The article on Confidentiality of Liquidation Value – IBC- UNDER THE LIGHT OF Videocon’s CIRP has been written by RAJRISHI RAMASWAMY.
The Insolvency and Bankruptcy Code, 2016 (“IBC”) has assumed the mammoth position of being the primary law regulating insolvency regulation and liquidation proceedings of corporate persons, even though alternate modes of redressal exist, especially for entities not crossing the threshold limit.
Since its inception in 2016, a wide array of cases relating to Corporate Insolvency Resolution Processes (“CIRP”) have been filed before the Company Law Tribunals and the Supreme Court.
Through these cases, the Tribunals and Courts have formulated rules and made many pertinent observations on various dimensions of the IBC.
One such observation was made by the Mumbai Bench of the National Company Law Tribunal (“NCLT”), in its Order dated 08.06.2021 in the Videocon Industries matter.
The Tribunal discovered that the liquidation value offered by the Resolution Applicant (“RA”), Twin Star Technologies, Ltd. was almost exactly similar to the asset value of the company.
This article attempts to explain liquidation value, the need for it to be confidential, and link the same to the aforementioned NCLT Order.
The term “liquidation value” is defined under Regulation 2(k) of the CIRP Regulations, 2016 to be “The estimated realizable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date.”
Pertinently, the definition clause was added by way of a notification by the Insolvency and Bankruptcy Board of India (“IBBI”) dated 6th February 2018 (“2018 Amendment”).
Before this notification, the definition of “liquidation value” was given under Regulation 35 along with the mode of determining this value and further procedures to be followed by the Resolution Professional (“RP”) after the value has been determined.
Presently, Regulation 35 also provides for the calculation of the “fair value” of the assets of the Corporate Debtor (“CD”). However, one significant aspect of this regulation has been retained post the 2018 Amendment, which deals with confidentiality of the liquidation value now under sub-regulation (3).
As per this sub-regulation, “the RP and all registered valuers shall maintain the confidentiality of the fair value and the liquidation value”.
Confidentiality of the Liquidation Value
Confidentiality of the liquidation value was alien to the IBC until an amendment was made to the CIRP Regulations, 2016, on 31st December 2017. This amendment added sub-regulation (3) to Regulation 35, which provided that once the liquidation value has been determined, the RP is to obtain an undertaking from every member of the Committee of Creditors (“CoC”) to the effect that they shall not disclose the value and keep it confidential and also that they will not use the value to cause undue gains or losses to itself or any other person.
After obtaining this undertaking, the RP can share the liquidation value with the members of the CoC, in electronic form. The sub-regulation also mandates compliance of the members of the CoC with the provision under Section 29(2) of the IBC.
Following the 2018 Amendment, to incorporate the requirements related to fair value, sub-regulation (3) was aptly amended. Presently, it is in Regulation 35(3) that the rule relating to the confidentiality of regulations on part of the members of the CoC can be found.
As regards confidentiality on part of the RP and registered valuers, too, there have been similar amendments and presently, Sub-regulation (3) of Regulation 35 provides that the RP and registered valuers (defined under Regulation 2(m) to be following the Companies Act) are to maintain the confidentiality of both the fair value and the liquidation value.
Why is the Liquidation Value to be Confidential?
The reason behind the CIRP Rules mandating confidentiality of the Liquidation Value can be understood through the phrase “cause an undue gain or undue loss”, used under Regulation 35(2).
It is clear from the phrase that the primary intention to maintain the confidentiality of liquidation values is to ensure no undue losses or gains are caused to other companies or made by the member of the CoC, respectively.
Few other reasons for the same include:
To ensure that the liquidation value does not become a ballpark figure across resolution plans; in layman terms, when the liquidation value becomes known to prospective RAs, not many of them may be willing to provide higher returns to the creditors of the CD in their resolution plans. This is detrimental to the interests of the CD and thus to avoid such a situation, the practical approach would be to make the liquidation value confidential.
To ensure fair competition among resolution applicants, so that one RA is not in an advantageous position compared to other RAs, due to knowing what the liquidation value is.
The admission Order for Videocon’s CIRP was passed by the Mumbai Bench of the NCLT on 8th June 2018, thus kickstarting Videocon’s restructuring under the IBC.
The latest significant development in the CIRP took place when the Mumbai Bench of the NCLT passed a 47-page Order that approved the resolution plan submitted by Twin-Star Technologies Ltd.
Twin Star’s bid in its resolution plan was Rs. 2,962.02 crore and the liquidation value of Videocon Industries (comprising of 13 companies) was valued at Rs. 2,568.13 by the registered valuers. Noting the proximity between these values, the NCLT proceeded to direct the IBBI to examine in-depth the process adopted by Twin-Star in arriving at its bid value, keeping in mind the confidentiality clause. The NCLT also emphasized unscrupulous compliance with the confidentiality clause.
The IBC and the Rules related to it are at their nascent stages. In such a time, it would be easier to identify shortcomings and effect amendments to mitigate them. Furthermore, the Preamble of IBC states that one of its objectives is to “balance the interests of all the stakeholders”.
Keeping in mind the adverse effects that revealing the liquidation value much earlier in the CIRP can have for the CD and the creditors, it is of utmost necessity to ensure checks and balances on the same.
The Videocon CIRP might be a precedent-setter concerning the serious manner in which confidentiality of liquidation values are viewed by Adjudicating Authorities.