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Things to Know about Insolvency and the New Insolvency Resolution Process

Things to Know about Insolvency and the New Insolvency Resolution Process

What is Insolvency?

Insolvency is the situation where a firm or an individual can no longer meet its financial obligations with its lenders as debts become due. It may occur even when liabilities exceed the company’s assets. Generally, in situations like this, the Liquidation Value of the stressed asset is determined and the proceeds from the sale are shared between the creditors and other stakeholders. However, recently there have been changes through amendments to Insolvency and Bankruptcy Board of India (IBBI) insolvency resolution process.

What’s New?

It is now mandatory to consider both the Fair Value and Liquidation Value for stressed asset valuation. The resolution professional will appoint 2 registered valuers to determine these 2 values.

Fair Market Value and Liquidation Value – What’s the difference?

Fair Market value (FMV) is an estimate of the market value of a property or asset. The asset can be bought or sold, and the transaction happens between an unpressured buyer and an unpressured seller.

Whereas

Liquidation Value is the most probable price of an asset when it is allowed insufficient time to sell on the open market. Assets are usually assessed for Liquidation Value when the company goes out of business and is unable to pay bills due to its creditors. Liquidation Value is typically lower than Fair Market Value.

The New Insolvency Resolution Process at a Glance

  1. The resolution professional will provide both the fair and the liquidation value to each member of the Committee of Creditors (CoC). Confidentiality of both the values will be maintained by all the people involved – The resolution professional, the registered valuers and the creditors.
  2. The resolution professional will send out an invitation to all the prospective resolution applicants. Upon receiving the invitation, the resolution applicants have maximum 30 days to submit the resolution plans.
  3. The resolution plan will include measures that can maximise the value of the assets of the insolvent company.
  4. The resolution plan approved by the CoC will be submitted to the National Company Law Tribunal by the resolution professional at least 15 days before the maximum period allowed for the completion of the corporate insolvency resolution process expires.

Benefits of the New Resolution Process

  • Clarity in the resolution plans invitation as well as the approval process
  • Less scope of litigation by the rejected bidders since the evaluation matrix is pre-approved by CoC and is intimated to all the prospective resolution applicants
  • The process is more systematic as the format of the invitation of bids from resolution applicants and the timelines are defined
  • Confidentially is maintained throughout the process

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