Banks staring at steep haircuts on resolution of accounts under Insolvency and Bankruptcy Code (IBC), have been handed some respite. In an amendment to the IBC, it is now no longer necessary to disclose ‘liquidation value’ in the information memorandum by the resolution professional.

The absence of an implicit benchmark — a piecemeal value of the assets of the company — can help open up room for competing offers from potential buyers, according to market players.

Banks have been lobbying against the mandatory disclosure of liquidation value to prospective bidders, which they believed impacted the value of bids. Under IBC, once a company is admitted for insolvency resolution, an interim resolution professional (IRP) is appointed. Within 30 days, the IRP calls for claims from creditors and also appoints a valuer to arrive at the liquidation value of the company.

Disclosure of liquidation value in the information memorandum, impacted the value of potential bids, as buyers often ended up bidding at similar valuations — close to or at a slight mark-up to the liquidation value, according to market players. “Liquidation value, as a concept, is the worst possible value for the assets, since liquidation assumption disregards the going-concern value of the assets, and looks at the value in disposal. The inclusion of the liquidation value as part of the information memorandum, which served as the basis for potential acquirer to submit their bids, was responsible for driving down bid valuations. The amendment will allow the RP to keep the liquidation value discrete, and hope for better valuations by potential acquirers,” says Vinod Kothari, a financial and legal consultant and insolvency professional.

“The experience of financial creditors under SARFAESI Act is sufficient to show that bidders always bid at or about the reserve price and there are several cases of collusive bidding or syndicate operation. Hence, keeping the liquidation value confidential will improve the chances of bids having realistic value. This will help achieve the actual purpose of IBC,” says Dr KS Ravichandran, Managing Partner, KSR & Co, Company Secretaries LLP. According to the amendment, the resolution professional can provide the liquidation value to every member of the committee of creditors after obtaining an undertaking that the confidentiality of the liquidation value shall be maintained.

Allaying concerns

The amendment also seeks to allay concerns of dissenting creditors, who do not agree to the resolution plan. Under IBC, after the case is approved by the NCLT for insolvency, the resolution professional prepares a resolution plan, within the stipulated time (180 days with 90 days extension).

This has to be approved by the committee of creditors —75 per cent of financial creditors by value. The amendment states that a resolution plan needs to identify specific sources of funds that will be used for paying the liquidation value due to dissenting creditors.

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