Dissenting lender to be paid liquidation value

The insolvency regulator has amended regulations to allay creditor concern on valuation of bids for insolvent companies. The Insolvency and Bankruptcy Board of India (IBBI) has also cleared the confusion over what constitutes a dissenting lender.

Amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations say liquidation value to be paid to dissenting lenders will have to be kept confidential.

Earlier, this value was disclosed in the information memorandum to be given to the committee of creditors. This used to lower the value of bids, since these are based on liquidation value. The latter value is arrived at by assuming assets of the companies are sold in parts. Less than the enterprise value, which takes a company as a running concern and factors in future cash flow. Bids should ideally be based on the enterprise value.

Lenders had earlier asked IBBI to devise a mechanism so that the liquidation value is not known to bidders.  The resolution professional will provide the said value to every member of the committee of creditors (CoC), after an undertaking from them on confidentiality of the value, according to the amendments that take effect from Tuesday.

A lender which does not agree with the insolvency resolution plan of a company approved by its CoC receives the “liquidation” value of the company.

The regulator clarified that dissenting creditors mean those either voting against or absent from voting for the resolution plan in the CoC. The latter must approve a resolution plan prepared by the resolution professional by at least 75 per cent vote.

This means if in a 10-member CoC, eight lenders agree to a resolution plan, one voted against and one was absent, there would be two dissenting lenders. Earlier, there was confusion on whether dissenting creditors will mean one lender or two lenders in the example given above.

Nilesh Sharma of Dhir & Dhir Associates say the new regulations will address the concern of lower bid values for insolvent companies and settle the issue of dissenting creditors. Sumanta Batra, managing partner of Kessar Dass & Associates, said the regulations would contain the abuse of liquidation value, as the real value of a company could be much higher.

He said treatment of abstaining voters as dissenters would ensure financial creditors vote either way but not abstain.

In a separate development, the Rajya Sabha witnessed heated argument during the debate over a Bill to replace an ordinance amending the Insolvency and Bankruptcy Code.  The house later passed the Bill.

Finance Minister Arun Jaitley said the government had entered into uncharted territory and would continue to modify the law on the issue. Responding to the concerns of members, he said the whole effort was to make the banking sector robust and detach it from politics.

“You need a strong banking system ...You need banks which are able to lend money to large industries, to infrastrucute projects, to small industry, for educational loans. You need a robust banking system,” he said.

Jaitley said during an insolvency process, banks and unsecured creditors will have to take some haircut and if the same management came back, nothing would change.

Former finance minister P Chidambaram said the Bill would benefit foreign companies over Indian firms. "It is quite possible that asset reconstruction companies and alternative investment bodies will turn out to be the bidders. Most Indian companies that go through the resolution process will pass from an Indian to a foreign management," he said.

"The second danger is the concern that there is no bidder for a company as a going concern and we will end up selling these companies in bits and pieces. That is the worst outcome of this insolvency code," he added.