This post has been contributed by Mr Bhumesh Verma. He is currently the managing partner of Corp Comm Legal, which he set up after spending 23 years with some of the best Indian law firms. He is a law graduate from Delhi University and also a Chevening Scholar. Mr Verma is experienced in corporate and commercial matters, M&A, FDI, financial and technical collaborations, private equity, venture capital, due diligence, regulatory and strategic advice. He has been recognised among India’s Top 100 Lawyers by the Indian Business Law Journal.
Lenders’ fear about valuation under Insolvency and Bankruptcy Code, 2016
Indian Insolvency and Bankruptcy Code (IBC) has been recently amended through promulgation of an Ordinance. The underlying intent of the government is to restrict wilful defaulters, persons associated with non-performing assets and defaulters in complying with the existing laws from bidding for assets of stressed companies.
While certain sections quarters has welcomed the amendment to IBC preventing attempt by promoters to regain control of the stressed company management at the possible lowest valuation of assets of stressed company, some lenders fear that this move may result in distress of assets valuation by non-promoter bidders as they may not realize the intrinsic or real value of the assets – in their view it may ultimately cause considerable loss to the lenders in recovery of their loans.
Such lenders feel that if the promoters are allowed to bid for the assets of the stressed companies, they are likely to bid for higher value which will be considered as a benchmark for other bidders.
It is an undeniable fact that prior to the enactment of IBC, existing procedures for any company winding up, company restructuring or recovering from the debt by the lenders were lengthy antime-consumingng. The promoters were taking advantage of the situation and would never let the control get out of their hands.
With the enactment of IBC, procedures are established for the fast track exit of companies and quick recovery of loans.
Promoters are primarily responsible for the formation, mismanagement, indebtedness and insolvency of such companies. If any company goes into debt, promoters are certainly responsible for that debt as they have had the knowledge of circumstances leading to the company landing into debts. If the same promoters are allowed to bid for the assets of the stressed companies, there is a good possibility of them regaining the control of the company with minimal effort and again utilize the control for their own benefits.
In my view, the lenders should not fear regarding valuation of stressed companies’ assets as any bidding is likely to be conducted in line with the existing fair market value of the assets. If the disqualified persons are allowed to bid for the stressed assets, it will defeat the very purpose of the IBC as it is enacted with the intent of the providing fair resolution (to the maximum extent possible) to all the stakeholders involved.
With the serious implementation of IBC, a fair chance will be accorded to all genuine stakeholders. Hence, the lenders’ fear about the distressed valuation of the stressed company assets seem unfounded.
Research and inputs by Paruchuri Baswanth Mohan