IBBI’s Proposal for A Single Valuer Model under CIRP
Anshika Kaushik
Second Year, B.A. LL.B(Hons.), NLIU, Bhopal
Introduction
The insolvency and bankruptcy board of India on 19th June 2024 has come up with a consultation paper wherein it has proposed amendments to the CIRP regulations. The paper outlines mainly four amendments which are related to improving the roles of registered valuer, streamlining and enhancing valuation estimate, enhancing the role of authorized representatives (AR) in pivotal voting procedure, and lastly redefining the scope of guarantor’s liability under IBC.
The author in this article provides a critical analysis of the proposed single Registered Valuer (“RV”) model. While the reason cited for the amendment is to streamline the CIRP regulations, it poses some serious issues which needs meticulous discussion.
Valuation is one of the pivotal activities to be conducted during CIRP under IBC. The process comes up with various ramifications and interest of all the stakeholders is involved here. The three pillars which govern the valuation particularly under IBC are completing the resolution in a time efficient manner, maximization of value, and equitable treatment of all the stakeholders. The correct valuation of a company’s asset is also critical in the sense that a lot of decision making particularly of committee of creditors is based on the valuation report which becomes the base for further stages under insolvency resolution process. In the above context it becomes imperative to thoroughly scrutinize the amendment relating to valuation under CIRP.
Rethinking the Single Registered Valuer Model under the Proposed Amendment.
Currently, regulation 27 of the CIRP regulation provides that the value of the corporate debtor shall be determined by two RVs appointed by the resolution professional(“RP”) who shall be responsible for submitting the estimates in a span of seven days. If the difference between the two valuations is significantly discrepant then a third valuer may be appointed by the RP and in such a case the average of two closest valuation is taken as the fair or liquidation value. The determination of value including the fair value and liquidation value is done in accordance with regulation 35 of the CIRP.
The proposed amendment provides to align the framework of valuation under CIRP with the valuation rules. In other words, it is proposed that the RP will appoint the RV which shall carry out the task of valuation of the corporate debtor according to rule 8(2) of the valuation rules. Now it becomes worth to ponder why such an amendment is been proposed. The reason cited for such an amendment in the discussion paper is that scheme for valuation under the IBC and the valuation rules are inconsistent since IBC provides that the valuation shall be done by separate RV for different classes of asset whereas the valuation rules provide that only one valuer shall conduct the valuation for all the asset class as whole. This inconsistency has led to different practices being adopted in the market and to address it the amendment is brought.
Rule 8(2) of the valuation rules provides that there shall be one RV who shall be primarily responsible for preparing the valuation report however he may take inputs for the report prepared by him or can get the valuation of an asset class done by another RV and in such a case any inputs taken are to be clearly disclosed in the valuation report. This means that if the proposed amendments are incorporated there shall be one RV unlike two or three depending upon the case and secondly that one RV shall be primarily responsible for valuation of all the asset class as whole unlike the CIRP regulations which provides for two RV in each of the three-asset class (2*3).
Even though the amendment is brought to bridge the discrepancy it must be noted that the two are different in their objectives. While the main objective behind the valuation rules is to get a clear and fair determination of value, the CIRP regulations provides for a broader framework of insolvency in which transparency and procedural fairness cannot be compromised or doubted.
Reducing the number of RV may reduce cost and administrative burden involved in appointing the RVs however it poses some serious question pertaining to the efficiency of the valuation procedure and qualification of the RVs. To elaborate, a valuer’s credentials play a vital role in determining the quality and accuracy in valuation process at the same time it is also responsible for COC’s confidence in the process however, under the proposed amendment a single valuer is entrusted with the valuation of the corporate debtor as whole irrespective of his credentials. To better understand, assume that while the valuers are skilled in valuing manufacturing facilities but have limited exposure to service-oriented businesses, their evaluation of service-based company assets such as customer contracts and goodwill may be less precise. In a similar vein, the valuers’ evaluation of intangible assets like intellectual property rights might not be thorough if they have a great deal of expertise evaluating tangible assets like machinery and equipment. In all a single valuer might not have all the knowledge and techniques needed for different asset classifications, such as real estate, machinery, and intellectual property. Undervaluation or overvaluation of assets could result from this, which would affect creditor recoveries and the fairness of the resolution process.
