Use of Caveats, Limitations and Disclaimers by the Registered Valuers in Valuation Reports – IBBI Guidelines
The IBBI has issued Guidelines called the Insolvency and Bankruptcy Board of India (Use of Caveats, Limitations, and Disclaimers in Valuation Reports) Guidelines, 2020.
The Guidelines are issued in exercise of the powers under Rule 14(i) of the Companies (Registered Valuers and Valuation) Rules, 2017 which designates IBBI as the authority for development and regulation of the valuation profession.
The said Guidelines shall come into force in respect of valuation reports in respect of valuations completed by Registered Valuers (RVs) on or after 1st October, 2020.
The objective of the said Guidelines is to provide guidance to the RVs in the use of Caveats, Limitations, and Disclaimers in the interest of credibility of the valuation reports. These also provide an illustrative list of the Caveats, Limitations, and Disclaimers which shall not be used in a valuation report.
As per the Guidelines;
(i) An RV shall prepare valuations reports under rule 8 of the Rules in adherence to these Guidelines.
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(ii) An RVO shall monitor adherence to these Guidelines through scrutiny of the valuation reports.
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Need for Caveats, Limitations, and Disclaimers
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The valuation of an asset is an estimate of the worth of that asset which is arrived at after factoring in multiple parameters and externalities. This may not be the actual price of that asset and the market may discover a different price for that asset. Sometimes different RVs arrive at different estimates of value for the same asset. While this may be possible when the purposes of valuation are different, such variance is often observed even when the purposes as also the circumstances in which the valuation is undertaken are the same. In such a situation, the market may question the ability of the RVs and the integrity of the valuation process. This is not in the interest of the stakeholders where crucial economic and commercial decisions are taken on the basis of the valuation reports.
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A limitation arises if the RV is unable to obtain sufficient information and explanations considered necessary for the purpose of the valuation. Where such limitation results in the RV being unable to carry out the valuation in accordance with the normal approach to valuation, the valuation report shall be modified with a paragraph setting out the nature of circumstances, giving rise to the limitation.
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A disclaimer is required in a valuation report to mitigate the potential risk of the RV.The reasons for providing disclaimers in a valuation report are as under:
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(a) A disclaimer protects the rights of a RV by cautioning and dissuading others when using the contents of a valuation report.
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(b) A disclaimer limits the liability of a RV since it serves both as a warning and a way to mitigate risk, a disclaimer protects a RV from liability. Anyone who reads the disclaimers should understand the risks involved in using the valuation report or acting upon the information that it contains.
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(c) A disclaimer protects the RV from incurring liability or limits the liability of the RV from the actions of the company or management or insolvency professional at whose instructions the valuation has been carried out.
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A valuation report should not carry a disclaimer, which has potential to dilute the responsibility of the RV 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 following points may be considered while providing disclaimers in a valuation report. An RV may:
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(a) identify the rights he/she wants to protect;
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(b) identify the areas where he/she might be subject to liability;
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(c) clarify that the contents of the valuation report pertain to specific use by the company; and
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(d) caution the reader of the potential risks.
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However, a disclaimer will not, by itself, be able to exclude an RV‟s liability in respect of negligence in performance of his duties.
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These Guidelines are divided into three sections. The first section elaborates on the need for Caveats, Limitations, and Disclaimers in a valuation report. The second section provides a guidance note on the use of Caveats, Limitations, and Disclaimers, while the third section provides an illustrative list of Caveats, Limitations, and Disclaimers for each asset class provided in the Rules.
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