Valuation Under IBC
- Insolvency and Bankruptcy Code is an act that was implemented in May 2016. The act was introduced in the parliament by the centre to resolve claims of insolvent companies. The code was written to provide solutions for resolving insolvencies and was written to protect the interests of small investors.
The code was also written to tackle bad loan problems affecting the banking system. Under this code, both debtors and creditors can start recovery proceedings against each other. The code was written to serve the interests of various stakeholders and to promote entrepreneurial ventures. Valuation under IBC, 2016 must be performed within a strict deadline to ensure that the value of assets is maximized.
The National Company Law Appellate Tribunal has stated the primary objectives of IBC,2016 as-.
- To provide resolution to all stakeholders.
- To ensure maximization of the value of assets of the corporate debtor.
- To promote entrepreneurship.
- To balance the interests.
- To promote the availability of credit.
Valuation under IBC, 2016
Business valuation under IBC, 2016 estimates the fair and liquidation value by-.
- Two registered valuers are appointed by the resolution professional. The registered valuer estimates the fair and liquidation value in accordance with the internationally accepted valuation standards. They estimate the fixed and liquidation values after physical verification of the inventory and the fixed assets of the corporate debtor.
- If the resolution professional finds the two estimates of the value significantly different, then he may appoint another registered valuer who will submit an estimate of the value computed similarly.
- Finally, the average of two estimates will be considered as the fair value and liquidation value.
The International Valuation Standards 2017 defines the fair value “as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The International Valuation Standards define liquidation value as the "amount that would be realized when an asset or group of assets are sold on a piecemeal basis. Liquidation Value should consider the costs of getting the assets into saleable condition as well as those of the disposal activity. Liquidation Value can be determined under different premises of value:
- An orderly transaction with a typical marketing period.
- A forced transaction with a shortened marketing period.
A valuer must disclose which premise of value is assumed.”
Valuation Standards under Companies (Registered Valuers and Valuation) Rules, 2017
As stated in rule 18 of the Companies Rules, 2017, the valuation standards are set on the committee's recommendations set up under rule 19. The committee sets valuation standards that aim to bring uniformity to the insolvency system. They deliberate on valuation bases, approaches, reporting style, financial instruments, the scope of work, and intangible assets.
Who is a registered valuer under IBC, 2016?
A registered valuer is a person or entity that is registered as a valuer with the Insolvency and Bankruptcy Board of India under the Companies (Registered Valuers and Valuation) Rules, 2017. The Companies (Registered Valuers and Valuation) Rules, 2017 state that a person who has a postgraduate degree or diploma or a bachelor’s degree or equivalent in the specified discipline and has passed the valuation examination under rule 5 is eligible to be a registered valuer.
The Corporate Insolvency Resolution Process Regulation under IBBI (Insolvency and Bankruptcy Board of India) states that the following persons cannot be appointed as a registered valuer to perform valuation under IBC, 2016-
- A relative of the resolution professional cannot be appointed to perform valuation under IBC, 2016.
- A related party to the corporate debtor cannot perform valuation under IBC, 2016.
- An auditor who has previously worked for the corporate debtor during the 5 years preceding the insolvency cannot perform valuation under IBC,2016.
- Any partner or director of the insolvency professional entity of which the resolution professional is a part cannot perform valuation under IBC, 2016.
Provisions of valuation under IBC,2016 that requires valuation reports prepared by a registered valuer
While there were 13 provisions in the Companies Act, 2013 under which valuation reports were required from a registered valuer. However, under the Insolvency and Bankruptcy Code, 2016, there are 7 such provisions. These are-
Section 59(3)(b)(ii) of the Insolvency and Bankruptcy Code, 2016- Under this section, in the case of voluntary liquidation of corporate persons or when a proposal to wind down the company has been made, the declaration of insolvency must be accompanied with a valuation report issued by a registered valuer.
Section 46(2) of the Insolvency and Bankruptcy Code, 2016- The Adjudicating Authority requires an independent expert to prepare a valuation report when there is an application for avoiding a transaction at undervalue.
Regulation 27 read with regulation 35 of the IBBI (Insolvency Resolution Process for corporate persons) Regulations, 2016- Under this regulation, the resolution professional, within 7 days of their appointment, must appoint 2 registered valuers to determine the fair value and liquidation value. The registered valuer must determine the fair and liquidation value of the corporate debtor within 7 days of their appointment but not later than 47 days.
Regulation 35 of the IBBI Regulations, 2016- This resolution states that a registered valuer must value any assets to be sold by the liquidator.
Regulations 3(1)(b)(ii) of the IBBI (Voluntary liquidation process) Regulations, 2017- This regulation states that the declaration of insolvency submitted by the directors must be accompanied by the valuation report written by a registered valuer.
Regulation 26 of the IBBI (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017- This regulation states that the resolution professional must appoint 1 registered valuer within 7 days of their appointment to determine the fair and liquidation value of the corporate debtor.
Regulation 34 of the IBBI Regulations, 2017- This regulation states that a registered valuer, in accordance with regulation 26, must submit a valuation report to the resolution professional.