Feb 8, 2018

Stressed asset valuation: Both fair and liquidation values to be considered

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The Insolvency and Bankruptcy Board of India (IBBI) has made it mandatory for a resolution professional to appoint two registered valuers to determine both the fair as well as liquidation value of a stressed company, instead of the existing practice of assessing only the liquidation value. The changes through amendments to IBBI’s Insolvency Resolution Process for Corporate Persons Regulations have come amid differences between lenders and bidders on the proper valuation of a stressed company. The bidders were of the view that such firms should be sold at the liquidation value, as indicated in the regulations under the Insolvency and Bankruptcy Code (IBC). However, lenders held that fair/enterprise valuation be taken into account as well so that bidding started from a higher point.

To maintain a standard formula and cut scope for differences on valuation methods, fair value has been defined as the “estimated realisable value of the assets of the corporate debtor, if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion”. Similarly, liquidation value means “estimated realisable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date”.

The amendments suggest after the receipt of resolution plans, the resolution professional will provide both the fair and the liquidation value to each member of the committee of creditors (CoC) in electronic form, on receiving a confidentiality undertaking. The resolution professional and registered valuers will also maintain confidentiality of the fair value and the liquidation value. The resolution professional will also issue an invitation, including the evaluation matrix, to the prospective resolution applicants. “He may modify the invitation as well as the evaluation matrix. However, the prospective resolution applicant shall get at least 30 days from the issue of invitation or modification thereof, whichever is later, to submit resolution plans. Similarly, he will get at least 15 days from the issue of evaluation matrix or modification thereof, whichever is later, to submit resolution plans,” the IBBI said. The IBBI said a resolution plan will provide for the measures to maximise the value of the assets of the stressed company. “These may include reduction in the amount payable to the creditors, extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor, change in portfolio of goods or services produced or rendered by the corporate debtor, and change in technology used by the corporate debtor.”

The resolution professional will also submit the resolution plan approved by the committee of creditors to the National Company Law Tribunal at least 15 days before the expiry of the maximum period permitted for the completion of the corporate insolvency resolution process (six months with a provision to extend it by three months with the approval of the adjudicating authority). Manoj Kumar, partner and head (M&A and Insolvency Resolution Services) at consultancy firm Corporate Professionals Capital, said the changes would bring clarity in the resolution plans invitation as well as approval process. “The approval of evaluation matrix by CoC beforehand and intimating the same to prospective resolution applicants would reduce the scope of litigation at later stage by the bidders whose applications are rejected. Format of invitation of bids from resolution applicants and timelines are also defined now, which would make the process much more systemic.”

“The amendments have addressed many unaddressed issues, including timelines with respect to submission of resolution plan, mode and manner of inviting resolution plans, confidentially to be maintained,” said Manoj K Singh, founding partner at Singh & Associates. Also, the CoC will now have to specify the amount they will be paying out towards insolvency cost, operational creditors and dissenting financial creditors at the time of approving a resolution plan, he added.

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