Responsibilities do Valuation Experts have in the IBC process

The core of the success of implementing insolvency laws is the concept of valuations. These Valuation Experts have an important role in determining the fair market of assets and liabilities during the corporate insolvency resolution process (CIRP) and are calculated and analysed by valuation experts. 

Overview of the IBC Process

When the corporate debtor faces financial distress, there are several financial reports, records, information, documents, etc. that have to be submitted. Stakeholders and insolvency professionals may not have the required knowledge to make accurate valuations during this time. The Insolvency and Bankruptcy Code, 2016 (hereon forward known as “the IBC”) reflects the importance of valuations at different stages of the insolvency process. The Adjudicating Authority requires a valuation to decide the admission or rejection of the application for initiating the CIRP. The insolvency professional can use the assistance of the valuation experts in drafting the resolution plan that decides the future of the corporate debtor. During the liquidation process, valuation experts are required in the sale of the assets of the corporate debtor and the distribution of proceeds from the sale of these assets. Read realted article: Role of Authorised Representative under IBC, 2016

Who Are Valuation Experts?

Valuation experts in the insolvency process are the registered valuer in the insolvency process. As per Rule 3 of the Companies (Registered Valuers and Valuation) Rules, 2017 (the Regulations, 2017) an individual is eligible to be a registered valuer if he is a valuer member of a registered valuers organisation (RVO), recommended by the RVO of which he is a valuer member for registration as a valuer, has passed the valuation examination, not a minor, not been declared to be of unsound mind, not an undischarged bankrupt, an Indian resident, not been convicted by any competent court, a fit and proper person. As per Rule 4 of the Regulations, 2017, individuals should have certain qualifications, such as a post-graduate degree or post-graduate diploma, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least three years of experience in the specified discipline,  a Bachelor’s degree or equivalent, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least five years of experience in the specified discipline,  or membership of a professional institute established by an Act of Parliament enacted for regulation of a profession with at least three years experience after such membership. 

Here define who valuation experts are, their qualifications, and their significance in the financial ecosystem and mention their credentials, like certifications (e.g., registered valuers) and professional affiliations. Read realted article: Treatment of secured and unsecured creditors in insolvency

What are the Key Responsibilities of Valuation Experts in the IBC Process

For different stages of the IBC process, the responsibilities of valuation experts vary on the state of the insolvency, bankruptcy, or liquidation process:

i) Pre-Admission Stage

Before the admission of the application of initiating the CIRP, valuation experts can conduct valuations for insolvent companies or individuals. These valuations are necessary to decide whether or not the application should be admitted or rejected, such as the nature of the debt, the requirements of minimum default for insolvency or bankruptcy being met, etc.

ii) Resolution Process

As per section 20(2) of the IBC, the interim resolution professional (IRP) is to appoint any professionals that may be deemed necessary. The resolution professional (RP) must appoint any professionals they may need for the completion of the CIRP under section 25(2). During the CIRP, the skills of valuation experts are required to accurately value the assets of the corporate debtor, including fixed, current, and intangible assets, and intellectual property. They also ensure accurate calculations in the resolution plan to ensure that creditors receive a fair assessment and repayment of their debts.

iii) Liquidation Process

As per Regulation 35 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereon forward known as “the Liquidation Process Regulations”) the liquidation has the authorisation to appoint 2 registered valuers for determining the realising value of assets of the corporate debtor within 7 days of the liquidation commencement date. Hence, valuation experts assist the liquidators and creditors in determining realistic sale prices and re-evaluating assets for fair liquidation values. They also have the responsibility to manage and update the valuation records if liquidation is a phased process.

What are the Methods Valuation Experts Use in the IBC Process

Under the IBC, valuation experts use specific methods to conduct valuations, such as the Market approach, Income approach, and Cost approach. These methods ensure consistency, fairness, and transparency in the resolution process while adhering to the insolvency framework. The type of method that needs to be used depends on the nature of the asset to be valued, the availability of inadequate inputs or information and its reliability, etc. Depending on the situation a combination of these approaches may also be used. To understand why and when the valuation experts use a particular type of valuation method, go through the following:

