India: Liquidation Value Of The Asset In The Resolution Plan

The term "Liquidation value" has been defined in the Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). The Regulation defines the "liquidation value" as the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date. The cursory reading of the regulation shows that estimated value of the assets of the corporate debtor at the time of the liquidation on the commencement date of the insolvency will be considered as the liquidation value for the purpose of the Insolvency process and such value will be used in the Information Memorandum under Regulation 36 of the CIRP Regulations. This estimated value is based on the principle of vertical comparison as used under the United States Bankruptcy Code. According to this principle, the creditor should not be placed in a situation which is worse than the situation at the time of liquidation of the assets of the corporate debtor.

The Insolvency and Bankruptcy Code, 2016 ("the Code") does not provide the meaning of "estimated realizable value" as mentioned in the Regulation 35 of the CIRP Regulation. However, the regulation does provide the manner in which the Liquidation value can be determined. The Regulation explains that two registered valuers appointed under Regulation 27 of the CIRP Regulations shall provide the value of the assets computed in accordance with internationally accepted valuation standards. If the Resolution Professional thinks that the values are significantly different, he may appoint another registered valuer who shall submit an estimate computed in the same manner. After the submission of the valuers reports, the average of the two closest estimates shall be considered the liquidation value.

Pursuant to section 30(2) of the Code, the Board has specified Regulation 38 of the CIRP Regulations, 2016 which states that:

"(1) A resolution plan shall identify specific sources of funds that will be used to pay the-

(a) insolvency resolution process costs and provide that the insolvency resolution process costs will be paid in priority to any other creditor;

(b) liquidation value due to operational creditors and provide for such payment in priority to any financial creditor which shall in any event be made before the expiry of thirty days after the approval of a resolution plan by the Adjudicating Authority; and

(c) liquidation value due to dissenting financial creditors and provide that such payment is made before any recoveries are made by the financial creditors who voted in favor of the resolution plan."

The liquidation value of the assets of the corporate debtor is calculated in its entirety. The total liabilities payable to the creditor firstly will be paid through the assets of the entity and after the exhaustion of the assets value, if the debt still remains to be paid, for such debt the management of the corporate debtor will be held liable for payment.

Logically, the liquidation value of the operational or financial creditor as mentioned in the above said regulation might be the minimum value payable to operational creditor or a financial creditor in a hypothetical liquidation as on the insolvency commencement date. As per the author's view, for determining the liquidation value due to creditor (operational or financial) one has to first arrange them in stacking order (i.e. the order of their priority in liquidation), and then start distributing the estimated realizable value of assets (i.e. Liquidation value) down the ladder. The liquidation value assigned at each stage of stacking order will be the liquidation value due to the persons at that stage of the staking order.

Therefore, liquidation value will be different from the amount of debts due to creditors. The amount of debts due to the creditors (operational or financial creditor) will be static (as "proved' by such creditor to the Resolution professional) and remain unaffected from the claims of other creditors. On the other hand, while determining the liquidation value due to creditors, due regard should be given to the priority of other debts in a liquidation scenario, as such the liquidation value due to a particular creditor may be much lesser than the actual amount of debts proved by and payable to such creditor.

It is also pertinent to mention that though the regulations require that the resolution plan must ensure the payment of liquidation value to operational creditors, the same shall be paid in priority to any financial creditor. Similarly, the liquidation value due to the dissenting financial creditor must be paid in priority to any consenting financial creditors. One of the inferences from the above regulation can be drawn that the regulation does not alter the priority of distribution of the liquidation value. However, it merely specifies the point of time at which payments shall be made, if any, to the operational creditors and dissenting financial creditors

Conclusion:

Valuation of assets is one of the core features of the corporate insolvency resolution process under the Code. However, there are various clarifications that are yet to be provided by the Insolvency and Bankruptcy Board of India in relation to the provisions pertaining to valuation of assets as provided under the Code. One of the prominent controversies in relation to valuation of assets is the stacking priority of the creditors during the drafting of the resolution plan. The CIRP Regulations 2016 does not clearly provide the priority list on the basis of which the distribution of the liquidation value of the assets could be done. However, inference can be drawn from the CIRP Regulations that the liquidation value of the assets could be distributed on the basis of the priority list provided for the liquidation process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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