In a move that will help deter cheap asset sales of companies facing insolvency proceedings, the bankruptcy regulator amended its regulations effective Jan. 1, 2018.
The Insolvency and Bankruptcy Board of India has now said it’s not mandatory to disclose the liquidation of the company in the information memorandum. So far, the information memorandum, prepared by a resolution professional for potential bidders, had to necessarily mention this .
The regulator’s decision came after concerns that mandatory disclosure of the liquidation led to people marking down their bids below this , Divyanshu Pandey, a lawyer practicing insolvency law at law firm JSA told BloombergQuint.
The of the corporate debtor should be assessed on a going concern basis and not necessarily on the basis of liquidation . If you realised that the liquidation is Rs 100, you would mark down your proposal and say that I will buy it for Rs 90 or even Rs 100 but not more than that. The of the company as a going concern could be slightly higher and so now, economic will have to considered rather than just ascribing a liquidation to the assets.Divyanshu Pandey, Partner, JSA
Bidders will now have to ascribe a to the business as a whole on the basis of financial information, asset , cash-flows in the future and this will help in realising the maximum for the corporate debtor, he added.
The move is to cater to the request of banks and other lenders that the reference to the liquidation being made publicly available may, in some cases where there are not enough bidders, depress the of the assets of the corporate debtor, Nilang Desai, an insolvency law partner at AZB told BloombergQuint.
As per the amendment, liquidation can now be disclosed to the Committee of Creditors on a confidential basis only after resolution plans have been submitted.
According to Pandey, the other benefit of this change in regulation will be in how financial creditors respond to resolution plans. He explained that the disclosure of a low liquidation in the memorandum could prompt dissenting financial creditors to approve just about any resolution plan. Going forward, since they won’t be privy to this information, financial creditors will adopt a more holistic approach while assessing resolution plans, Pandey said.
Besides a change in the disclosure of liquidation , regulations have also been amended to clarify the definition of a dissenting financial creditor. Earlier, it was not clear if a dissenting financial creditor would also include those creditors who abstained from voting on a resolution plan. The amended regulations clarify that this category would qualify as a dissenting financial creditor.
Now, if a financial creditor abstains from voting on a resolution plan it will be counted as a no, Desai explained.
This has two benefits - it makes the voting count clear as opposed to leaving it open to interpretation. And two, there was some controversy as to if I merely abstain and I don’t say no to a resolution plan, do I then get the liquidation ? The change in definition makes it clear that this category will get the liquidation .Nilang Desai, Partner, AZB
The dissenting financial creditors are promised liquidation due to them and the law requires resolution plans to identify specific sources of funds for this purpose. This liquidation , due to dissenting financial creditors, has to paid before any recoveries are made by the financial creditors who voted in favour of the resolution plan.
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