Introduction
One of the most unsettling developments under the INSOLVENCY AND BANKRUPTCY CODE, 2016 (“IBC”) is the increasing acceptance of resolution plans offering value below the liquidation value of the corporate debtor. While such approvals are routinely justified under the umbrella of “commercial wisdom of the Committee of Creditors (CoC)”, a critical question arises:
Can commercial wisdom override economic irrationality indefinitely, or does approval below liquidation value plant the seeds of future legal instability?
This article examines whether resolutions below liquidation value are a legitimate commercial outcome or a latent legal risk capable of unsettling the insolvency framework.
Understanding the Valuation Architecture under IBC
Valuation under IBC is not an ornamental compliance exercise. Regulation 35 of the CIRP Regulations mandates determination of:
- Fair Value
- Liquidation Value
These benchmarks are intended to:
- Enable informed decision-making by CoC
- Protect stakeholders from arbitrary value erosion
- Serve as reference points for assessing resolution feasibility
Yet, IBC does not explicitly prohibit approval of a resolution plan below liquidation value. This regulatory silence has become fertile ground for controversy.
The Commercial Wisdom Doctrine: Shield or Sword?
Judicial deference to CoC’s commercial wisdom has been the cornerstone of IBC jurisprudence. Courts have consistently refrained from substituting their views for that of financial creditors on matters of:
- Business viability
- Feasibility of resolution plans
- Acceptable levels of haircut
However, commercial wisdom is not synonymous with absolute immunity. It presupposes:
- Rational decision-making
- Application of mind
- Consideration of relevant material, including valuation
When a plan is approved below liquidation value, the implicit presumption is that liquidation would yield even less or be value-destructive. But what if this presumption is flawed?
Resolution Below Liquidation Value: When Does It Become Problematic?
1. Economic Paradox
Liquidation value represents the worst-case scenario. A resolution plan yielding less than this baseline challenges fundamental economic logic:
- Why preserve the corporate debtor if liquidation offers higher value?
- Is the going-concern assumption artificially inflated?
- Are valuations being strategically ignored?
Such outcomes raise concerns of value suppression rather than value maximisation.
2. Valuation as a Casualty of Expediency
In practice, valuation reports often suffer from:
- Limited data access
- Time compression
- Conservative assumptions
When CoC approves a plan below liquidation value without recording compelling reasons, valuation risks being reduced to a procedural formality rather than a substantive input.
This weakens the credibility of the entire insolvency process.
3. Latent Litigation Risk
While approval may survive immediate judicial scrutiny, it may:
- Invite challenges from dissenting creditors
- Trigger scrutiny in avoidance proceedings
- Become vulnerable in post-approval disputes
A plan below liquidation value may not explode instantly—but it ticks silently, especially when challenged on grounds of arbitrariness or discrimination.
Is Liquidation Value Merely Indicative? A Dangerous Assumption
The argument that liquidation value is “only indicative” must be handled cautiously.
If liquidation value is:
- Too low → valuation integrity is questioned
- Ignored altogether → valuation relevance is destroyed
Both outcomes undermine trust in the insolvency ecosystem and erode confidence of:
- Prospective resolution applicants
- Minority creditors
- Valuation professionals
Valuers in the Crossfire
Valuers are often the invisible casualties in such resolutions.
When plans below liquidation value are approved:
- Valuation reports are selectively relied upon
- Adverse outcomes invite retrospective scrutiny
- Professional accountability becomes ambiguous
The absence of documented reasoning by CoC exposes valuers to unfair blame for commercial decisions beyond their control.
A Shift from Value Maximisation to Value Acceptance?
IBC’s objective is maximisation of value, not mere acceptance of loss.
If resolutions below liquidation value become normalized:
- Liquidation value loses deterrent significance
- CoC discretion becomes unstructured
- Insolvency outcomes risk becoming opportunistic rather than optimal
This could dilute the Code’s credibility as an economic reform.
Way Forward: Risk-Proofing Commercial Wisdom
To prevent future instability, the following safeguards are essential:
1. Reasoned CoC Decisions
Approval below liquidation value should be accompanied by recorded economic justification.
2. Enhanced Valuation Disclosures
Clear articulation of assumptions, limitations, and stress scenarios.
3. RP as Process Guardian
Ensuring valuation is meaningfully placed before CoC, not mechanically circulated.
4. Judicial Calibration, Not Intervention
Courts need not second-guess numbers—but must ensure rationality.
Conclusion
Approving a resolution plan below liquidation value may be commercially expedient, but it is not legally innocuous. Commercial wisdom cannot be a substitute for commercial rationality. Unless supported by transparent reasoning and robust valuation logic, such approvals risk becoming legal time bombs—quietly ticking beneath the surface of India’s insolvency regime.
The true test of IBC lies not in how quickly cases are resolved, but in whether value is genuinely preserved, transparently justified, and equitably distributed.
******
Author Note: The author is an Insolvency Resolution Professional with extensive experience in managing multiple CIRP and liquidation assignments. For queries or professional discussions related to the Insolvency and Bankruptcy Code (IBC), you may reach out to: Krit Narayan Mishra at kritmassociates@gmail.com | +91 99108 59116.
Author Bio
