Insolvency and Bankruptcy Code: IBBI Proposes Revised Valuation Norms to Capture Intangible Assets in Distressed Companies

The Indian government is set to revise the valuation norms under the Insolvency and Bankruptcy Code (IBC), 2016, with the Insolvency and Bankruptcy Board of India (IBBI) taking the lead. This initiative aims to address inconsistencies and a lack of uniformity in valuing distressed companies by ensuring that intangible assets are fully accounted for. Currently, assessments often fail to capture the full worth of assets like brand value, intellectual property, customer relationships, and goodwill, as well as the overall going-concern value of a business.

The IBBI has proposed a single set of harmonised valuation standards to be applied consistently across all valuation processes under the IBC, including corporate insolvency resolution processes (CIRP), liquidation, and pre-packaged insolvency resolution processes (PPIRP). This move seeks to promote reliability and professionalism in the valuation ecosystem.

Furthermore, the current definition of "fair value" has been found wanting, as asset-specific estimates often neglect the corporate debtor's unified worth. To rectify this, the IBBI is advocating for a shift from asset-specific assessments to a "holistic valuation" method that better reflects the debtor's commercial and economic value.

Existing rules require resolution professionals to appoint two valuers to determine fair value and liquidation value, which can increase costs and slow down insolvency proceedings, especially for smaller companies. The IBBI has suggested allowing resolution professionals to appoint a single valuer per asset class for companies below a certain threshold, unless the committee of creditors, citing specific complexities, decides otherwise.

Impact:

This revision is expected to lead to more accurate valuations of distressed companies, ensuring that creditors can recover more value. It will also bring greater clarity and consistency to the insolvency process, potentially making it more efficient.

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Difficult Terms:

Insolvency and Bankruptcy Code (IBC): A law in India that governs the process of insolvency resolution and bankruptcy for companies and individuals.

Insolvency and Bankruptcy Board of India (IBBI): The regulatory body that oversees insolvency and bankruptcy proceedings in India.

Intangible Assets: Assets that lack physical substance but have value, such as brand names, patents, copyrights, goodwill, and customer lists.

Fair Value: The estimated price at which an asset would change hands between a willing buyer and a willing seller, each having reasonable knowledge of relevant facts.

Liquidation Value: The net realizable value of an asset if it were sold separately.

Resolution Professional (RP): A professional appointed to manage the insolvency process for a corporate debtor.

Committee of Creditors (CoC): A group of creditors who have the primary decision-making power in a corporate insolvency resolution process.

Corporate Insolvency Resolution Process (CIRP): The process under the IBC to resolve the insolvency of a corporate debtor.

Liquidation: The process of winding up a company and selling its assets to pay off its debts when resolution is not possible.

Pre-packaged Insolvency Resolution Process (PPIRP): A process where a resolution plan is agreed upon by the corporate debtor and its operational creditors before it is filed with the adjudicating authority.