IBBI amends rules, drops need to disclose liquidation value of asset

IBBI amends rules, drops need to disclose liquidation value of asset

The Insolvency and Bankruptcy Board of India (IBBI) has done away with the requirement for disclosing the liquidation value of an asset undergoing resolution—a move that is expected to help better price discovery for stressed assets under the bankruptcy framework.IBBI amended its regulations on 31 December and the changes took effect from Monday.

The regulator also said that a resolution plan needs to identify the specific sources of funds that will be used to pay the liquidation value to creditors who don’t agree to the plan. “Since the liquidation value was previously included in the information memorandum, prospective bidders who had access to the same were providing bids which were closer to the liquidation value rather than a value (based) on a going concern basis.

This amendment was necessary and will help in optimal price discovery for assets and reduce haircuts for lenders,” said Aashit Shah, a partner at law firm J Sagar Associates. The information memorandum is a document prepared by the resolution professional which gives bidders access to information such as the financial position of the debtor and disputes the debtor is involved in.

Sumit Binani, a resolution professional, said investors or buyers had been using liquidation value as the guiding price while submitting bids. “In most cases, bids were close to the liquidation value. This move is positive. In cases where information memorandum is already shared, this amendment may not alter anything as far as values are concerned.

But it is definitely positive for cases from here on,” he said. Lenders are in the middle of finalizing resolution plans for 11 of the 12 accounts that were referred to the National Company Law Tribunal for early insolvency proceedings following the Reserve Bank of India’s directive in June 2017.

The central bank followed this with a second list of 28 accounts, accounting for Rs2 trillion in bad loans, in late August. Here, the lenders were mandated to firm up a resolution plan by 13 December, failing which they were forced to take these defaulters to NCLT. Of the second list, 25 firms will be put through insolvency proceedings. In a few cases, lenders have already filed petitions at NCLT.

To be sure, the interim resolution professional will still have to derive the liquidation value of an asset, which has to be shared with the members of committee of creditors only after the receipt of resolution plans. To do so, the IRP has to obtain an undertaking from the members that they shall not disclose the liquidation value and not use it to cause undue gain or loss.

IBBI also defined dissenting financial creditors as those who voted against or abstained from voting for a resolution plan approved by the creditor committee. According to the amendment, a resolution applicant must submit bids within the time stated in the invitation for the resolution plans. “This will enable the committee of creditors to close a resolution process as early as possible subject to provisions in the Code and the regulations,” the IBBI said in a statement. “On the timelines, bidders were often submitting plans beyond the stated timelines.

And since IRPs are mandated to share all plans with the committee of creditors, it was creating confusion and delaying the process. This directive of the IBBI will now ensure that only plans which are submitted within time stated in the expression of interest will be taken up for approval,” said Binani

The Mint, New Delhi, 03rd January 2018