Op EdsOP. ED.


The Insolvency and Bankruptcy Code, 2016 came as a ray of hope amidst the deteriorating condition of the recovery mechanisms available to the creditors in the Indian market. Recovery rates had sunk to new lows, and the need to hit the refresh button to reset the entire system was paramount.

The intent behind any legislation can be truly brought from the Preamble, something that the entire text of the legislation follows. The Preamble of the Insolvency and Bankruptcy Code envisages it as an Act which will primarily look into the aspects of consolidation and updating of the numerous laws regarding insolvency and resolution of the same for corporate entities, partnership firms and individuals as well. It has to be carried out within strictly defined time-frames, so that the value of the assets is maximised. All of this is done to promote the entrepreneurial ventures and to equitably serve the interest of the various stakeholders.

In  Binani Industries Ltd. v. Bank of Baroda,[1] the National Company Law Appellate Tribunal (NCLAT) held that:

  1. … The first order objective is “resolution”. The second order objective is “maximisation of value of assets of the ‘corporate debtor’ and the third order objective is promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.[2]

The point that has to be kept in mind is that the Preamble explicitly mentions of the maximising of the value of the assets. Over the course of this article, an evaluation has been attempted regarding whether the provisions in the Code dealing with the aspect of the valuation of assets have stayed true to what was first mentioned in the Preamble of the Act.

The primary foundation towards the valuation of assets is laid down as soon as with the appointment of Valuer. Valuer stands for a registered valuer, who can be a resolution professional as well. They are tasked with putting a monetary value on the debtor’s properties, securities, other assets and liabilities as well.

However, our primary concern here is the aspect of valuation of assets. To understand this part of the liquidation process, it is essential to have a thorough understanding of how the value is to be estimated and certain other related concepts.

Valuation Standards

Under Section 247 of the Companies Act, 2013, the Ministry of Corporate Affairs has notified Companies (Registered Valuers and Valuation) Rules, 2017. The valuation standards are to be set up in accordance with Rule 18 of the aforementioned Rules. These standards are notified by the committee as constituted under Rule 19. As of now, the standards issued by Institute of Chartered Accountants of India (ICAI) in its 375th meeting are said to be in force in India.

This system of valuation speaks of valuation bases, approaches, scope of work, reporting, business valuation, intangible assets and financial instruments. These standards are aimed at bringing uniformity in the system, so as due to anarchy, one valuer is leaps and bounds ahead in giving a monetary value to the same asset as opposed to another valuer.

However, by establishing valuation standards, sometimes the motive of “value maximisation” takes a back seat as the valuation standards are not one dimensional in approach. They also take the interest of the buyer into account and are justified in doing so as well. But an argument can be made to make the entire standards lean in favour of the debtor, as the standards being followed are domestic in nature, and the domestic agency should prioritise the notion of keeping the standards in such a manner that they encourage the continuation in one form or the other to help the growing economy of the country.

Sale of Assets under the Code

The Act in itself does not shed much light upon how assets can be sold by the liquidator. However, to clarify the same, the Board, in Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, has laid down the manner in which the assets can be sold.

According to Regulation 32 of the above mentioned Regulations, the assets of a corporate debtor can be sold in various ways, such as on a standalone basis, in a slump sale, collectively as a set, in parcels, the corporate debtor as a going or the business of corporate debtor as a going concern.

Regulation 32-A further states that when in the opinion of the committee of creditors or the liquidator himself, it is beneficial for the corporate debtor to be sold as a going concern i.e. the sale as a going concern under Regulations 32(e) and (f) is only allowed if its allows value maximisation of the assets of the corporate debtor.

The Regulations provide with two methods in which the sale of assets can be carried about. The primary methods under Regulation 33 read with Schedule I is by the way of an open online bidding process. However, in special circumstances, such as in the case of perishable goods, the sale can be made by the way of a private sale as well, when it is understood that private sale will be more beneficial in realising the maximum value of the assets.

Apart from the legislative input, certain principles laid down by the judiciary are also safeguarding the interest of the buyers and sellers as well. In Gordhan Das Chuni Lal Dakuwala v. T. Sriman Kanthimathinatha Pillai[3], the Court held that when the property is sold by a private contract, then it is the duty of the court to satisfy itself that the price offered is the best that could be offered, because, the court is the custodian of the interest of the company.

