This article is written by Akhil Kumar. The article is a discussion on Valuation Of Assets Under The Insolvency And Bankruptcy Code.

The liquidator may sell an asset on a standalone basis or sell the assets in a slump sale, sell a set of assets collectively, in parcels or sell the corporate debtor as a growing concern.[1] In Gujarat NRE Coke Ltd., in re,[2] the resolution plan was not approved by Committee of Creditors during 180 days and even in extended period of CIRP, the company was working and had 1178 employees.

The company was making operating profit. If the order was passed under Section 33 of the Insolvency and Bankruptcy Code, it would result in discharge of all the employees. It was ordered that liquidator should try sale of corporate debtor if it is a going concern as livelihood of employees is involved. If such sales fail within three months, liquidation shall take place. It was also held that slump sale is permitted.

As per Regulation 33 of IBBI (Liquidation Process) Regulations, 2016 the liquidator shall originally sell the assets of the corporate debtor through an auction in the manner specified in Schedule I of the regulations.

Private Sale in Certain Cases

The liquidator may sell the assets of the corporate debtor by means of private sale in the manner specified in Schedule I of the regulations when the asset is perishable, likely to deteriorate in value significantly if not sold immediately, the asset is sold at a higher price than the reserve price of a failed auction or the prior permission of the adjudicating authority has been obtained for sale.

Assets not to be sold without prior permission of the adjudicating authority

The liquidator shall not sell the assets, without prior permission of the adjudicating authority, by way of private sale to a related party of the corporate debtor, his related party (Liquidator’s) and any professional appointed by him.

No Sale in case of Collusion between Buyers

The liquidator shall not begin with the sale of an asset if he has grounds to believe that there is any collusion between the parties discussed hereunder.

• The buyers, or the
• Corporate debtor’s related parties and the buyers, or the
• Creditors and the buyer,

The liquidator shall then submit a report to the Adjudicating Authority in this regard, seeking appropriate orders against the colluding parties.

All Money to be paid into Bank Account except Petty Cash

According to Regulation 41(2) of IBBI (Liquidation Process) Regulations, 2016, the liquidator shall open a bank account in the name of the corporate debtor followed by the words ‘in liquidation’, in a scheduled bank, for the receipt of all money due to the corporate debtor.

The liquidator shall deposit in the bank account all money including cheques and demand drafts received by him as the liquidator of the corporate debtor, and the realizations of each day shall be deposited in the bank account without any deduction not later than the next working day.

The liquidator, however, is permitted to maintain a cash of one lakh rupees or higher amount as may be permitted by the NCLT to meet liquidation expenses.

Provision for registered valuer under the Companies Act

The Companies Act, 2013 makes provisions for registered valuer. In cases where valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets of a company or its liabilities under the Companies Act, 2013. On similar lines valuation is also required under the various provisions of Insolvency and Bankruptcy Code, 2016 (hereinafter “the Code”).

Valuer registered under Companies Act can also undertake valuation work under the Code and SEBI (REIT and INVIT) Regulations, 2016. Such valuation shall be done by a person having prescribed qualification and experience. He should be registered as a valuer in prescribed manner and terms and conditions.

Powers under section 247 – Delegated to the IBBI

It is also pertinent to note that the powers and functions entrusted upon the Central Government (for valuation) under Section 247 of the Companies Act have been delegated to Insolvency and Bankruptcy Board of India (hereinafter “IBBI”).

How to be a registered valuer

The Board has issued details of educational courses and valuation examination. A person doing asset valuation under the Companies Act must be registered with the IBBI as a valuer. He should be a valuer member of a recognized valuer organization and pass examinations conducted by IBBI.

Institutes of Estate Managers and Appraisers, Registered Valuers Foundation and ICSI Registered Valuers Organization have been recognized as registered valuers organization under the Companies (Registered Valuers and Valuation) Rules, 2017. The aforementioned rules lay down the provisions relating to eligibility, classification and experience, conduct of valuation, functions of valuers, punishments etc.

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The applicant must be a practicing CA, CS or CMA or a retired member of Indian Corporate Law Service or member of Institution of Engineers or Institute of Architects with five years of experience. Additionally, he shall also pass the examination conducted by IBBI. They also have to abide by the prescribed model code of conduct as envisaged under the Companies (Registered Valuers and Valuation) Rules, 2017.

