The Insolvency and Bankruptcy Board of India had made the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2018, effective from 6th February, 2018 (the ‘Amendment Regulations, 2018’), to make amendments in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the ‘CIRP Regulations, 2016’), w.r.t. invitation of Resolution Plans, information memorandum, introduction of the concepts of evaluation matrix and fair value.

 According to the Amendments,

a. The Resolution Professional shall appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor. After the receipt of resolution plans, the resolution professional shall provide the fair value and the liquidation value to each member of the committee of creditors in electronic form, on receiving a confidentiality undertaking. The resolution professional and registered valuers shall maintain confidentiality of the fair value and the liquidation value.

b. The Resolution Professional shall submit the information memorandum in electronic form to each member of the committee of creditors within two weeks of his appointment as resolution professional and to each prospective resolution applicant latest by the date of invitation of resolution plan, on receiving confidentiality undertaking.

c. The Resolution Professional shall issue an invitation, including the evaluation matrix, to the prospective resolution applicants. He may modify the invitation as well as the evaluation matrix. However, the prospective resolution applicant shall get at least 30 days from the issue of invitation or modification thereof, whichever is later, to submit resolution plans. Similarly, he will get at least 15 days from the issue of evaluation matrix or modification thereof, whichever is later, to submit resolution plans. An abridged invitation shall be available on the web site, if any, of the corporate debtor, and on the web site, if any, designated by the IBBI for the purpose.

d. While the Resolution Applicant shall continue to specify the sources of funds that will be used to pay insolvency resolution process costs, liquidation value due to operational creditors and liquidation value due to dissenting financial creditors, the committee of creditors shall specify the amounts payable from resources under the resolution plan for these purposes.

e. A Resolution Plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets. These may include reduction in the amount payable to the creditors, extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor, change in portfolio of goods or services produced or rendered by the corporate debtor, and change in technology used by the corporate debtor.

f. The Resolution Professional shall submit the resolution plan approved by the committee of creditors to the Adjudicating Authority, at least 15 days before the expiry of the maximum period permitted for the completion of the corporate insolvency resolution process.

The present article analyses these amendments in a precise manner.

1. Definition

Clause (ha) and (hb) are inserted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2018, w.e.f. 6-2-2018 in Regulation 2 of the CIRP Regulations, 2016, to provide for the following:

  • “evaluation matrix” means such parameters to be applied and the manner of applying such parameters, as approved by the committee, for consideration of resolution plans for its approval – clause (ha);
  • “fair value” means the estimated realizable value of the assets of the corporate debtor, if they were to be exchanged on the insolvency commencement date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had acted knowledgably, prudently and without compulsion – clause (hb).

Further, clause (k) has also been substituted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2018, w.e.f. 6-2-2018 to provide for the following:

  • “liquidation value” means the estimated realizable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date – clause (k)

1.1. Evaluation matrix: It lays down such parameters for the purpose of analyzing and verifying a resolution plan, as to whether it is good to be considered for approval by the Committee of Creditors (‘CoC’). Such matrix should also contain the manner of application of the defined parameters. A specimen evaluation matrix is as given below:

Evaluation Matrix

ABC Limited

[Under Corporate Insolvency Resolution Process]

