Understanding The Term Liquidation Value: Valuation Of Assets Under The Insolvency And Bankruptcy Code, 2016
Liquidation value is the total worth of a company's physical assets when it goes out of business or if it were to go out of business. liquidation value is determined by assets such as real estate, fixtures, equipment and inventory. Liquidation value matter a lot to those who work with bankruptcies and workouts. While checking out the entire market value of assets, liquidation value is decided and finalised based on varoius factors.
The Insolvency and Bankruptcy Code, 2016, commonly referred to as The Code, aims to overhaul the existing corporate insolvency and liquidation framework. The Code, envisions a holistic remedy for insolvent corporate entities – instead of allowing individual creditors to take their bites from the assets of the corporate debtor, it involves them, collectively—a committee of creditors consisting of financial creditors of the corporate debtor decides on whether the entity may be resolved or should be liquidated. The entity is taken into liquidation only if these attempts fail. The Resolution Plan is a well-defined plan under which The Code is carried out. Under this plan, the creditors of that entity shall not be put in a situation worse than what would have been in the case the entity were to be liquidated. But then again, it is not always the case that when a liquidation value is displayed to the investors of the corporate debtor, the bidding amount will be restricted to the liquidation value.
Pursuant to section 30 of the Code, a resolution applicant can submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. The resolution professional, pursuant to regulation 29 of the Code read with regulation 36 of the Insolvency and Bankruptcy Board of India Regulations, 2016, prepares the IM, which includes among other details the liquidation value of the assets of the corporate debtor. As per the Code, the resolution plan must provide for repayment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of liquidation of the corporate debtor. Pursuant to section 30 of the Code, a resolution applicant can submit a resolution plan to the resolution professional prepared on the basis of the informationmemorandum. The resolution professional, pursuant to regulation 29 of the Code read with regulation 36 of the Insolvency and Bankruptcy Board of India Regulations, 2016, prepares the IM, which includes among other details the liquidation value of the assets of the corporate debtor.
Regulation 35 (i) of the Code defines liquidation value as:
“Liquidation value is the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date.”
Regulation 38 (i) mandates that the resolution plan shall identify the liquidation value due to operating creditors and liquidation value due to dissenting financial creditors.
The amendment bought out by IBBI was a much-required one. There have been amendments where the IM doesn’t contain the Liquidation Value for the purpose of value maximization. The fair market value is always a price higher then the liquidation value. While making any decicion based on assets, its important to compare both the values and then decide the actual value. The basic aim is to maximize the fair value and also increase the liquidation value. Analyzing the market growth and updations, assets can be given proper consideration and value. It becomes important for consultants to keep themselves updated. Maximizing the liquidation value works as an important act which helps in developing better financial condition.
The Insolvency and Bankruptcy Code, 2016, commonly referred to as The Code, aims to overhaul the existing corporate insolvency and liquidation framework. The Code, envisions a holistic remedy for insolvent corporate entities – instead of allowing individual creditors to take their bites from the assets of the corporate debtor, it involves them, collectively—a committee of creditors consisting of financial creditors of the corporate debtor decides on whether the entity may be resolved or should be liquidated. The entity is taken into liquidation only if these attempts fail. The Resolution Plan is a well-defined plan under which The Code is carried out. Under this plan, the creditors of that entity shall not be put in a situation worse than what would have been in the case the entity were to be liquidated. But then again, it is not always the case that when a liquidation value is displayed to the investors of the corporate debtor, the bidding amount will be restricted to the liquidation value.
Pursuant to section 30 of the Code, a resolution applicant can submit a resolution plan to the resolution professional prepared on the basis of the information memorandum. The resolution professional, pursuant to regulation 29 of the Code read with regulation 36 of the Insolvency and Bankruptcy Board of India Regulations, 2016, prepares the IM, which includes among other details the liquidation value of the assets of the corporate debtor. As per the Code, the resolution plan must provide for repayment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of liquidation of the corporate debtor. Pursuant to section 30 of the Code, a resolution applicant can submit a resolution plan to the resolution professional prepared on the basis of the informationmemorandum. The resolution professional, pursuant to regulation 29 of the Code read with regulation 36 of the Insolvency and Bankruptcy Board of India Regulations, 2016, prepares the IM, which includes among other details the liquidation value of the assets of the corporate debtor.
Regulation 35 (i) of the Code defines liquidation value as:
“Liquidation value is the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date.”
Regulation 38 (i) mandates that the resolution plan shall identify the liquidation value due to operating creditors and liquidation value due to dissenting financial creditors.
The amendment bought out by IBBI was a much-required one. There have been amendments where the IM doesn’t contain the Liquidation Value for the purpose of value maximization. The fair market value is always a price higher then the liquidation value. While making any decicion based on assets, its important to compare both the values and then decide the actual value. The basic aim is to maximize the fair value and also increase the liquidation value. Analyzing the market growth and updations, assets can be given proper consideration and value. It becomes important for consultants to keep themselves updated. Maximizing the liquidation value works as an important act which helps in developing better financial condition.