Registered valuers can’t use limitation, disclaimer clause to escape accountability

The insolvency regulator feels that the professional valuers are using the ‘caveats, limitations and disclaimers’ section of the valuation report to dilute his/her responsibility for the report’ and therefore, has issued a set of guidelines for registered valuers in this regard.

The guidelines issued by the Insolvency and Bankruptcy Board of India (IBBI) on the content and format of the ‘Caveat, Limitations and Disclaimer’ section say: “A valuation report should not carry a disclaimer, which has potential to dilute the responsibility of the valuer or makes the valuation unsuitable for the purpose for which the valuation was conducted. The valuation reports should be capable of being tested through the crucible of legal evidence in judicial proceedings.”

The guidelines for registered valuers define Caveats, Limitations and Disclaimer, and then go on to explain why the three are important for the credibility of the valuation report.

Caveat, limitation and disclaimer

The guidelines define Caveats as warnings or cautions to the client/user of services, Limitation as a restriction on the scope of the valuer’s work including inspection or investigation of the data available for analysis, while disclaimer as a statement intended to specify or delimit the scope of rights and obligations that may be exercised and enforced by parties in a legally recognized relationship.

It specifically says that a disclaimer is a statement denying responsibility intended to prevent civil liability arising for particular acts or omissions.

“While caveat, limitations and disclaimers have different connotation, in the context of a valuation, the clauses may get used in an interchangeable manner as limitation or a disclaimer by a valuer could be caveat for the user of the report. Hence, it is imperative that the users of the report are familiarized about the same to enable them to assess the impact of the disclaimer/caveat/limitation on the credibility and reliability of the report,” noted the guidelines.

According to the guidelines, the registered valuer while preparing a valuation report should not disclaim liability for his expertise or deny his duty of “due care”.  A registered valuer, instead, must prepare the valuation report of the company based on information and records concerned as provided by the management, and the management should be held liable for the correctness and veracity of the information so provided.

However, the guidelines say that the registered valuer must investigate and corroborate significant inputs provided by the management/owners, and in case where credibility of information supplied cannot be corroborated, it must be mentioned in the report whether or how such information is used.

The guidelines further notes that the various projections of business growth, profitability, and cash flows etc, which are used in the valuation report are estimates made by the company, and the valuer should consider the reliability and credibility of projections after testing the assumptions made by the management/owners/ company in given market conditions and after sufficient inspection, enquiry, computation and analysis. The valuer may disagree with the projections if they are conjectural or bordering on the unreal and accordingly make necessary modifications.

In a valuation report, the registered valuer can state that the assumptions are statements of fact provided by the company and not generated by him/her. “This warning statement is necessary as data provided by the company is often construed be a part of the valuation report. Notwithstanding this, the registered valuer has to carry out sufficient inspection, enquiry, computations and analysis to ensure that valuation is properly supported,” say the new guidelines.

The registered valuer is required to carry out all valuations in sufficient detail to comply with the requirements of “due care”.  However, it can be reasonably expected that circumstances may place certain limitations regarding access to information or the time available. Hence, one has to recognize limitations of time and context in valuations, as it cannot constrain business need and flexibility.

The guidelines further say that the effort, diligence and level of expertise applied by the relevant Registered Valuer, need to be stated in the valuation report.

Concern on the quality of valuation report

While issuing the guidelines for registered valuers, the insolvency regulator has specifically expressed concern over quality of valuation reports. The regulator made the observation that in context of the Insolvency and Bankruptcy Code, the Adjudicating Authority (NCLT) has on several occasions raised concern about the sharp difference between the valuations arrived at by two different registered valuers or the variation between the amount offered by a successful resolution applicant and the amount stated in the valuation report.

It, therefore, asked for a detailed and fully reasoned valuation report in every case of valuation done in respect of both mandatory and discretionary valuation, where a registered valuer is appointed.