INSOLVENCY AND BANKRUPTCY CODE 2016

INSOLVENCY AND BANKRUPTCY CODE 2016:

                   Under the Insolvency and Bankruptcy Code, 2016 valuation of asset is one of the core features of the corporate insolvency resolution process.

However, there are various clarifications that are yet to be provided by the Insolvency and Bankruptcy Board of India in relation to provisions pertaining to valuation of assets as provided under the Code and the Regulations.

One of the prominent controversies in relation to valuation of assets is the lack of clarity surrounding interpretation of the term 'liquidation value' under the Code.

The term "liquidation value" is defined under Regulation 35(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations) as 'the estimated realizable value of assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date'. 

Regulation 35 (2) of the CIRP Regulations prescribes the method for determining liquidation value. From a bare reading of the said definition, it emerges that liquidation value is the notional realizable value that assets of the corporate debtor would fetch, should the corporate debtor be liquidated on the insolvency commencement date (and not the value that may be actually realized under a resolution plan).

However, the ambiguity arises with respect to determining " estimated realizable value " in the context of the insolvency resolution process as opposed to valuation in an out-and-out liquidation of assets. Typically, a valuation report often comprises more than one sale value for an asset based on valuation under different scenarios. For instance, a valuation report may provide for a fair market value, realizable value and distressed sale value of an asset. 

The multitude of jargon and terminology in valuation only adds to the already difficult task that registered valuers (appointed under the Code) and the insolvency professional discharging his/her function as an interim resolution professional (IRP) / resolution professional (RP) face in determining character of asset value that should be considered as liquidation value for purpose of Regulation 35 read with Regulations 36 and 38 of the CIRP Regulations. 

The determination of 'liquidation value' of assets is an extremely crucial exercise, keeping in view its practical implication on the resolution plan, claims of creditors and prospective investors.

Objective:

One of the most important pieces of information that forms part of the Information Memorandum is liquidation value. The purpose of having to provide for a liquidation value as part of the Information Memorandum during the corporate insolvency resolution process is in turn to enable compliance with provisions of Regulation 38 of the CIRP Regulation which requires identification (and subsequently payment) of specific sources of funds for payment of dues of operational creditors and dissenting financial creditors at liquidation value in priority to recovery of dues of other financial creditors who approve the resolution plan. In the event a resolution plan is reached and approved, operational creditors and dissenting financial creditors will have to be paid at this " notional " liquidation value in Regulation 35 (1) since the corporate debtor would not actually go into liquidation.


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