S. No PARAMETERS WEIGHTAGE TOTAL SCORE (RANGE) RATIONALE FOR SUGGESTION
(A) QUANTATIVE PARAMETERS
1. Upfront cash recovery as per resolution plan 50% 0-100 50 Bidder offering maximum upfront cash recovery will get a score of 100 and for other bidders the score will reduce by 10 against every 10% difference with highest bidder (rounding off would be done)
2. Net present value (NPV) of continuing portion of debt (Discounting rate of 10% per annum would be used for NPV for all the bidders) 20% 0-100 20 Bidder offering highest NPV of continuing portion of debt will get a score of 100 and for other bidders the score will reduce by 10 against every 10% difference with highest bidder (rounding off would be done)
3. Term of resolution plan (number of years after approval of resolution plan by NCLT) 20% 0-100 20 Bidder offering minimum number of years after approval of resolution plan by NCLT will get a score of 100 and for other bidders the score will reduce by 20 against every year difference with highest bidder.
4 Fresh fund introduced (equity or debt) for the purpose of capital expenditure and working capital requirement 10% 0-100 10 Bidder introducing highest fresh funds will get a score of 100 and for other bidders the score will reduce by 10 against every 10% difference with highest bidder (rounding off would be done)
Total score of quantitative parameters 100%
Total weight of quantitative parameters (A) 70%
(B) QUANTATIVE PARAMETERS
1. Experience of resolution applicant/group in Hotel & Hospitality Industry 30% 0-100 30 The experience of resolution applicant would be important as this is a running concern and the experienced person will have higher possibility of successful revival of the unit. The score will be awarded by COC based on presentation by resolution applicant along with documentary evidences.
2. Financial strength of resolution applicant/group (group net worth, revenue, EBIDTA) 30% 0-100 30 The financial strength of applicant would be important as the corporate debtor would need financial support for working capital and better utilisation of existing assets. The score will be awarded by COC based on presentation by resolution applicant along with documentary evidences.
3 Availability of additional collateral security and personal/corporate guarantee and value thereof 40% 0-100 40 Additional collateral security, corporate guarantee and personal guarantee of resolution applicant, proposed management would provide additional comfort to lenders.
Total score of qualitative parameters 100% 100
Total weight of qualitative parameters (B) 30% 30
Total score of resolution applicant (A+B) 100

Notes:

1. Bid evaluation matrix is required for making comparison between bids received during resolution process. It is not meant for taking a decision on acceptance or rejection of the offer.

2. The bid evaluation matrix would only be used in case resolution plans are received from more than one resolution applicants.

3. The committee of creditors will have right to reject a resolution plan even if the resolution applicant has top score and may opt for another bid inviting process with different evaluation matrix or may opt for liquidation of the corporate debtor.

4. The Committee of Creditors will have all rights to accept or reject any presentation done by any resolution applicant based on insufficiency of documents and evidences.

1.2. Fair Value and Liquidation Value

Earlier there was a concern that wide dissemination of liquidation value to applicants caused bids of lower value since bids tend to hover near the liquidation value mark which is significantly less than market value of the asset. The valuers now need to provide both the ‘fair value’ as well as ‘liquidation value’. In companies facing severe distress, the fair value and liquidation value may converge. But in many cases where the companies have capabilities of generating positive cash flows, a ‘fire-sale’ liquidation value is an inaccurate reflection of intrinsic value. This requirement is expected to address a long-standing concern of the creditor community, since the feeling is that currently bids are influenced by the liquidation value of the insolvent company. It is possible that the fair value may influence the decision of the financial creditors in accepting bids and deciding whether the company should go for rebidding, resolution or liquidation.

For instance, in the matter insolvency of Gujarat NRE Coke Ltd., CoC emphasized on selling off one of the assets i.e. windmill because the value of the assets was depleting day by day. Value of windmill doesn’t deplete on a daily basis usually, however, the value was depleting in this case because of following reasons:

a. Asset belonged to a company which was under CDR Mechanism first and then undergoing CIRP;

b. There was no maintenance of the assets because the company was unable to pay for the maintenance.

Liquidation value in the case was arrived to be at Rs. 180 Crore owing to above factors. Had the above two factors were not in play, fair value of the said asset would have been more than Rs. 180 Crore.

Fair value is the estimated realizable value if the assets were to be exchanged between a willing buyer and seller on an arm’s length basis, as on the insolvency commencement date. The definition of liquidation value is derived from the text of regulation 35(1). Earlier, the definition was clause-specific, however, post amendment, it shall become universal for all the provisions, wherever the reference of ‘liquidation value’ is made, throughout the CIRP Regulations, 2016.

Fair value is based upon the assets that are to be exchanged but the Liquidation value is based upon the assets that are to be liquidated.

