By M R Umarji
The Insolvency and Bankruptcy Board of India (IBBI) has framed regulations for insolvency resolution process which provide that liquidation value means estimated realisable value of the assets of the corporate debtor is used for computation of liquidation value.
The regulations further provide that the information memorandum prepared by the Resolution Professional shall incorporate the liquidation value.
Neither the provisions of the Insolvency and Bankruptcy Code, 2016 nor the regulations framed thereunder make any reference to the enterprise value or going concern value to be taken into consideration while preparing the resolution plans. Lack of provisions as regards to enterprise value in the IBC, is resulting in liquidation value becoming the basis for preparation of resolution plan and also for repayment of the dues of creditors and other claimants as part of the resolution plan. Such an interpretation goes against the basic objective of IBC 2016 to maximise the value of assets of the insolvent company.
If the basis for resolution plans of insolvent companies is taken as liquidation value, such a resolution plan cannot achieve the objective of maximisation of value of assets. If the insolvency petition is filed on default of Rs 1 lakh or above, the valuation of the enterprise will have to be on the assumption that the company will continue to operate for the foreseeable future and not on the basis that on account of default the company is to be liquidated. But the regulations are silent on the enterprise value of any company under financial stress and as a result, the objective of the Code is getting distorted.
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The objective of providing for resolution process on default is to find the causes for default and assess the techno-economic viability of the enterprise at the earliest stage and suggest resolution plans within the stipulated time-frame of 180 days. Such a resolution plan has to be on the basis of enterprise value and not on the assumption that an operating company is to be liquidated merely on the ground of default. However, in practice, liquidation value stated in the information memorandum is becoming the basis of formulating resolution plans or obtaining offers for takeover of the company Thus, resolution plans can be prepared on the basis of enterprise value and liquidation value is relevant only for settling claims of operational creditors and dissenting creditors as provided in the IBBI Resolution Process Regulations.
The resolution plans proposed for insolvent companies are on the basis of liquidation value and they involve huge sacrifices on the part of lenders who hold the security interest over assets belonging to the company. If, instead of liquidation value, the continued use of such assets is taken into consideration, the valuation would be different and lenders can expect to realise much more of the defaulted loans and the objective of the IBC 2016 will also be achieved. It is, therefore, necessary that IBBI modifies the relevant regulations and makes a specific provision for the purpose of computation of the going concern or enterprise value of the company for which the resolution plans are to be prepared.
Unless such modifications are made in the Code and the regulations thereunder, the lenders will continue to be reluctant to avail the benefit of the new law for the purpose of resolving stress in the borrower companies. It is necessary that the promoter directors, creditors and other claimants are given freedom to consider any resolution plan that is proposed and approve it as per the provisions of the law and the terms of such plan should be allowed to be decided by the stakeholders concerned and should not be dictated by IBBI or by any law or regulations made thereunder. Such a policy stance would result in achievement of the objectives of the law.
(By Former ED, DNBS, RBI)