Asset and Business Valuation Under Regulation 35
Once a company enters liquidation under the Insolvency and Bankruptcy Code (IBC), the focus shifts from trying to resolve the business to realizing value from the corporate debtor and distributing the proceeds to creditors. The liquidator may sell the company as a going concern, its business, or individual assets, depending on the circumstances and the permitted mode of sale.
Before any of that happens, however, the liquidator needs a reliable view of what the assets or business are worth. Regulation 35 of the IBBI (Liquidation Process) Regulations, 2016 lays down the framework for this valuation during liquidation.
It is important to distinguish this provision from Regulation 35 of the CIRP Regulations, which also deals with "Fair Value and Liquidation Value" but applies during the corporate insolvency resolution process (CIRP), before liquidation begins. The Regulation 35 discussed here is the separate provision under the Liquidation Process Regulations and deals with valuation once the company has entered liquidation.
When Is a Fresh Valuation Required?
A valuation may already have been carried out during the CIRP. Regulation 35 provides a framework for situations where that valuation is not available or where the liquidator, after consulting the Stakeholders' Consultation Committee, believes that a fresh valuation is necessary in light of the circumstances at the liquidation stage.
Where a fresh valuation is required, the liquidator appoints two registered valuers to determine the realisable value of the assets or business.
The valuation needs to take into account the different ways in which the assets or business may be sold under the liquidation framework. Depending on the circumstances, this could include a sale of the business as a going concern, a slump sale, or the sale of individual assets or groups of assets.
Who Can Be Appointed as a Valuer?
The regulations place restrictions on who can be appointed for this role. The purpose is to maintain independence and avoid situations where a valuer has a relationship with the corporate debtor, resolution professional, or liquidator that could compromise the valuation.
The specific categories of persons who are disqualified are set out in the regulation itself. Since these requirements can change through amendments, the current text of the regulations should be checked before relying on the specific eligibility or disqualification criteria.
How Is the Value Determined?
Where two registered valuers are appointed, their estimates are considered and the average of the estimates is taken as the value of the assets.
The use of two valuers helps reduce the impact that the judgment of a single professional could have on the valuation. This is particularly important in liquidation because the valuation can have a direct bearing on how much creditors ultimately recover.
What Happens If the Valuation Differs Significantly From the CIRP Valuation?
One of the more important features of Regulation 35 is the mechanism for dealing with a substantial difference between the liquidation-stage valuation and the valuation carried out during CIRP.
If the valuation of an asset class under the Liquidation Process Regulations differs by 25% or more from the valuation of the same asset class carried out earlier under the CIRP Regulations, the liquidator must facilitate a meeting in which the registered valuers explain the reasons for the difference to the Stakeholders' Consultation Committee.
The purpose is not to prevent the valuation from changing. Instead, it ensures that a significant change is identified and explained to the stakeholders whose recoveries may be affected by it.
A difference between the two valuations does not necessarily mean that either valuation is wrong. Circumstances can change significantly between the CIRP and liquidation stages. Assets may deteriorate, customers or employees may leave, business prospects may weaken, or market conditions may change.
What Regulation 35 seeks to avoid is a significant change in valuation going completely unexplained.
Why Does Regulation 35 Matter?
For creditors, the valuation provides an important benchmark when assessing offers for the company's assets or business. Where recoveries are substantially lower than expected, questions may naturally arise about the assumptions and methodology underlying the valuation.
For registered valuers, it is equally important to understand what is actually being valued at this stage. A liquidation valuation is concerned with the realisable value in the circumstances of the liquidation. That is not necessarily the same question as determining fair value or assessing the value of a business as a going concern during CIRP.
Confusing these concepts can result in a valuation that may be technically sound in isolation but does not answer the question that needs to be addressed at the liquidation stage.
Regulation 35 of the IBBI (Liquidation Process) Regulations, 2016 provides a framework for obtaining an independent valuation when a fresh valuation is required during liquidation. By involving two registered valuers and requiring significant differences from the earlier CIRP valuation to be explained, the regulation is intended to bring greater transparency and consistency to the valuation process.
For creditors, liquidators, and registered valuers, understanding the distinction between the CIRP and liquidation-stage valuation is particularly important. The circumstances can change considerably once a company moves from resolution to liquidation, and the value determined at one stage may not necessarily remain appropriate at the next.
Because the regulation contains specific requirements relating to valuation, appointment of valuers, eligibility, timelines, and the treatment of significant valuation differences, the current version of Regulation 35 and any applicable amendments should always be checked before relying on its specific requirements.