In TCI Distribution Centres Ltd. v. Official Liquidator,[4] the Court held that the liquidator should not keep any information to himself, and shall convey any information he has regarding nature, description, extent of property, non-availability of title deeds, etc.

Asset Sale Report: A Mere Formality

Regulation 36 mandates that a liquidator has to prepare an asset sale report as a part of the progress reports. This regulation also spells out the contents of the asset sale report, however, the list is merely indicative, further details regarding the sale can be furnished in the report, what the liquidator feels may be of relevance.

The following details are a mandatory part of the asset sale report, as per the ambit of Regulation 36:

(a) the realised value;

(b) cost of realisation, if any;

(c) the manner and mode of sale;

(d) if the value realised is less than the value in the asset memorandum, the reasons for the same; and

(e) the person to whom the sale is made.[5]

However, the Code and the accompanying Regulations are silent on the purpose of this report. It might lead one to think that this report is a mere formality. Another reasonable presumption which can be drawn from the fact that it is to be enclosed with the progress report is that the function of this report is to make the entities concerned aware of the situation of the assets during the liquidation process.

Suggested Reforms

To achieve the elusive dream of “value maximisation”, the Code and the supplementary Regulations have laid down various provisions, such as the idea of private sale. Private sale has been allowed by the Code and the Regulations in certain cases. For example, in case the assets are of a perishable nature, or, the value of the assets will diminish with the passage of time, in such situation, a departure from the online bidding process, in the form of a private sale is allowed.

On a second look and on reading between the lines, one can easily infer that the kind of sale mentioned above is set to serve the primary purpose of “value maximisation”. Allowing the sale of the assets as a whole, or in parts, or even as a going concern is also based on the same narrative.

Hence, the Code has indeed made an effort to stick to the principle of “value maximisation”, as given in the Preamble. However, certain changes can be brought about in the legal framework of insolvency and bankruptcy in India to give a better justification to the aforementioned principle of the Preamble.

The idea of sale of assets is only introduced during the liquidation process. But during the resolution process, the interim resolution professional and the resolution professional are empowered to sell the assets of the company. But, the Code is silent on whether the sale is allowed as a part of the resolution plan. If it is explicitly laid down that the sale of assets can be made during the resolution stage, a better value can be attached to the assets, as, the fair value of the assets is generally more than the liquidation value. The value of the assets which are prone to perish or deteriorate over time can also be maximised.

During the sale of assets by the way of online bidding, an average of the value estimated by the registered valuers is taken as the base price. Instead of the average value, there is no harm in taking the base price as the fair value of the asset. This is due to the fact that there already are provisions which provide for reduction in base price in case the bidding process fails. Hence, starting from a higher base can actually fetch a higher price to the assets.

Also, if the non-disclosure of the highest bid is made the go-to format during an online bidding process, instead of it being used in exceptional circumstances, the uncertainity amongst the bidders can lead to a higher bid, and serve the principle of asset maximisation better.

Lastly, another reform which can have a positive impact on the aspiration of “value maximisation” is by introducing strict timelines with respect to Section 52 of the Code. Section 52 provides for a choice to the secured creditor as to either enforce his secured interest or to relinquish it and get his money’s worth through the liquidation process. The Code does not provide for the time within which this choice has to be made. It might happen that the asset on which the interest of the secured creditor lies is the kind that diminishes in value with the passage of time.

If the secured creditor informs of his choice to the liquidator weeks after the liquidation process has begun and by that time, a substantial value of the asset has evaporated, the Preamble of the Code will not be satisfied. Hence, the provision should be amended to include a strict timeline within which such choice is to be made, and also, a presumption that the creditor has relinquished his interest in case he fails to convey his choice.

†  IVth Year B.A. LLB (H) Student NUALS, Kochi, e-mail: puruv31@gmail.com.

[1]  2018 SCC Online NCLAT 521

[2]  Ibid

[3]  1920 SCC OnLine Mad 166

[4]  2009 SCC OnLine Mad 1481 : (20 09) 4 LW 681.