Further the RPs may welcome the idea to streamline the valuation procedure as it lessens the burden and aims to complete the process in a timely manner however the reaction of the COC may be mixed. Reduction in burden is much appreciated however the opinions may conflict when it comes to reliability and comprehensiveness of the valuation done as a whole by a single valuer. In hindsight it is pertinent to look at the NCLT’s decision in the case of M/S Ranasaria Poly Pack Pvt. Ltd vs M/S Uniworld Sugars Pvt. Ltd.(2022) ibclaw.in 473 NCLT The above case presented a situation where the valuation done by the two RVs was different and in such a case a third RV was appointed whose estimate was drastically low compared to the two previous estimates and therefore the tribunal rejected the third valuation and estimated the liquidation value to be average of the previous two valuation. Even though the rejection was made as regulation 27 was not followed the case is pertinent here to discuss because the ruling was heavily guided by the fact that such a low estimate will result in low liquidation projections which will adversely affect the claims of the operational creditors, employees and other stakeholders. This observation by NCLAT substantiate that CIRP regulations aims to maximise the value so that interest of all the stakeholders is dealt equitably. However, under the proposed single RV model the same may not be taken care of as only one RV is primarily responsible for the valuation report, the role of second RV is only limited to providing any inputs or valuation of an asset class when asked. Putting the responsibility of the entire valuation process on a single RV poses two problems first that it may lead to under or over valuation projections which cannot be checked through by appointing the third RV in contrast to the existing CIRP laws. Secondly this can also become a conflicting point for COC as they can put question on such unilateral valuations thereby stalling the insolvency process and prompting unnecessary legal challenges.
Another issue which the single valuer model presents is the ambiguity in level of comprehensiveness required in the disclosure of inputs. The amendment simply provides that if any input or valuation is done by the second RV the same shall be disclosed by the primary RV in the valuation report. More needs to be explained regarding the degree of the disclosure which needs to be made. Under the single valuer model disclosure sufficiency becomes more important because the responsibility of entire valuation solely rests on one valuer, therefore the disclosure of the inputs should be adequately made so as to prevent any biased decision or compromise in the quality of valuation. Issue related to confidentiality is also crucial under the proposed amendment. The NCLT has in a recent ruling observed the importance of confidentiality in the valuation process. In the instance case the value projected post valuation closely mirrored by the bid presented by resolution professional. Chances of such a breach is more under the proposed amendment since the primary responsibility rests with a single RV.
Another points to be deliberated upon is the issue relating to breach of due care and negligence on part of the valuer, the provision for two RV for different asset class under the current CIRP regulations provides for mechanism for check and balance where there is less risk of reliance on single judgement at the same time it also develops stakeholders’ confidence in the valuation procedure. It was to address this issue that the Amendment to rule 35 of CIRP to appoint third RV was brought and the same is supported by the IBBI’s April consultation paper. Similar issue has come up before the New Delhi bench of the NCLT in a case wherein the issue of incorrect valuation and breach of care was raised. Such issues can become more frequent if the proposed amendments are incorporated without addressing the concern.
Conclusion and Way Forward
While the other three proposals outlined in the consultation paper are much appreciated offering constructive development especially the one concerning creditors’ rights to pursue guarantors and enforce guarantees as observed by the Supreme Court in the Lalit Kumar Jain v. Union of India case Ors. (2021) ibclaw.in 61 SC, the proposed amendment regarding the valuation system relying solely on a single registered valuer (RV) for the entire valuation process as whole raises significant concerns about the process’s quality and integrity. It is imperative for all stakeholders, including the Committee of Creditors (COC), to engage in thorough deliberations on these challenges. A balanced solution must be sought that takes into account the financial burden and administrative efficiency, while also guaranteeing transparency and integrity of the valuation process within the insolvency resolution framework.
