The Liquidation Value- ‘Erstwhile’ Benchmark for Prospective Investors

[Rohit Sharma is a Company Secretary in Kolkata, and can be reached at [email protected]]

Introduction

In accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’), the interim resolution professional was required to appoint two registered valuers for the valuation of the assets of the corporate debtor. The registered valuers were appointed for the valuation of the assets of such debtor. However, recently there have been numerous amendments introduced by the Insolvency and Bankruptcy Board of India (‘IBBI’) specifying the manner of its determination and availability to the relevant entities.

This post seeks to analyse the reason for such an emphasis on liquidation value of the assets of the corporate debtor and keeping it away from the public domain to the extent possible. From the point of view of realisable value, it is important for the resolution professional to be aware of the liquidation value of the assets of the corporate debtor, if not for all the ones associated with such debtor.

Liquidation Value

Pursuant to section 30 of the Code, a resolution applicant can submit a resolution plan to the resolution professional prepared on the basis of the information memorandum (‘IM’). The resolution professional, pursuant to regulation 29 of the Code read with regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency Regulation Process for Corporate Persons) Regulations, 2016 (‘CIRP Regulations’), prepares the IM, which includes among other details the liquidation value of the assets of the corporate debtor. However, with the fourth amendment to the CIRP Regulations coming into picture on 31 December, 2017, the requirement of specifying the liquidation value in the IM has been done away with.

There can be several interpretations coming in from various corners regarding the non-inclusion of liquidation value in the IM. One of the major reasons for IBBI to come up with the requirement of not involving the liquidation value in the IM could be that when a benchmark value of anything is already determined and displayed to the prospective investor, such prospective investor(s) who could have paid more than the benchmark value will be influenced by such price and would never go beyond the benchmark set.

The amendment, therefore, tries to prevent prospective investors from restraining themselves from bidding the highest possible value by way of a resolution plan. Having said that, the investors would definitely satisfy themselves based on the assets of the corporate debtor.

Non-Inclusion of Liquidation Value in the IM

The amended version of regulation 35 of the CIRP Regulation lays down as follows:

35. Fair value and Liquidation value

1. The registered valuer appointed under regulation 26 shall submit to the resolution professional an estimate of the fair value and of the liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor.

2. After the receipt of resolution plans in accordance with the Code and these regulations, the resolution professional shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section (2) of the section 29.

3. The resolution professional and registered valuer shall maintain the confidentiality of the fair value and the liquidation value.”.

Analysis

The aforesaid amendment brought in the requirement for submission of fair value along with the liquidation value in the valuers report. However, the requirement of fair value is an addition that was not required earlier. In addition, the resolution professional is required to share the liquidation value only with the committee members, that too after receipt of an undertaking of confidentiality from them.

But then again, it is not always the case that when a liquidation value is displayed to the investors of the corporate debtor, the bidding amount will be restricted to the liquidation value. In the case of Gujarat NRE Coke Limited, before Kolkata Bench of the National Company Law Tribunal, even though the liquidation value was assessed to be around Rs. 360 crores, the bidding received by the resolution professional was beyond the liquidation value. Therefore, one may have a different perspective towards the aforesaid amendment on the basis that it is not mandatory that if the liquidation value is displayed to the investors, the investors would refrain themselves from bidding beyond such displayed figure. But it is important to understand that the requirement of non-inclusion of liquidation value in the IM must have been decided considering not only a well-known corporate debtor’s liquidation process but also the medium and small-sized enterprises.  

Conclusion

The amendment bought out by IBBI was a much-required one. In order to safeguard the medium and small enterprises from falling into the liquidation trap and then being able to derive a lesser value will lead to further loss to the creditors of the corporate debtor. It is pertinent to note that the said amendment may be useful for the debtor where a moratorium has just begun or where the IM has not yet been prepared; conversely, where the IM has been prepared and already distributed to the prospective investors, the debtor may be at a loss.

It has been more than a year since the Code came into existence and it has already seen a large number of cases moved before the National Company Law Tribunal. Along with the number of applications, the Code has also seen more than a few amendments and circulars. At the same time, the amendment under discussion is an important one as investors will now have to properly examine and analyse before placing their bids, and cannot place a bid merely by giving much importance to the liquidation value of the corporate debtor, which could easily be derived from the IM. However, it is also important to note that such major amendments are expected at a rapid pace, as resolution plans and bidding processes are underway for several corporate debtors, and everything for the revival of a debtor depends upon its resolution plan.

– Rohit Sharma

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