[5]  Regn. 36, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

Image credits: economictimes.com

Legislation UpdatesNotifications

In order to encourage investment in the capital market, it has been decided to withdraw the enhanced surcharge levied by Finance (No. 2) Act, 2019 on tax payable at special rate on income arising from the transfer of equity share/unit referred to in Section 111 A and Section 112 A of the Income-tax Act,1961 (the ‘Act’) from the current FY 2019-20. The following capital assets are mentioned in Section 111A and Section 112A of the Act:

i) Equity shares in a company;
ii) Unit of an equity-oriented fund; and
iii) Unit of a Business Trust

The derivatives (Future & options) are not treated as a capital asset and the income arising from the transfer of the derivatives is treated as business income and liable for a normal rate of tax. However, in the case of Foreign Institutional Investors (FPI), the derivatives are treated as capital assets and the gains arising from the transfer of the same is treated as capital gains and subjected to a special rate of tax as per the provisions of Section 115 AD of the Act. Therefore, it is also decided that the tax payable on gains arising from the transfer of derivatives (Future & options) by FPI which are liable to a special rate of tax under Section 115 AD of the Act shall also be exempted from the levy of the enhanced surcharge.

Therefore, the enhanced surcharge shall be withdrawn on tax payable at special rate by both domestic as well as foreign investors on long-term & short-term capital gains arising from the transfer of equity share in a company or unit of an equity-oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under Section 115 AD by the FPI on the capital gains arising from the transfer of derivatives. However, the tax payable at the normal rate on the business income arising from the transfer of derivatives to a person other than FPI shall be liable for the enhanced surcharge.

[Notification dt. 24-08-2019]

Ministry of Finance

Central Board of Direct Taxes

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India: G. Mahalingam (Whole Time Member) partly modified its order against Religare Finvest Limited (RFL) in the matter of Fortis Healthcare by allowing the firm to dispose of its assets subject to certain conditions.

The securities market regulator vide its order dated 19-03-2019, had barred Singh brothers – Shivinder Mohan Singh and Malvinder Mohan Singh (former promoters of Fortis Healthcare) – from selling any of their assets till they, along with seven other companies associated with them pay back Rs 403 crore that they had taken out from the hospital chain. The said order was passed when it came to notice that Fortis Hospitals had entered into multiple structured transactions from 30-06-2016 to 30-06-2017, which were prima facie fictitious and fraudulent in nature as the ultimate beneficiaries of these transactions were Singh brothers. The Board had also directed RFL (of which Singh brothers were the promoters) to not dispose of, alienate or divert any of its assets except for complying with a corrective action plan as stipulated by Reserve Bank of India (RBI).

The instant order was passed in an application filed by RFL on 20-06-2019, whereby it sought relaxations from SEBI in order to execute revival plan for the betterment of the company by taking required steps, including the restructuring of loans and securitization/ assignment of its assets to Asset Reconstruction Companies (ARCs) to reduce its standing liability.

SEBI noted that RFL was a Non-Banking Financial Company (NBFC) registered with RBI, and functioned under its overall regulatory supervision. Further, RFL’s current cash flows were insufficient to meet the immediate one-year debt obligations; banks had the first charge over all its assets and coercive steps of a bank for recovery of dues were highly possible. Also, RFL was prohibited from the expansion of credit/ investment portfolios other than investment in government securities.

In view of the above, it was opined that RFL was under severe financial strain and was staring at the possibility of default in meeting its debt obligations to the lender banks. Thus, proposed measures like the restructuring of RFL’s debt with lender banks, assignment of its SME gross NPAs to ARCs and raising of capital to meet capital adequacy norms were essential for survival and revival of the company.

Thus, the Board modified the directions contained in its 19-03-2019 order holding that RFL shall not dispose of or alienate funds assets without the prior permission of SEBI, “except for meeting expenses of day-to-day business operations and taking all measures as it deems fit for revival of RFL (including restructuring of its debts/loans, assignment of its financial assets to ARCs, raising of capital, borrowing, etc.), subject to strict adherence to the terms of “Corrective Action Plan”.[Fortis Healthcare Ltd., In Re, 2019 SCC OnLine SEBI 55, decided on 28-06-2019]

Case BriefsHigh Courts

Bombay High Court at Goa: C.V. Bhadang, J., discharged the petitioner (proprietor of the defendant Company) of the notice served upon him in an execution case.

