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.
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 (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.
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.
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