Appointment of Professionals & Third Valuation Report
Insolvency and Bankruptcy Code, 2016.
# Section 20. Management of operations of corporate debtor as going concern. -
(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.
(2) For the purposes of sub-section (1), the interim resolution professional shall have the authority-
(a) to appoint accountants, legal or other professionals as may be necessary;
(b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process;
(c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property:
Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.
(d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and
(e) to take all such actions as are necessary to keep the corporate debtor as a going concern.
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
# Regulation 27. Appointment of Professionals.
(1) The resolution professional shall, within seven days of his appointment but not later than forty-seventh day from the insolvency commencement date, appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor in accordance with regulation 35.
(2) The interim resolution professional or the resolution professional, as the case may be, may appoint any professional, in addition to registered valuers under sub-regulation (1), to assist him in discharge of his duties in conduct of the corporate insolvency resolution process, if he is of the opinion that the services of such professional are required and such services are not available with the corporate debtor.
(3) The interim resolution professional or the resolution professional, as the case may be, shall appoint a professional under this regulation on an arm’s length basis following an objective and transparent process:
Provided that the following persons shall not be appointed, namely: -
(a) a relative of the resolution professional;
(b) a related party of the corporate debtor;
(c) an auditor of the corporate debtor at any time during the period of five years preceding the insolvency commencement date;
(d) a partner or director of the insolvency professional entity of which the resolution professional is a partner or director.
(4) The invoice for fee and other expenses incurred by a professional appointed under this regulation shall be raised in the name of the professional and be paid directly into the bank account of such professional.
# Regulation 35. Fair value and Liquidation value.
(1) Fair value and liquidation value shall be determined in the following
(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.”.
Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# Regulation 35. Valuation of assets intended to be sold.
(1) Where the valuation has been conducted under regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 or regulation 34 of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017, as the case may be, the liquidator shall consider the average of the estimates of the values arrived under those provisions for the purposes of valuations under these regulations.
(2) In cases not covered under sub-regulation (1) or where the liquidator is of the opinion that fresh valuation is required under the circumstances, he shall within seven days] of the liquidation commencement date, appoint two registered valuers to determine the realisable value of the assets or businesses under clauses (a) to (f) of regulation 32 of the corporate debtor:
Provided that the following persons shall not be appointed as registered valuers, namely: -
(a) a relative of the liquidator;
(b) a related party of the corporate debtor;
(c) an auditor of the corporate debtor at any time during the five years preceding the insolvency commencement date; or
(d) a partner or director of the insolvency professional entity of which the liquidator is a partner or director.
(3) The Registered Valuers appointed under sub-regulation (2) shall independently submit to the liquidator the estimates of realisable value of the assets or businesses, as the case may be, computed in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017, after physical verification of the assets of the corporate debtor.
(4) The average of two estimates received under sub-regulation (3) shall be taken as the value of the assets or businesses.
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15th February 2022
Insolvency and Bankruptcy Board of India
Discussion Paper; Engagement and appointment of ‘professionals’ in a corporate insolvency resolution process
22. It is proposed that a sub-regulation (5) be added under regulation 27 of the CIRP Regulations and it shall state the following:
“(5) The interim resolution professional or the resolution professional, as the case may be, shall perform the following actions before making an appointment under this Regulation:
(a) The request for appointment of professional must be laid before the CoC for ratification.
(b) Such request for appointment must be accompanied by a statement in writing providing the reason and justification for the appointment by way of cost benefit analysis, the scope of work assigned, the absence of such services in the corporate debtor, the manner of selection and reasonableness of cost for such service.
(c) The request must also be accompanied by a declaration by the IP that,
(i) he has exercised reasonable due-diligence before proposing such appointment
(ii) the appointment is not of a related party
(iii) he has obtained an undertaking that the same professional(s) will not associate himself, in any way, with other stakeholders involved in the process, and
(iv) requisite disclosures have been made regarding such appointments.”
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13th April, 2022
Insolvency and Bankruptcy Board of India
Consultation paper on issues related to reducing delays in the corporate insolvency resolution process
Part 4: Significant difference in valuations during a CIRP and appointment of a third valuer
24. Regulation 27 (1) of the CIRP Regulations provides that, the RP shall, within seven days of his appointment but not later than forty-seventh day from the insolvency commencement date, appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor in accordance with regulation 35.
