IBBI reprimands Plants and Machinery Valuer for Lack of Due Diligence in Valuation [Read Order]

The Insolvency and Bankruptcy Board of India (IBBI) has recently reprimanded a registered valuer for lack of due diligence in conducting the valuation, in the Corporate Insolvency Resolution Process (CIRP) of V3 Engineers Pvt Limited (Corporate Debtor/CD).

An Inspecting Authority (IA) was appointed to conduct inspection of the valuation report submitted by Mr. Pulianda Chengappa Achaya in the Corporate Insolvency Resolution Process or CIRP of V3 Engineers Pvt Limited to examine compliance with section 247 of the Companies Act, 2013 read with relevant provisions of the Valuation Rules.

Based on the findings of the inspection, a prima facie opinion was formed that sufficient  cause exists to consider actions under sub-rule (5) of rule 17 of the Valuation Rules and accordingly SCN dated 27th January 2023 was issued to RV for contravention of the rules 8(3),(h) and (j) of the Valuation Rules.

The written reply was sought from the RV and an opportunity of personal hearing was accorded to him. The valuer responded to the SCN on 10th March 2023. The matter was referred to this Authority for disposal of the SCN where the valuer, Pulianda Chengappa Achaya availed the opportunity of personal hearing.

The RV in his response had submitted that under approach to valuation in page 3 of his report he had explicitly mentioned that the machines are special purpose machines with very few market instances as such direct market comparison may not be possible. The contention of mentioning this statement was that in the absence of enough comparable market data it is not possible to draw any matrix through a weightage score method.

He further submitted that he had explained that cost approach is used/adopted in determination of plant and machinery value. The machinery value conclusion arrived and indicated in his report was not arbitrary and was based on calculations under cost approach with appropriate treatment for condition of asset. The RV has however admitted that it escaped his attention to attach a work sheet of calculations with the report.

The RV contended that from the above submission it is clear that there is sound convergence between the methodology adopted for value conclusion that culminates in justification of fair value and liquidation value.

Book value of individual assets could not be recorded in his valuation report due to non-availability of fixed assets register extract, he added.

The Disciplinary Committee observed that the RV has placed on record the work sheet of calculations utilized by him in preparing the valuation report.

The work sheet of the calculations reflects that the RV has taken certain assumptions with respect to discounting on the basis of obsolescence, salvage value, fair value, liquidation value, etc., based on which the valuation estimates of the assets have been provided by the RV, the DC noted.

However, the worksheet does not provide the basis for arriving at such discounting rates. It is well understood that the valuer has the liberty to exercise his professional judgment while estimating the value, however, the assumptions with respect to the discounting factors must rest on some logical basis which should be recorded in the valuation report for consideration of its stakeholders, the DC observed further.

The Disciplinary Committee held that, “The report must clearly lay down the assumptions and the logic and basis of such assumptions to safeguard the reliability of the valuation estimate provided by him. In view of the foregoing, after considering the allegations made in the SCN, the detailed reply provided by the RV and the materials available on record, the Authority has arrived at the conclusion that due diligence on part of the valuer has not been up to the mark.”

Therefore, the Authority disposed of the Show Cause Notice with the direction to the RV to be cautious in preparation of the valuation report.

It was also added that, “He should henceforth endeavor to record all the relevant facts in the report itself.”

To Read the full text of the Order CLICK HERE

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IBBI No: IBBI/Valuation/Disc./17/2023 , 17th May 2023