Objective of Valuation under IBC

Valuation of assets is one of the core objectives under the IBC to ensure value maximisation, time-bound resolution of the Corporate Insolvency Resolution Process (CIRP) and balancing the interests of all stakeholders. The process of valuation helps to determine the current value of the assets to be liquidated.

Valuation is conducted in all three-asset classes: (i) plant and machinery, (ii) land and building (iii) securities or financial assets.

The credible determination of the value of the assets leads to an informed decision making by the Committee of Creditors (CoC).

Types of Valuation under IBC

The types of valuation are: -

a. Fair Value: An estimated value of the assets of the Corporate Debtor (CD) to be exchanged on the Insolvency Commencement Date (ICD) between a willing buyer and a willing seller in an arm's length transaction, where the parties acted knowledgeably, prudently and without compulsion^[2].

b. Liquidation Value: An estimated realizable value of the assets of the CD, if the CD were to be liquidated on the Insolvency Commencement Date^[3] (ICD).

Role of Registered Valuers (RVs) under the IBC

RVs under the IBC are professionals entrusted with determining the current market value of property, land, stocks, debentures, the net worth of the company or any other asset or liabilities under the provisions of the Companies Act, 2013 and IBC 2016.

IBC under the IBBI^[4] (CIRP) Regulations, 2016 prescribes the role of a “registered valuer” as follows:

1. The Code mandates the presence of two registered values to determine the fair value and liquidation of the CD^[5].

2. To determine the fair value of the inventory and assets of the CD, as per the Internationally accepted valuation standards.^[6]

3. During the course of liquidation, a liquidator within seven days of the liquidation commencement date shall appoint two registered valuers to determine the value of the assets of the CD.

4. If, the two estimates of a value in the asset class are “significantly different” by the two RVs who were appointed, the RP may appoint a third RV to determine the correct value of such asset. Further, this Regulation specifies that the term “significantly different” means a difference of twenty-five percent in liquidation value in an asset class and the same shall be calculated as (L1- L2)/ L1, where,

L1= higher valuation of liquidation value

L2= lower valuation of liquidation value

5. Regulation 26 of the Fast Track CIRP Regulations specifies that the RP within seven days of his appointment, appoint one RV to determine the fair value and the liquidation value of the CD in accordance with Regulation 34.

6. Regulation 34 of the Fast Track CIRP Regulation states that the RV appointed under Regulation 26 shall submit to the Resolution Professional (RP) an estimate of the fair value and the liquidation value in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the CD.

Valuation under the CIRP Process

Valuation of assets during the CIRP is a structured exercise, conducted by RVs recognized by the IBBI. The process begins with the selection of appropriate valuation methods, which includes, Income, Market, Replacement Cost and Asset Value approaches. The valuation is anchored to the Insolvency Commencement Date (ICD), and the resulting Valuation Report must articulate both the 'Fair Value' and the 'Liquidation Value' of the assets of the CD. This report serves multiple purposes- it aids the RP in preparing an Information Memorandum for prospective bidders, facilitates comparison of resolution plans, and informs financial creditors within the CoC regarding resolution proposals.

RVs must navigate challenges such as incomplete financial information, physical verification of assets, and ensuring compliance with valuation standards, which may vary based on their affiliation with different Registered Valuer Organisations (RVOs).

Ultimately, the valuation process under the IBC is designed to provide a fair assessment that reflects both the potential recovery value in a going concern scenario and the distress sale value in a liquidation context, guiding stakeholders through complex insolvency proceedings (Kamath, 2024).

However, the valuation of assets under the IBC in India has been facing significant challenges, leading to a noticeable decrease in asset valuations over time. This trend can be attributed to several factors, including inconsistencies in valuation practices, delays in the CIRP, and the impact of multiple valuations on final estimates.

Inconsistencies in Valuation Practices

One of the core issues affecting asset valuation under the IBC is the inconsistency in the estimates provided by the RVs. The IBC mandates the appointment of multiple valuers—two or three—to determine asset values. This system can lead to significant discrepancies, as seen in cases where a third valuer's estimate was drastically lower than those of the first two valuers. For example, in one notable case, initial valuations ranged from INR 121.01 crore to INR 126.30 crore, while a third valuer estimated the liquidation value at only INR 52.69 crore, causing confusion among creditors (Sharma, 2023). Such inconsistencies not only delay the resolution process but also result in lower recovery rates for creditors.

Courts on the Impact of Delays on the Maximation of the Value of Assets

The Supreme Court of India (SC) in its judgment of Swiss Ribbons^[7], has categorically mentioned that the maximization of the value of the assets of the CD is the core objective of IBC^[8]. The judgment refers to the Preamble of the IBC to discern the objective of the IBC and remarked that the IBC is a legislation enacted by the Parliament for reorganisation and insolvency resolution of CD and unless such reorganisation is affected in a time-bound manner the value of the assets will deplete. Therefore, in order for CD to effectively run as a going concern, the maximisation of the value of assets of the CD is of crucial importance.

SC in another judgment^[9] has emphasised that timely implementation of the Resolution Plan is crucial to achieve IBC's objective of protecting assets dissipation. Further, the NCLAT in its judgment^[10] delivered in 2018, reiterated the objectives of the IBC and held that the first order objective is "resolution" the second order objective is “maximation of the value of assets of CD” and the third order objective is to “promote entrepreneurship and availability of credit”.^[11].

In conclusion, the Supreme Court and the NCLAT have emphasised that the objective of the IBC is the maximization of asset value to ensure the CD remains a going concern. It has emphasized that timely resolution is essential to prevent asset depletion.

Regulatory Challenges and Recommendations

The IBBI has made amendments^[12] to improve the valuation process; however, ambiguities remain regarding how significantly lower valuations should be treated by resolution professionals. Additionally, there is a pressing need for a unified approach to asset valuation that aligns with internationally acceptable standards to enhance transparency.

In conclusion, while the IBC aims to facilitate effective resolutions and maximize values of assets for creditors, ongoing inconsistencies and procedural delays are often leading to a decline in asset valuations. Addressing these challenges through regulatory reforms and clearer valuation standards will be crucial for improving recovery outcomes in the future.

The authors are Advocates , views are personal.

Bibliography

Kamath, R. (2024). Valuation under the CIRP process: Few Important Concepts and Use in Practical Scenarios. The Resolution Professional, 24-29.

Sharma, M. (2023, April). Retrieved from NLU Delhi Blog: https://www.cbflnludelhi.in/post/inconsistencies-in-asset-valuation-revisiting-the-role-of-registered-valuers-in-the-cirp

Thomas, K. E. (1990, January). Valuation of Assets in Bankruptcy Proceedings: Emerging Issues. Montana Law Review, 126-157.