25. Regulation 35 provides that the fair value and liquidation value of the CD shall be determined by two registered valuers and the values be computed in accordance with internationally accepted valuation standards. It also provides that, “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 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.” The assessment of difference in the valuation has been left to the opinion of the RP leading to scope for discretion.
26. The valuation exercise is an important concern in the insolvency process as it plays an important role in decision making by the CoC. It helps to determine the minimum entitlement to operational creditors and to dissenting financial creditors. Though not a floor price for the assets, it serves as a guidance for assessing the resolution plans.
27. The exercise of valuation is by nature subjective. Given that there are no notified standards in India and registered valuers tend to use different standards, which could lead to difference in approach and methodologies adopted for valuation. Further, the assessment or understanding of valuation reports have to be done discounting for several caveats and assumptions also. Differences also occur with the kind of asset being valued and approach used has to be nuanced.
28. Valuation is also required under other legislations. Section 260 of the Companies Act, 2013, requires the company administrator to prepare a valuation report. Here there is requirement of only 1 (one) valuer to be appointed. Similarly, under SEBI (Issue of capital and disclosure requirements) 2018, which provide that where specified securities are issued on a preferential basis for consideration other than cash, the valuation of the assets in consideration for which the equity shares are issued shall be done by an independent valuer, which shall be submitted to the stock exchanges where equity of share of issuer are listed. The Code also makes a departure for the fast-track insolvency resolution process where only one registered valuer is required to be appointed. International practice also shows that valuation is done by one valuer.
29. The Handbook on Policy, Standards and Procedures for Real Estate Valuation by Banks and HFIs in India issued in 2011 by IBA and NHB states the following:
‘1.9 Obligations of the Banks/HFIs
Wherever the value of the property is more than Rs.10 crore, two valuers of Category A or B shall be appointed in order to get the valuation done. In case the difference in the valuation arrived at by both the valuers is not more than 15 percent, the average value is considered. In case the difference is more than 15 per cent, then, a third valuer, who shall also be a senior valuer in the A or B category, shall be appointed and the bank/HFI shall take an appropriate considered decision on the value.’
30. Proposal: In order to remove ambiguity, to reduce any potential litigation and to provide a guiding factor in the appointment of the third valuer, it is proposed that the CIRP Regulation be amended to provide a threshold of 25% difference for appointing a third valuer. Different thresholds of difference for each asset class may also be considered, if required. Draft amendment is placed in Annexure A.
Proposed Amendment to CIRP Regulations
v. In the principal regulations, under regulation 35, an explanation, shall be added namely:-
“Explanation: ‘Significantly different’ for the purposes of this regulation shall mean a difference of 25 per cent in value.”
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Case Laws;
i). NCLT Ahmedabad (01.03.2021) in Dinesh Sugnomal Kanjani Vs. Sunil Kumar Agarwal RP For H M Industrial Pvt Ltd & Anr [IA 390 of 2020 in CP(IB) 81 of 2019 ] held that;
that, as per the provision of Section 18(c) (d) & (g) r.w. Section 20 (2) (a) the IRP is well within his power to appoint Valuer. It is also not in dispute that there is no requirement under the provisions of the Code' to take approval of such appointment by IRP from CoC so far as the present issue is concerned. Further to that as per Section 17 IRP is obliged to manage the affairs of the Corporate debtor. Thus, there is complete authority with IRP to conduct Corporate Insolvency Resolution Process (CIRP) as per the provisions of law and no legal restrictions exist and the post facto approval is also not required in such situation.
It is also noted that even RP is not required to take any approval from the COC in this regard as RP is competent to do so in terms of provisions of Section 23(2) r.w. Section 25(2) (d) of Insolvency & Bankruptcy Code, 2016 for such appointment no approval is required under Section 28 of the Insolvency & Bankruptcy Code, 2016.
ii). NCLT Chandigarh (24.10.2017) In Punjab National Bank Vs. M/s James Hotels Ltd. [CA Nos. 165/ 2017 and 164/ 2017 in CP (IB) No.15/Chd/CHD/2017] held that;
the instant application is disposed of with the directions to the Resolution Professional that he is at liberty to appoint a new Chief Financial Officer for the purposes of signing the financial statements
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Arvind Mangla
Insolvency Consultant
Dated; 08.05.2022
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