• Market Approach: A market approach is a valuation approach that uses prices and other relevant information generated by market transactions that involve identical or comparable assets, liabilities, or a group of assets and liabilities. This approach is used where the asset to be valued or a comparable or identical asset is traded in the active market, there is a recent and orderly transaction in the asset to be valued, or there are recent observable transactions in substantially similar assets.
• Income Approach: The income approach converts maintainable or future amounts, such as cash flows or income and expenses, to a single current amount. The fair value measurement is determined based on the value indicated by current market expectations about those future amounts. The registered valuer may use the income approach where the assets do not have any market comparable or comparable transaction, where the asset has fewer relevant market comparables, and where the asset is an income-producing asset for which the future cash flows available can reasonably be projected. 
• Cost Approach: In this approach the amount that would be required currently to replace the service capacity of an asset. The registered valuer applies the cost approach when the asset can be quickly recreated with substantially the same utility as the asset to be valued, in cases where the liquidation value is to be determined, or the other two approaches cannot be used. 

What are the Challenges Faced by Valuation Experts in the IBC

Adhering to the strict timelines under the IBC, information should be collected and analysed in a timely manner. The resolution professional or liquidator should use the expertise of the valuation expert when needed to avoid any delays in the insolvency or liquidation proceedings. However, valuation experts may face obstacles in complying with the period under the IBC. One of the most common hindrances include a lack of transparency or the insolvency professional or liquidation may provide them incomplete financial records. Providing accurate valuations depends on many factors, many of which are unpredictable. Valuation experts often face market volatility which impacts fair valuations. To draft a suitable resolution plan may be difficult for the registered valuer as they have to balance the interests of all stakeholders. The pressure of stakeholders with their conflicting interests only delays the resolution process. 

What is the Importance of Accurate Valuation in the IBC Process

Accurate valuation is important during the insolvency or liquidation process allowing the Committee of Creditors to make informed decision-making, creditors can be fairly compensated based on their claims submitted, and contributes to market confidence by ensuring that distressed assets are sold at a fair price to attract potential buyers. The accuracy of valuation experts enhances transparency in the insolvency process and builds trust among the stakeholders, including debtors, creditors, investors, etc.

Regulatory and Compliance Aspects

As per the Handbook given by the Institute of Chartered Accountants of India, registered valuers have to act ethically, which means that they have to have integrity, fairness, professionalism, good faith, respecting the public interest. Valuation experts should also employ attributes of due diligence, and improve their skills with the dynamic market conditions. The IBBI is the authority empowered to determine the standards of the valuation experts and grants the certificate of registration to individuals as registered valuers. Valuation experts must adhere to ethical standards and valuation reporting guidelines.

Conclusion

Valuation experts are not only important for procedural mechanisms but also for fairness, transparency, and compliance with laws, rules, and regulations. Understanding their roles and importance during different stages of CIRP is crucial for stakeholders. Giving accurate valuations is critical to promote confidence in investors, facilitating the insolvency, bankruptcy, or liquidation process of the corporate debtor, and the efficiency of insolvency laws. While the current legal system will be constantly amended to match the changing insolvency system, the responsibilities of valuation experts will increase. Hence, stakeholders and insolvency professionals need to recognise the importance of qualified valuation experts to understand the complex resolution or liquidation procedures.

FAQs

What are the primary qualifications for a valuation expert in IBC?

As per Regulation 4 of the Companies (Registered Valuers and Valuation) Regulations, 2017, an individual should have the following qualifications and experience to be eligible:

• post-graduate degree or post-graduate diploma, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least 3 years of experience in the specified discipline
• a Bachelor’s degree or equivalent, in the specified discipline, from a University or Institute established, recognised or incorporated by law in India and at least 5 years of experience in the specified discipline.
•  membership of a professional institute established by an Act of Parliament enacted for the purpose of regulation of a profession with at least 3 years of experience after such membership.

How does asset valuation impact the resolution process?

Asset valuation is an important part of the resolution process as it determines the future of the corporate debtor, protects the interests of the stakeholders, drafts the resolution plan, assesses the risks associated with financial reporting, and ensures that the financial statements comply with accounting standards and regulations. 

Can valuation experts face liability for inaccurate assessments?

Yes, the valuation experts face liability for inaccurate assessments. The Central Government can take disciplinary action against such experts and suspend or cancel the registration of the registered valuer as per Regulation 15 of the Companies (Registered Valuers and Valuation) Regulations, 2017.