The respondent filed a civil suit against one Harshad Trading Company a company incorporated under the Companies Act. As per the suit title, the Company was not shown to be represented by any person. The suit was decreed ex-parte against the defendant company. Thereafter, the respondent filed an application for execution of the decree pursuant to which a notice was served on the petitioner. He filed for discharge on the ground that he was neither a Director nor an employee of the Company. It was contended that he was the proprietor of the Company, which are two separate entities. However, Executing Court dismissed the petitioner’s application.

The High Court noted that the decree was passed against  Harshada Trading Company alone. It was well settled:  “where the decree is against the Company, which is an independent entity, the decree cannot be executed against any individual, being a Director or a person responsible for the conduct of the business of the Company.”

On the factual score, the Court said, “It was for the respondent to point out as to what are the assets of the Company, against which the decree can be executed. Such details can be obtained by the decree-holder from the office of the Registrar of Companies (RoC). Without doing any such exercise, the respondent is trying to execute the decree against an individual and that too, without showing that the petitioner is in anyway related to the Company-Harshada Trading Company.”

In such view of the matter, the impugned order of the Executing Court was set aside and the petitioner was discharged. [Belarmina Gowda v. Ranjith Nath, 2019 SCC OnLine Bom 588, Order dated 04-04-2019]

Legislation UpdatesRules & Regulations

S.O. 1023(E)—In the exercise of the powers conferred by Section 169 read with Section 33 of the Representation of People Act, 1951 (43 of 1951), the Central Government after consulting the Election Commission hereby makes the following rules further to amend the Conduct of Elections Rules, 1961, namely:––

1. (1) These rules may be called the Conduct of Elections (Amendment) Rules, 2019.
(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Conduct of Elections Rules, 1961 in FORM 26,––
I. in PART A—
(i) for paragraph (4) and the Table thereunder, the following shall be substituted, namely:—
“(4) Details of Permanent Account Number (PAN) and status of filing of income tax return:

[Refer link for detailed notification: Notification]

Ministry of Law and Justice

Note: In accordance to the amended Form 26, five years’ returns are to be furnished, along with details of offshore assets. Along with this,  it would also require details under various heads of the candidate’s spouse, members of the Hindu Undivided Family (if the candidate is a ‘karta’ or coparcener) and dependents.

Case BriefsHigh Courts

Patna High Court: The Division Bench of Amreshwar Pratap Sahi, CJ and Anjana Mishra, J. dismissed an appeal challenging election of a village mukhiya.

Appellant herein had filed an election petition assailing the election of Respondent 3 as mukhiya of a village on the ground of non-disclosure of his assets and liabilities as per the Bihar Panchayat Raj Act, 2006. This petition was dismissed and the writ petition challenging Election Commission’s order was also dismissed. Hence, the present appeal.

Counsel for the appellant contended that nomination paper of Respondent 3 was improperly accepted as he had not filled up details of his assets and liabilities. An affidavit was filed later declaring such assets and liabilities to supplement respondent’s nomination papers but the same was a manipulated document inasmuch as it had been manually stamped while other documents were stamped through a franking machine.

Learned counsel for the respondent objected to the maintainability of election petition for not being verified in accordance with Rule 108 of the Bihar Panchayat Raj Rules, 2006. Further, the sole ground raised in the petition was non-disclosure of assets; no challenge was raised in relation to the affidavit filed by the respondent. The subject affidavit was accepted with the nomination papers before the Assistant Returning Officer who scrutinized the same and thereafter declared Respondent 3’s nomination valid. The nomination could not have been declared to be valid in the absence of requisite declaration and therefore there was a valid presumption under the law regarding the existence of this fact.

The Court observed that the casual manner in which petition had been verified was a serious defect. Argument regarding the non-existence of affidavit could not have been appreciated without a petition being verified on the basis of records available. Further, once the defense of supplemental affidavit had been raised, then the burden lay on the election petitioner to dislodge the same by summoning the Assistant Returning Officer.  It was held that the acceptance of affidavit by the Returning Officer without any objection from the appellant or election petitioner provided a clear presumption of fact regarding the validity of nomination of Respondent 3. Lastly, since the issue regarding stamping of an affidavit was not pleaded or advanced either before the learned Single Judge or the Election Tribunal, therefore it could not be raised at this juncture.

