Valuation Methods For Distressed Assets.
VALUATION METHODS FOR DISTRESSED ASSETS
1. Meaning of Distressed Asset Valuation
Distressed asset valuation refers to the assessment of the fair economic value of assets or a business when the entity is:
Insolvent or near insolvency
Facing severe liquidity stress
Subject to insolvency, liquidation, or restructuring proceedings
The valuation aims to balance:
Value maximisation
Speed of resolution
Market realities
Stakeholder fairness
LEGAL AND REGULATORY CONTEXT
Insolvency and Bankruptcy Code, 2016
IBBI (Insolvency Resolution Process) Regulations
Companies Act, 2013
Judicial oversight by NCLT / NCLAT / Supreme Court
COMMON VALUATION METHODS FOR DISTRESSED ASSETS
2. Liquidation Value Method
Determines the value if assets are sold piecemeal in liquidation.
Case Law 1: Swiss Ribbons Pvt. Ltd. v. Union of India (2019)
Supreme Court recognised liquidation value as a statutory benchmark
Emphasised value maximisation over forced sale
➡️ Significance: Liquidation value is a floor, not the goal.
3. Fair Value Method
Represents the estimated realisable value between willing buyer and seller.
Case Law 2: Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2019)
Court acknowledged the relevance of fair value in decision-making
Valuation informs commercial wisdom of creditors
➡️ Significance: Fair value guides resolution planning.
4. Going Concern Valuation
Values the business as a continuing enterprise.
Case Law 3: ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2019)
Supreme Court stressed preservation of the corporate debtor as a going concern
Supported higher valuation through revival
➡️ Significance: Going concern valuation is preferred where feasible.
5. Discounted Cash Flow (DCF) Method
Projects future cash flows and discounts them to present value.
Case Law 4: Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh (2020)
Court accepted DCF-based valuation in resolution plans
Held that precise mathematical accuracy is not required
➡️ Significance: DCF reflects long-term revival potential.
6. Asset-Based Valuation Method
Assesses net value of tangible and intangible assets.
Case Law 5: Y. Shivram Prasad v. S. Dhanapal (2019)
NCLAT recognised asset-based valuation in liquidation scenarios
Emphasised staged auctions and reserve price calibration
➡️ Significance: Useful where business viability is lost.
7. Market-Based / Comparable Transactions Method
Uses comparable distressed sales or industry benchmarks.
Case Law 6: Binani Industries Ltd. v. Bank of Baroda (2018)
Tribunal acknowledged market-driven valuation dynamics
Emphasised fair competition among bidders
➡️ Significance: Competitive bidding validates valuation.
8. Resolution Plan Value vs Liquidation Value
IBC prioritises resolution over liquidation.
Case Law 7: K. Sashidhar v. Indian Overseas Bank (2019)
Courts will not interfere with valuation choices made by CoC
Commercial wisdom prevails if process is fair
➡️ Significance: Valuation is a commercial, not judicial, function.
PRINCIPLES GOVERNING DISTRESSED ASSET VALUATION
| Principle | Judicial Position |
|---|---|
| Value maximisation | Primary objective |
| Going concern | Preferred |
| Liquidation value | Safety floor |
| Commercial wisdom | Supreme |
| Judicial interference | Limited |
| Market realities | Recognised |
PRACTICAL CHALLENGES IN DISTRESSED VALUATION
Information asymmetry
Depressed markets
Legacy liabilities
Uncertain cash flows
Time-bound resolution pressures
CONCLUSION
Valuation of distressed assets is a context-driven, judgment-based exercise rather than a precise science. Indian courts consistently hold that:
Multiple valuation methods may coexist
Resolution value matters more than liquidation value
Commercial decisions of creditors deserve deference
Thus, distressed asset valuation seeks to balance economic realism with legal discipline.
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