This article has been authored by Manaswita Nakwaal, a third-year law student at Symbiosis Law School, NOIDA
The Insolvency and Bankruptcy Code, 2016 (Code) in its long title reflects the objective of the Code, which reads as under:
“It is an act which attempts to consolidate and amend laws apropos reorganisation and Insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons…”
National Company Law Tribunal, in Binani Industries Limited v. Bank of Baroda & Anr elucidated the objectives of the Code as follows: “First object is “resolution”. The second object is “maximisation of value of assets” and the third objective is “promoting entrepreneurship, availability of credit and balancing the interests”. This order of objectives is sacrosanct.” It is considered to be a landmark judgment passed by NCLT and in this matter, it focused to extract maximum value from resolution of stressed assets and ensure that interests of operational creditors are also well served.
This article attempts to examine. the concept of fair value of assets under IBC regime and also discusses about maximisation of value of assets under IBC regime. The role of Insolvency Professionals and the challenges faced by them is also discussed in the later parts of this article.
Valuation of Assets under the Insolvency and Bankruptcy Code, 2016
Section 247 Companies Act 2013 lays down the provision for valuation of any property, stock, shares or any other assets. It is pertinent to note that the powers entrusted to the Central Government for valuation under the aforementioned Section have been delegated to the Insolvency and Bankruptcy Board of India (IBBI).
Whenever any company or a business goes bankrupt, the need for liquidation arises to pay off the debts. During the process of liquidation, all the assets of the bankrupt company or business are valuated in terms of money. The term Fair Value Clause2(hb) and Liquidation Value Clause 2(k) are explicitly defined under the Insolvency and Bankruptcy of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2018
There are certain valuation standards which are to be followed while valuating the assets. International Valuation Standards, 2017 issued by International Valuation Standards Council (IVSC) is one of them. Additionally, the value has to also abide by the provisions laid down under Securities and Exchange Board of India, Reserve Bank of India.
The continuous deteriorating conditions of recovery mechanism for corporate debtors propounded the practice of maximisation of the value of assets. In India, during 1990, there was a hike in the non-performing assets due to which the graph of economy went to south. Not only the economy but also the interests of the corporate debtors were on stake due to unjust recovery from assets whilst liquidation. Hence there was need to have a balance in the economy.
Decoding Maximisation of Value of Assets under the Code
Prior to understanding the concept of maximisation of the value of assets under the Code, it is important to note that maximisation of value of assets in no way refers to maximum recovery of dues to the creditors. Customarily, short-term reduction of pay-out to creditors can lead to way better asset performance and as a result, it may lead to maximisation of value of assets of the corporate debtors.
Likewise, in instances of expeditious liquidation processes, maximisation of the value of corporate debtors’ assets takes place, as its business may have lost the viability as a going concern. Hence, immediate liquidation may give the best returns on the assets.
The IBC Code and CIRP Regulations aim to create such an ecosystem that entertains all, including third parties, to be a part of the resolution process, also at the same time ensures that participation is within the parameters of a pre-defined process that is certain, transparent and predictable. Section 25(2)(h) of the Code “requiring the Committee of Creditors and the Resolution Professional to lay down the process of invitation and evaluation of resolution plans before inviting resolution plans, is in recognition of the well-recognized principle of public law emphasizing on the significance of transparency and predictability of the process.”
Such a process cannot certainly be allowed to be infracted in the name of value maximisation. For instance, the process prescribed is of closed bidding, then it cannot suddenly be altered into an open auction after declaration of inter-se competitiveness of the resolution plans received in the closed bidding process.
Role of Insolvency Professionals in Asset Value Maximisation
Section 17 of the Code, vests the responsibility of a corporate debtor in the hands of an interim resolution professional, it is a natural consequence of creditor-in-possession regime. ‘Debtor-possession’ means that throughout the resolution process, the debtor continues to remain in possession of the management of the entity. While tracing the history it is found that Sick Industrial Companies Act, 1985 worked on the aforementioned approach. It is also pertinent to note that SICA worked on the lines of US Bankruptcy Code.
The N L Mitra Committee advocated a deviation from the approach as follows:
“The most critical provision in the SICA is that the promoter/ management bringing the entity to the Board for Industrial and Financial Reconstruction BIFR remains in possession and creates incentives for stripping off assets. Therefore, creditors are against most restructuring proposals. It is therefore recommended that if the owner/promoter/ existing management files the petition for the bankruptcy of a company, the possession of the company with its entire assets and liabilities must be vested with the Trustee immediately without any loss of time. That ensures the first principle of maximisation of asset value. If a creditor files the petition the possession of the company’s assets and liabilities shall vest on the Trustee as soon as the petition is allowed.
Challenges faced by Insolvency Professionals while liquidating the assets under IBC regime
Although the working of Insolvency proceedings is a smooth process, there exist some difficulties, which are faced by Insolvency Professionals (IPs) whilst the liquidation process. During a CIRP the main tasks of IPs is to get the best value of assets for corporate debtors when liquidation is taking place.
But getting all the relevant information is difficult, as the IPs are not entertained well by the corporate debtors. The information which is not printed anywhere and recorded is to be collected from some first-hand source but failure in cooperation is a big challenge faced by IPs. Another big issue is meeting the deadlines, which is a 180 days long period to complete the entire liquidation process. Hence, it is suggested that insolvency professionals should take care of limited number of cases at a time so as to complete the proceedings on time and with quality.
After going through the above-mentioned discussion, one thing is clear that maximisation of value nowhere means maximum recovery from the assets during the process of liquidation rather is it a concept which helps corporate debtors to get a fair valuation in return. The Insolvency and Bankruptcy Code have the back of maximisation of value of assets, by incorporating it in its very objective. While examining this concept, certain points are to be kept in mind like ‘Value’ does not denote price. The value of any business improves when it continues in the market and the assets owned by it are used more efficiently.
Though, the Code proposes to inculcate the concept of maximisation of value of assets, the Committee of Creditors faces a dilemma while framing the resolution plan, as to whether the resolution plan aims to maximise value of the assets of the corporate debtors or for claimants or for both. Considering this, the Code has kept away from prescribing any rule or formula for decision making as far as this issue is concerned. The Code leaves it to the wisdom and ingenuity of the Committee of Creditors and the Resolution Professional to decipher the colours and, if higher degree of information is available, the shades as well. Though value maximisation is constrained optimisation, those constraints get relaxed with higher degree of information, making it a colourful art, rather than a bland, black, and white arithmetical calculation.