In view of the above, the appeal was dismissed for being bereft of merits.[Ram Roop Devi v. State of Bihar, 2019 SCC OnLine Pat 44, Order dated 11-01-2019]

Case BriefsForeign Courts

Supreme Court of Pakistan: A Three-Judge bench comprising of Umar Ata Bandial, Faisal Arab and Sajjad Ali Shah, JJ. while hearing an appeal in relation to disqualification of a parliamentarian, ruled that a parliamentarian can be disqualified under Article 62 (1)(f) of the Constitution of Islamic Republic of Pakistan only when he has dishonestly concealed his assets.

Petitioner’s appointment to public office was challenged by the respondent before the Islamabad High Court alleging that while holding office in Pakistan, petitioner was serving a UAE based company as its full-time employee. Respondent’s constitution petition for quo warranto was allowed by the High Court and the petitioner was disqualified as a member of the National Assembly. This order was challenged in the instant petition.

Petitioner submitted that he only rendered advice on the phone to the company and was not required to be physically present in UAE. Also, since the salary received from the company had already been spent by him, therefore its details were not mentioned in his nomination paper.

The Supreme Court observed that the entire purpose behind seeking details of assets and liabilities under election laws is to discourage persons who have wrongfully acquired assets, from contesting elections. Therefore, in a proceeding brought under Article 62 (1)(f) of the Constitution, Court must first call upon the elected member to explain the source from which the alleged undisclosed asset was acquired. Where no satisfactory explanation is forthcoming from him and the undeclared asset is not commensurate with his known sources of income, a presumption of unlawful means having been used in relation to that asset arises. Relying on its decision in Muhammad Hanif Abbasi v. Imran Khan Niazi (PLD 2018 SC 189) the Court held that unless a member is found guilty of dishonest concealment of assets in appropriate judicial proceedings, Article 62(1)(f) cannot be invoked to disqualify him for life.

It was observed that though it was highly inappropriate for a parliamentarian to take a full-time job in a foreign country, but it seemed highly improbable that a person holding such a position would actually be rendering his services as a full-time employee elsewhere. Thus, the petition was allowed holding that since no undeclared proceeds from UAE company existed at the time of filing of petitioner’s nomination papers, therefore no case of concealment of assets was made out. [Khawaja Muhammad Asif v. Muhammad Usman Dar, Civil Petition No.1616 of 2018, decided on 19-10-2018]

High Courts

Delhi High Court: Answering the question, whether the transaction of sale and purchase of shares of an overseas company deriving only a minor part of its value from assets located in India, would be taxable in India, the Court held that after amendment of S. 9(1)(i) Explanations 4, 5 Income Tax Act, 1961, post the “Vodafone case” Vodafone International Holdings BV v. Union of India: (2012) 6 SCC 613, any share/interest in a company registered outside India, shall be deemed to be situated in India, if such share derives (directly/indirectly) its value “substantially’” from assets located in India. The Court further clarified that as per the Shome Committee report on retrospective amendment relating to indirect transfer of assets and Direct Tax Code Bill, 2010, the gains arising from sale of shares of a company incorporated overseas, deriving less than 50% of its value from assets situated in India, would not be taxable u/S. 9(1)(i) of the Act r/w Explanation 5. 

In this case the Copal group (an overseas company) sold shares of an Indian company, to Moody’s Cyprus and shares of a US company (having an Indian subsidiary) to Moody’s USA. The group sold 67% of its shareholding in Copal-Jersey (the ultimate holding company) to Moody UK for $93,509,220. While 33% stake was held by banks and financial institutions. This purchase price was not inclusive of any value in Indian companies as 100% economic interest in these companies was already acquired by Moody’s group. On applications filed by these companies for above transactions, the Authority of Advance Rulings (AAR), ruled that such transactions were not taxable in India and Moody’s group, as buyers, had no obligation to withhold tax. This ruling was challenged by the Revenue. 

Agreeing with AAR’s view, the Court reasoned that since, value of shares derived from assets outside India was $93,509,220, and that from assets situated in India was $28,530,435.8, only a fraction of the value of shares of Copal-Jersey was derived indirectly from the value of shares of the Indian companies. Such transactions would not attract tax in India and Moody’s group did not have any withholding tax obligations. Director of Income Tax (International Tax) v. Copal Research Limited, Mauritius, W.P.(C) 2033/2013, decided on 14-08-2014

To read the full judgment, refer SCCOnLine