Value will be termed as fair only if the exchange of the asset(s) is on an arm’s length basis, where:

1. Proper marketing has been conducted to ensure wide public disclosure;

2. The parties to the transaction acted:

a. knowledgeably,

b. prudently, and

c. without compulsion.

In case of liquidation value, there is no requirement to arrive at the same, considering the arm’s length criteria

Regulation 35 has been substituted with the following regulation:

35. Fair value and Liquidation value.

(1) Fair value and liquidation value shall be determined in the following manner:-

(a) the two registered valuers appointed under regulation 27 shall submit to the resolution professional an estimate of the fair value and of the liquidation value computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor;

(b) if in the opinion of the resolution professional, the two estimates of a value are significantly different, he may appoint another registered valuer who shall submit an estimate of the value computed in the same manner; and

(c) the average of the two closest estimates of a value shall be considered the fair value or the liquidation value, as the case may be.

(2) After the receipt of resolution plans in accordance with the Code and these regulations, the resolution professional shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person and comply with the requirements under sub-section (2) of section 29:

(3) The resolution professional and registered valuers shall maintain confidentiality of the fair value and the liquidation value.”

A third registered valuer shall be appointed, if the difference between two estimates of any or both the values are significant. The change which provides that the fair value and liquidation value shall be provided only after receipt of resolution plans seems counter-intuitive in nature. This will totally isolate all the prospective resolution applicants from the liquidation value and fair value of the assets they are willing to acquire. Earlier to the amendment, estimate of only liquidation value was to be computed by two registered valuers. However, post amendment, fair value along with the liquidation value must be arrived and submitted by the registered valuers to the RP. Such arrived fair value and liquidation value will be made available to the CoC members only on getting a declaration to the effect that they shall maintain utmost confidentiality of such values. Additionally, it is also the responsibility of the RP and the registered valuers.

2. Information Memorandum and New Timelines

The Resolution Professional shall submit the information memorandum in electronic form to each member of the committee of creditors within two weeks of his appointment as resolution professional and to each prospective resolution applicant latest by the date of invitation of resolution plan, on receiving confidentiality undertaking. The Resolution Professional shall issue an invitation, including the evaluation matrix, to the prospective resolution applicants. He may modify the invitation as well as the evaluation matrix. However, the prospective resolution applicant shall get at least 30 days from the issue of invitation or modification thereof, whichever is later, to submit resolution plans. Similarly, he will get at least 15 days from the issue of evaluation matrix or modification thereof, whichever is later, to submit resolution plans. An abridged invitation shall be available on the web site, if any, of the corporate debtor, and on the web site, if any, designated by the IBBI for the purpose.

While the Resolution Applicant shall continue to specify the sources of funds that will be used to pay insolvency resolution process costs, liquidation value due to operational creditors and liquidation value due to dissenting financial creditors, the committee of creditors shall specify the amounts payable from resources under the resolution plan for these purposes. A Resolution Plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets. These may include reduction in the amount payable to the creditors, extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor, change in portfolio of goods or services produced or rendered by the corporate debtor, and change in technology used by the corporate debtor.

The Resolution Professional shall submit the resolution plan approved by the committee of creditors to the Adjudicating Authority, at least 15 days before the expiry of the maximum period permitted for the completion of the corporate insolvency resolution process.

Regulation 39(4) provides that:

“The resolution professional shall submit the resolution plan approved by the committee to the Adjudicating Authority, at least fifteen days before the expiry of the maximum period permitted under section 12 for the completion of the corporate insolvency resolution process, with the certification that—

(a) the contents of the resolution plan meet all the requirements of the Code and the Regulations; and

(b) the resolution plan has been approved by the committee:

Provided that the timeline specified in this sub-regulation shall not apply to an ongoing corporate insolvency resolution process which has completed 130th day from its commencement date.”

Compiled by: CA Kamal Garg [Insolvency Professional] and CA Himanshu Sarpal. The contributors can be reached at cakamalgarg@gmail.com

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