Valuation Standards

Valuation shall be done as per valuation standards till such standards are notified, valuation can be done on the basis of International Valuation Standards, 2017 issued by International Valuation Standards Council (IVSC). The valuer shall also abide by provisions as prescribed by SEBI, RBI and Income Tax Act wherever applicable.

The valuer appointed under Section 247(1) of the Companies Act shall:

1. Make an impartial, true and fair valuation of any asset which may be required to be followed.
2. Exercise due diligence while performing the functions as a valuer.
3. Make the valuation in accordance with such rules as may be prescribed.
4. Not undertake valuation of any assets in which he has a direct or indirect interest or becomes “so interested at any time during a period of three years prior to his appointment as valuer or three years after the valuation of assets.”[4]

Penalty for Contravening the Provisions of Section 247

If a valuer contravenes the provisions of Section 247 of Companies Act, 2013 or the rules made thereunder, the valuer shall be punishable with fine which shall not be less than twenty five thousand rupees but may be extended to one lakh rupees.

Punishment if valuer acts in a fraudulent manner

If the valuer has contravened such provisions with an intention to defraud the company or its members, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees and may extend to five lakh rupees.

Damages Payable and Fee Refundable by Valuer if Convicted

If the valuer is convicted under Section 247(3), he shall be liable to the following:

• Firstly, refund the remuneration received by him to the company and
• Secondly, to pay for damages to the company or to any other person for loss arising out of wrongful or misleading statements of particulars in his report.

It is also to be noted that a valuer is an expert and not an arbitrator. A valuer cannot claim immunity if he acts negligently while carrying out his duties. He can also be sued under tort or negligence. If valuation is found to be erroneous, the court is bound to accept the determination or opinions of an expert. In a class action suit under Section 245(3) of the Companies Act, 2013, damages or compensation can be claimed.

Valuation by Expert and not through Arbitration or any other way

The valuation shall be done by the valuer as expert and not by arbitration proceedings or half way course of giving reasons. The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other, and both parties take the same risk in this respect.

Methods for Valuation

Valuation can be done by various methods discussed below.

• Net Asset Value (NAV)
• Comparable Companies Multiple (CCM)
• Profit Earning Capacity Value (PECV)
• Discounted Cash Flow etc.

Valuation of assets on basis of giving weightages to various methods was approved in the case of Rakita Oversears v. Salter India Pvt. Ltd.[7]

Liability of Valuer is equivalent to the liability of an ‘Expert’

According to Section 2(38) of Companies Act, 2013, a valuer is an expert and his civil and criminal liability is the liability of an expert. “Expert includes an engineer, a valuer, a Chartered Accountant, a Company Secretary, a Cost and Works Accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force.”

An expert can be held criminally liable and liable for action under Section 447 of Companies Act, 2013 for misstatement or omission, unless he proves that such statement or omission was immaterial or that he had reasonable grounds to believe and did believe that the statement was true and inclusion or omission was necessary.

Class action can be initiated against an expert for false statement, under Section 245 of Companies Act, 2013 along with compensation or damages claimed.

Liability of expert in case of issue of securities

According to Section 35(1)(e) of the Companies Act, 2013 an expert is liable for civil liability if any person suffers any loss of damage on account of misstatements in prospectus.

However, Section 35(2) prescribes that an expert will not be liable if he proves that the prospectus was issued without his knowledge or consent, and that on becoming aware of the issue, he has to give a reasonable public notice that it was issued without his knowledge or consent.

Conclusion

Valuation is a conventional part of the Corporate Insolvency Resolution Process. Therefore, a proper understanding of liquidation value is essential for protecting the interests of stakeholders and to come up with a resolution plan. Any mistake in determining liquidation value in the corporate insolvency resolution process can have radical consequences, including the effect of subverting or reversing any resolution plan that may be approved on the basis of an incorrect liquidation value.

In the case of Hotel Gaudawan Private Ltd., a criminal case against the officers of a private securitization company and the resolution professionals has been lodged for alleged incorrect determination of liquidation value under the CIRP. Therefore, it is very necessary that the valuers stick to their task in a very prudent manner.

[1] Regulation 32, IBBI (Liquidation Process) Regulation, 2016.

[2] (2018) 146 SCL 63.

[3] IBBI Press Release dated December 31, 2017.

[4] Inserted with effect from February 9, 2018.

[5] Mihir Chakraborty v. Multi Tech Computers, (2001) 32 SCL 257.

[6] O’ Neill v. Phillips, (1999) 1 WLR 1092 (HL).

[7] (2006) 68 SCL 336 (CLB).