The author is Mayannk Sharma, a third year student at Jindal Global Law School.
Valuation of a corporate debtor’s assets under the Insolvency and Bankruptcy Code, 2016 (“IBC”) is a core feature of the entire Corporate Insolvency Resolution Process (“CIRP”) since it helps the Committee of Creditors (“CoC”) take a conscientious decision on the viability of a resolution plan. As per the National Company Law Tribunal (“NCLT”), Chennai Bench, a valuation report is essentially a yardstick for the CoC to negotiate with prospective resolution applicants to ensure effective asset maximisation of the corporate debtor. An accurate depiction of the corporate debtor’s assets is thus fundamental to the entire CIRP; however, a balance has to be struck between an accurate depiction and time-bound resolution.
This is where the role of registered valuers comes into picture, who are responsible for facilitating the valuation process and submitting their report on the ‘fair’ and ‘liquidation’ value of the corporate debtor’s assets. Regulation 27 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) lays down the appointment of two registered valuers by the resolution professional to determine the fair value and the liquidation value of the corporate debtor in accordance with Regulation 35 of the CIRP Regulations. However, the present statutory framework does not offer a standardised mechanism for valuation of assets. Moreover, conflict in valuation of assets owing to differences in methodologies adopted by the registered valuers also needs a review.
Current valuation matrix
At present, there is no objective valuation standard prescribed by the Insolvency and Bankruptcy Board of India (“IBBI”) for valuation of the corporate debtor’s assets by registered valuers. Instead, Regulation 35 of the CIRP Regulations prescribes that “the two registered valuers appointed under regulation 27 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”.
To overhaul the (non)existing valuation framework, an expert committee report titled ‘Report of the Committee of Experts to Examine the Need for an Institutional Framework for Regulation and Development of Valuation Professionals’ was released by the Ministry of Corporate Affairs in April 2020 which accompanied with itself the ‘Draft Valuer’s Bill, 2020’. However, the latter is yet to see the light of day. Notably, the Committee of Experts’ report suggested setting up a National Institute of Valuers (“NIV”) in line with the National Medical Council and Bar Council of India. This would institutionalise the process of valuation; however, it would still not provide a proxy for valuation of assets by registered valuers, which would continue to be governed by internationally accepted valuation standards as per Regulation 35 of CIRP Regulations.
Inconsistencies in valuation of assets
Regulation 27 of the CIRP Regulations stipulates the appointment of two registered valuers to determine the fair and liquidation value of the corporate debtor’s assets. However, appointment of two valuers posits a situation where there is a significant difference in the valuations put forth by the registered valuers. This is compounded by the fact that the registered valuers perform independent valuation exercises notwithstanding the possibility of coming up with significantly different sums. When there is a ‘significant difference’ in valuations by the initially appointed registered valuers, a third and independent registered valuer is again appointed as per Regulation 35(1)(b), who submits their estimate to the resolution professional. However, the Code does not accommodate situations where the third valuer’s estimate is also significantly different from the initial valuations. The exercise essentially prolongs the CIRP in cases where the estimate of the third valuer is significantly different than the earlier estimates.
While many prominent jurisdictions (Such as Singapore, USA) subscribe to the idea of a single registered valuer overlooking the valuation of the corporate debtor’s assets, the IBC makes a marked departure in appointing two (and sometimes even three) registered valuers to obtain an estimate. Prior to its omission, Section 260(2)(c) (Chapter XIX) of the Companies Act, 2013 also provided for the company administrator to submit a valuation report which was only prepared by a single valuer. Even Section 26 of the ‘Fast Track Insolvency Resolution Process for Corporate Persons’ provides for the appointment of a single registered valuer to determine the liquidation value as opposed to CIRP Regulations 27 and 35.
To exemplify the current predicament, it would be pertinent to look at the Hon’ble National Company Law Appellate Tribunal’s (“NCLAT”) decision in M/S Ranasaria Poly Pack Pvt. Ltd vs M/S Uniworld Sugars Pvt. Ltd. In the instant case, the Appellate Tribunal adjudicated upon the validity of a third valuer’s estimate of the corporate debtor’s assets which was significantly lower than the initial estimates of the earlier two registered valuers. The first valuation by the two registered valuers was done on 28.05.2018, according to whom the liquidation value of the assets was found to be Rs 126.30 Cr and Rs 121.01 Cr respectively. However, the Committee of Creditors, to get a more recent estimate, sought to get a third valuation which estimated the liquidation value of assets to be a mere Rs 52.69 Cr, which was not even 50% of the initial estimates.
Due to the material inconsistency in the disputed valuations and non-compliance with Regulations 27 and 35 of the CIRP regulations, the NCLAT disregarded the third valuation and instead, assumed the liquidation value to be the average of the first two liquidation estimates (Rs 126.30 Cr and Rs 121.01 Cr.) which came out to be Rs 123.66 Cr. This decision was also largely guided by the fact that the significantly lower liquidation estimates, as per the third valuation, would have a bearing on the dues outstanding to workmen, employees, and operational creditors as well. Operational creditors, as per the newly proposed resolution plan approved by the secured financial creditors were provided for only Rs 1.58 Cr against an admitted claim of Rs 8.34 Cr as opposed to secured financial creditors who were abundantly provided Rs 45.76 Cr against an admitted claim of Rs 53.61 Cr. The third valuation not only provided a significantly lower estimate, but the valuation was also prejudicial to operational creditors and employees of the corporate debtor since it gave a significant haircut to the dues owed to them.
On a positive note, the IBBI has been actively taking stock of issues pertaining to valuation of the corporate debtor’s assets over the past year and has been readily amending the CIRP regulations to accommodate these concerns. In a consultation paper dated 13th April 2022, the IBBI invited comments on the topic ‘Issues Related to Reducing Delays in the Corporate Insolvency Resolution Process’. The consultation paper recommended the appointment of a third valuer only in cases where the difference in estimates between the initial two valuations is 25% or more. Within a few weeks, the IBBI accepted the recommendations of the consultation paper and thereafter amended ‘significant difference’ in Regulation 35(1)(b) to mean “a difference of twenty-five per cent in liquidation value under an asset class”. Prior to this recommendation, it was up to the resolution professional’s discretion to appoint a third valuer if he was of the opinion that there is a significant difference in the estimated values by the registered valuers.
In hindsight, it is apparent that in M/S Ranasaria Poly Pack Pvt. Ltd there was no need for appointing a third registered valuer since the difference in estimates by the initial two valuers (Approx. 4%) was nowhere near to the one prescribed in the amended regulations, i.e., 25%. Thus, an unnecessary appointment of the third valuer significantly hampered the entire resolution process and added to considerable delays, costs, and litigation already plaguing the Code.
While this amendment is considerably praiseworthy since it shows the IBBI’s inclination to engage with issues delaying the resolution process and proactively engaging with stakeholders, there are issues that require the Board’s consideration. For example, the amendment to Regulation 35 still does not clarify whether the resolution professional is obligated to consider the third valuer’s estimates even if the same is significantly lower than the initial estimates. Furthermore, the need for a standardised valuation mechanism cannot be underscored since the process for valuation continues to be governed by undefined “internationally accepted valuation standards” as per Regulation 35 of the CIRP regulations.
The IBC has moved beyond its nascent stages where reliance on internationally accepted standards was needed for the development of the Code. However, now that the IBC is steadily transforming India into a mature jurisdiction for resolution of distressed companies, it is pivotal that the IBBI comes up with its own standardized metrics to avoid unnecessary delays in the resolution process.