Conundrum of Liquidation Value Vs Resolution Value

Bridging the gap between the Resolution Plan value and the Liquidation Value: Not a mandate


Liquidation value as defined under Regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, is the estimated realizable value of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date. While a Resolution plan, as defined under Section 5(26) of the IBC, 2016, is a proposal that aims to provide a resolution to the problem of the corporate debtor’s insolvency and its consequent inability to pay off its debts. This paper deals with the question of whether the value of a resolution plan can be lower than that of the estimated liquidation value of a Corporate Person going under liquidation and whether the IBC, 2016 provides a provision for the same.

The Apex Court in a recent landmark judgment in the case of The Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors., dealt into this question extensively which will be discussed in detail below. Further, while dealing with this question in the abovementioned judgment, another question arose in front of the Supreme Court which is regarding the withdrawal of a resolution plan as per section 12 A of the Code, which is also highlighted in this paper.

The Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors. (Supreme Court)[1]

  • Background of the case:

Indian Bank the forerunner of the CIRP, filed an application under Section 7 of the I&B Code on June 12, 2017, against United Seamless Tubular Private Limited (Corporate Debtor). The said application was subsequently admitted by National Company Law Tribunal, Hyderabad.

The total debt incurred by the Corporate Debtor was Rs.1897 Crores. After the appointment of 3 Registered Valuers, the estimated liquidation value of the company was placed at Rs.597.54 Crores.

The Resolution Professional received four Resolution Plans altogether from which the Resolution Plan submitted by Maharashtra Seamless Limited (MSL) of Rs.477 Crores, was approved by the majority of the Committee of Creditors by 87.10% of voting share.

The NCLT (Hyderabad) Bench, upheld the Resolution Plan submitted by the MSL and passed an order regarding the same.

The Order went into an appeal to the NCLAT, wherein the bench found that the Resolution Plan submitted by MSL is against the statement and object of the I&B Code and thereby rejected the lender-approved resolution plan on the ground that the proposed upfront payment for the stressed asset of the Corporate Debtor, was significantly lower than the average liquidation value. Ergo, the court directed the winning bidder to modify the plan by paying additional Rs.120.54 Crores to make it at par with the average liquidation value of Rs.597.54 Crores.

Consequently, the order was challenged in front of the Apex Court.

  • Issues raised in the case:

Issue 1: Whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not?

Issue 2: Whether Section 12-A is the applicable route through which a successful Resolution Applicant can retreat?

  • The decision of the Bench

While dealing with issue no. 1 of the case, the bench of the Supreme Court held that there is no such provision in the Code of Regulations that has been brought to the notice of the court under which the bid of any Resolution Applicant has to match liquidation value arrived at in the manner provided in Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Further, while dealing with the second issue, the Apex Court held that MSL cannot withdraw from the proceeding in the manner they have approached this Court. The exit route prescribed in Section 12-A is not applicable to a Resolution Applicant. The procedure envisaged in the said provision only applies to applicants invoking Sections 7, 9 and 10 of the code. The only route through which a resolution applicant can travel back after the admission of the resolution plan is the aforesaid provision.

  • Essar Steel Judgment, the backbone to the Maharashtra Seamless Limited decision

For arriving at the conclusion, the Apex Court prominently placed reliance on the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta[2], which lays down the scope of judicial interference by the Adjudicating Authority. The relevant extract of the ruling, as cited in the present case, is as follows:

“There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximizing the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include a judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximize the value of its assets; and that the interests of all stakeholders including operational creditors have been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such a plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.”

  • The rationale behind the judgment

While evaluating the argument of the respondents relating to the violation of the objects and reasons of the act the court found that considering that the Code has been formulated for maximization of value of assets of stakeholders, and to balance the interests of all the stakeholders of the corporate debtor, the court observed that resolution of the corporate debtor should be given preference over the liquidation of the corporate debtor. The rationale being that during resolution, the corporate debtor remains a going concern, whereby the financial creditors will have the opportunity to lend further money, the operational creditors will have a continued business and the workmen and employees will have job opportunities.[3]

The judgment stated that:

“It appears to us that the object behind prescribing such a valuation process is to assist the CoC to take the decision on a resolution plan properly. Once, a resolution plan is approved by the CoC, the statutory mandate on the Adjudicating Authority under Section 31(1) of the Code is to ascertain that a resolution plan meets the requirement of sub-section (2) and (4) of Section 30 thereof. We, per se, do not find any breach of the said provisions in the order of the Adjudicating Authority in approving the resolution plan.”

Further, while dealing with the second issue, the Supreme Court did not engage in the judicial exercise of determining the question as to whether after having been successful in a CIRP, an applicant altogether forfeits their right to withdraw from such process or not.

Conclusion and impact of the above decision

The Supreme Court ruling in effect found that the said plan met all the requirements of Section 30(2) of the Code and thus Adjudicating authority did not err in approving the resolution plan and thereby affirmed the order of Adjudicating Authority dated 21st January 2019. Albeit, on the other hand, it found that the Appellate Authority had, exceeded its jurisdiction in directing matching of liquidation value in the resolution plan and wrongly proceeded on equitable perception rather than commercial wisdom. Thus, again reiterating that the resolution plan should be left to the commercial wisdom of the Committee of Creditors.

It is evident from the Supreme Court judgment that paramount importance would be given to the commercial wisdom of CoC while deciding on the feasibility and viability of the resolution plan. The judgment walks a tightrope between maximization of value of assets of Corporate Debtor and the continued life of the Corporate Debtor as a going concern and hence, in absence of any provisions under the Code or the regulations stipulating that the amount offered under resolution plan should be equivalent to the liquidation value, the impugned NCLAT order was set aside.

However, a few questions and concerns have not been touched by the Courts until now, the principle that will enable one to judge if COC has been able to keep in consideration the interest of operational creditors and other stakeholders successfully.






[1] Civil Appeal No. 4242 of 2019, Dated: 22/01/2020

[2] CIVIL APPEAL NO. 8766-67 OF 2019

[3] The Apex Court referred to the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta (CIVIL APPEAL NO. 8766-67 OF 2019) to reach the above conclusion.

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