafted by the resolution professional that contains all the relevant information of the corporate debtor to be conveyed to potential buyers and investors. This document also assists the insolvency professional in preparing the resolution plan required for the outcome of the insolvency process, in the interest of the corporate debtor, its creditors, and stakeholders. Considering the crucial role of the information memorandum under IBC in the insolvency process, adhering to legal and regulatory requirements and strict timelines is essential. This article delves deeper into what the information memorandum is, its contents, and the necessary legal compliances.
What is an Information Memorandum?
An information memorandum is defined as per section 5(10) of the Insolvency and Bankruptcy Code, 2016 (IBC), as a document prepared by the resolution professional (RP) under section 29(1). Under Regulation 36(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereon on forward known as the “Regulations, 2016”). Shorten with AI
An IM is a comprehensive document that consists of all relevant information about the corporate debtors, such as its, financial statements, operations debts, required by the resolution applicant. It is important for the resolution applicant as they need for the preparation of the resolution plan. The IM should be submitted by the RP to the Committee of Creditors (CoC) on or before the 95th day from the insolvency commencement date as per Regulation 36(1). Shorten with AI
What are the Advantages of an Information Memorandum?
- Being a comprehensive document which provides all the relevant information in one place, by drafting an IM there is a uniform information distribution system, with the potential buyers and investors of the corporate debtor receiving the same information. Hence, there is transparency and impartiality during the insolvency process.
- The IM is an important communication tool which is important as only a small number of people can visit the company’s premises. Therefore, stakeholders, such as the investors directors, board members, advisors, and other interested decision makers, remain informed and engaged during the insolvency process.
- The preparation and the manner in which the IM is prepared may also positively influence the potential investors. Hence, it is necessary that the IM is prepared by an expert.
- As the IM consists of information about the corporate debtor and, therefore, provides a basis for the preparation of the resolution plan.
What is the Duty of the Resolution Professional to prepare an Information Memorandum?
a) Process of Collecting Information and Creating the IM
As per section 25(2)(g) of IBC, the RP is responsible for preparing the IM as per section 29. Section 29 provides that the RP should provide to the resolution application access to the ‘relevant information’ in physical and electronic form after receipt of undertaking from the resolution applicant. It should be prepared simply and well-crafted to invite potential investors. The RP has the duty to ensure that the IM complies with the requirements listed in the provisions of the IBC and within the timelines mentioned in the IBC.
b) Role of RP in Managing Negotiations Between the Debtor and Creditors:
When the RP is appointed under section 25(1), the RP has the duty to preserve and protect the corporate debtor’s assets. The RP also has the duty to take custody and control of the corporation’s assets along with the corporate debtor’s business records.[1] Through these duties, the RP has the main role of assessing the continuity of the business operations. By providing a platform for negotiations between the corporate debtor and creditors, the RP has may be able to form proposals to revive the company that are beneficial for the corporate debtor, creditors, and potential investors.
The preparation of the IM under section 29 provides a communication tool between the creditors and the corporate debtor. Being an intermediary between the two, it is the duty of the RP as per section 25(2)(c) include both of their interests while drafting the resolution plan that is submitted before the CoC, Read related article Conflict of Jurisdiction between NCLT and Civil Courts
What Information should be Included in an Information Memorandum?
It is important that the RP needs to include relevant information to inform potential buyers and investors about the current position of the corporate debtor. ‘Relevant information’ under Regulation 36 means the details of the financial status, details of any legal disputes that involve the company, and other information that the RP finds necessary to convey in the IM. According to this regulation, the information to be included in the IM is:
a) Assets and liabilities as of the insolvency commencement date
b) Latest annual financial statements
c) Audited financial statements of the corporate debtor for the last 2 financial years and provisional financial statements for the current financial year, not earlier that 14 days from the date of the application
d) A list of creditors, including their names, the amounts claimed by them, the amount of their claims admitted, and security interest
e) Particulars of a debt due from or to the corporate debtor
f) Details of the guarantees that have been given in relation to the debts of the corporate debtor by other persons.
g) The names and addresses of the members or partners holding at least 1% state in the corporate debtor
h) The details of all material litigation and on-going investigation or proceeding initiated by the Government and statutory authorities
i) The number of workers and employees and liabilities of the corporate debtor towards them
j) Company overview
k) Details of the business evolution, industry overview and key growth drivers of the corporate debtor.
What is the Period Prescribed for Issuing Information Memorandum under IBC?
The period prescribed for issuing the information memorandum under IBC is not specifically mentioned under IBC, but with reading section 29 with Regulation 36(1) of the Regulations, 2016, the RP shall submit the IM in electronic form to each member of the CoC on or before 95th day from the insolvency commencement date.
Under Regulation 40B, the RP, within 7 days of issue of IM to the members of CoC as under Regulation 36 to file form CIRP 3. This form includes the details of the RP filing the form, the details of the registered valuers, handing over the records of the corporate debtor by the interim resolution professional to the RP, taking over the management of the corporate debtor, any applications seeking cooperation management, the details of the IM, and any non-compliances with the provisions of the IBC and other applicable laws.
What are the important compliances of the Resolution Professional for issuing IM?
- Section 29 of IBC has the title ‘preparation of information memorandum’. As per this section the RP must prepare the IM as per the specifications under the Regulations, 2016. The RP has the duty to provide the resolution applicant with the relevant information in physical and electronic form while ensuring that there is compliance with all necessary legal requirements, protection of any intellectual property of the corporate debtor, and not to share any relevant information with third parties unless the previous two requirements are met with.[2]
- Under Regulation 36 of the Regulations, 2016, the RP must submit the IM to the CoC on or before the 95th day from the commencement of the insolvency commencement date. The IM consists of all the relevant information of the corporate debtor, such as its business operations, financial statements, and all the information of the corporate debtor, for instance, its assets and liabilities, latest financial statements, etc.
- By complying with the deadlines given under Regulation 40B, the RP will be able to ensure the insolvency process as per the applicable laws, preventing any unnecessary delays.
What are the Common Mistakes while Preparing the IM?
The information memorandum under IBC is a document which provides that the buyers and investors have the relevant information about the corporate debtor. Therefore, it is important for the revival of the company and is important for the IM to be truthful and accurate. This indicates that the IM should not portray any unrealistic estimations, that is, not underestimating the market competition or overestimating the market potential.
The information memorandum under IBC needs to reflect the current position of the company, hence, the cash flow and investment need to be as per the present condition, the revenue and expense estimates should be correctly calculated. The RP must keep in mind that all the relevant information is disclosed for transparency between the corporate debtor, creditors, stakeholders, and potential buyers and investors.
Conclusion
The resolution professional has the major responsibility of including all the relevant information in this information memorandum under IBC. Hence, the information memorandum plays an important role during the insolvency process as it essentially provides the potential buyers and investors information about the company. By adhering to the timelines and details as per the IBC and the Regulations, 2016, the RP ensures that the insolvency process is efficient and transparent. It is mandatory that the RP include information that is up-to-date to the current condition of the corporate debtor, accurate, and in accordance to the relevant legal and regulatory requirements.