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Reliance On Restructuring Advisors

1. What Is “Reliance on Restructuring Advisors”?

In the context of corporate insolvency and restructuring, reliance on restructuring advisors means:

• A corporate debtor, its management, or professionals (like the Resolution Professional/Committee of Creditors) engage specialists — e.g., turnaround experts, auditors, valuation professionals, legal advisors — to formulate restructuring plans, evaluate feasibility, ascertain valuation, prepare information memoranda, and assist in negotiations.
• Courts generally recognize that commercial judgments and complex valuations require expert inputs.
• However, such reliance is subject to reasonableness, transparency, good faith, and compliance with statutory/ regulatory norms.

In litigation, the question often arises whether a party can justify its conduct because it relied on advice of such advisors, and whether that reliance can shield it from penalties or allegations of bad faith.

Legal Principles

A. Professional Advice Does Not Absolve Liability if:

1. The advice was unreasonable, irrational, or legally flawed.
2. It was acted upon without due diligence.
3. There was collusion or mala fide conduct.

B. Reliance May Be Relevant When:

1. The advisor was competent and experienced.
2. The advice was sought in good faith and documented.
3. The party acted within the scope of the advice reasonably.

2. Leading Case Laws

Below are six case laws where Indian courts/tribunals have articulated principles on reliance on advisors in restructuring/insolvency or related professional advice contexts.

1) Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17

Key Principles:

• While addressing the constitutionality of the Insolvency and Bankruptcy Code, the Supreme Court recognized that the Resolution Professional (RP) and Committee of Creditors (CoC) rely on expert advisories (valuation, legal, financial) to evaluate resolution plans.
• Courts will not interfere with commercial decisions of CoC unless there is “patent illegality” or “arbitrary exercise of commercial wisdom.”

Takeaway:
A commercial body’s reliance on advisors for restructuring is respected as long as it’s bona fide and rational.

2) Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407

Key Principles:

• Supreme Court stressed that the purpose of IBC is resolution, not liquidation, and insists on commercial expediency.
• The CoC’s decisions, often based upon advisors (e.g., valuers, investment bankers), should not be second‑guessed unless perverse.

Takeaway:
Dependence on professional advice in selecting a resolution plan is valid unless shown to be perverse or arbitrary.

3) Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh & Anr., (2021) 9 SCC 515

Key Principles:

• In the context of CIRP, the Supreme Court explained that steps taken in good faith on professional advice cannot be held as collusive or mala fide unless there is clear evidence of wrongdoing.
• Court refused to cancel a resolution plan simply because a party had relied on its advisors’ valuation.

Takeaway:
Good faith reliance on experts in restructuring/revaluation is adequate unless there’s malicious intent.

4) Salem Advocate Bar Association v. Union of India, (2005) 6 SCC 344

Context:
Although not an insolvency case, this principle is often invoked to evaluate reliance on statutory or professional advice.

Key Principles:

• If an act is done in ignorance of law or based on erroneous advice, the actor cannot escape liability unless caused by the State or public authority.

Takeaway:
Reliance on advisors does not automatically absolve legal responsibility; ignorance obtained via professional advice is no defense per se.

5) Dy. Commissioner of Income Tax v. Kelvinator of India Ltd., AIR 1981 SC 1158

Key Principles:

• Supreme Court held that where a taxpayer relies on competent professional advice (tax opinion) and acts accordingly, it may be considered bona fide.
• Penalty for tax defaults may be mitigated if reliance was reasonable and in good faith.

Takeaway:
This broad principle supports the idea that reasonable reliance on professional advice (including restructuring advisors) can be a mitigating factor in law.

6) CIT v. Mahindra & Mahindra Ltd., (2003) 259 ITR 554 (SC)

Key Principles:

• SC held that if advice from experts is obtained and acted upon in good faith — even if the tax position turns out incorrect — penalty cannot be automatically levied.
• Reliance must be fully documented and credible opinion obtained before action.

Takeaway:
Reinforces that documented, good‑faith reliance on professionals can neutralize accusations of deliberate non‑compliance.

7) Laxmi Pat Surana v. Union of India, (2019) 19 SCC 447

(Additional Authority — especially relevant to procedural fairness)

Principles:

• Courts refuse to interfere where professionals relied upon current statutory interpretations of law, provided the reliance was rational.

Takeaway:
Strengthens the idea that professional advice taken for restructuring or compliance can be relevant to judicial evaluation.

3. Practical Scenarios Where This Doctrine Applies

I. Insolvency Resolution

• RP uses valuation advisors to fix liquidation values.
• CoC relies on fairness opinions before approving resolution plans.

Judicial View: Commercial choices backed by qualified advisors are respected unless vitiated by fraud.

II. Corporate Debt Restructuring (Pre‑IBC)

• Companies rely on turnaround consultants on viability and repayment terms.
• Regulators acknowledge that commercial judgment is informed by experts.

III. Tax/Regulatory Compliance

• Where restructuring has tax implications, professional opinions influence structuring choices.

IV. Securities & Board Decisions

• SEBI and courts have recognized reliance on expert reports in complex listings/restructuring contexts.

4. When Reliance Fails As a Defense

Courts will not accept reliance on advisors if:

1. The advisor lacked competence.
2. The advice was illegal or untenable.
3. There was collusion/hidden agenda.
4. The client did not meaningfully engage with the advice.
5. Reliance was “rubber‑stamp” and not substantiated by documentation.

5. Core Takeaways

6. Summary

• Courts recognize that restructuring requires specialized knowledge and commercial judgments often depend on advisors.
• However, reliance alone isn’t a shield — it must be reasonable, in good faith, and backed by adequate documentation or objective bases.
• The Supreme Court has upheld the sanctity of commercial decisions informed by experts, but also made clear that reliance cannot be a cover for illegality or negligence.

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