Distressed valuations under IBC: liquidation value vs going-concern value

When a corporate debtor enters the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, the Resolution Professional has to procure two valuations from registered valuers. Liquidation value, and fair value (which under the IBC framework approximates going-concern value).

The two numbers are different by design. Liquidation value assumes a forced sale of assets on an individual basis, with no operating business attached. Fair value assumes the business continues to operate normally and is sold as a going concern. The gap between the two can be Rs. 50 crore for a small operating-debtor or Rs. 5,000 crore for a major infrastructure company. Either way, the gap determines what resolution plans are feasible.

The statutory framework

Section 36 of the IBC and Regulation 35 of the CIRP Regulations require two valuations.

Liquidation value. The amount that could be realised by a sale of the assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date. Valued on a forced-sale, individual-asset basis. No goodwill, no operating premium, no synergy.

Fair value. The amount that could be realised in an arm's-length transaction between an informed buyer and an informed seller. Valued on a going-concern basis where applicable. This is functionally the going-concern value of the business.

The Resolution Professional appoints two registered valuers (or three in some cases). Each valuer independently arrives at both numbers. The average of the two is the figure used in the resolution process. The valuations are confidential until the resolution plan is approved.

Resolution plans must offer at least liquidation value to operational creditors. Section 30(2)(b) of the IBC, as amended, requires the resolution plan to ensure that operational creditors receive an amount that is not less than what they would receive in a liquidation. This sets the liquidation value as the structural floor.

The methodology divergence

Liquidation value: asset-by-asset, forced sale

Each significant asset is valued separately:

Land and buildings at distressed-sale market value, not at fair-market value. The 'forced sale' assumption reduces the price by 20-40 percent below fair-market depending on location and asset type.

Plant and machinery at second-hand market value, again with a forced-sale discount. For specialized industrial equipment, the secondary market is thin, and the discount is severe — 50-70 percent below replacement cost is not unusual.

Inventory at expected realisation value. Finished goods at distressed-sale prices, work-in-progress at scrap value for the most part, raw materials at salvage value.

Receivables at expected recovery — typically 30-60 percent of book value for distressed companies.

Investments and other financial assets at marked-to-market.

Intangibles: in liquidation, usually zero. Brand, customer relationships, and goodwill have no value in a forced-sale of individual assets.

Fair value: going-concern DCF or equivalent

The fair value uses business-as-usual assumptions. The company continues to operate. Customer contracts remain in place. The brand and goodwill retain their economic value. The DCF approach is the standard, with appropriate adjustments for the distress situation.

The discount rate is higher than for a normal-course valuation — reflecting the elevated risk of the going-concern assumption holding. Typically 200-400 basis points above what would apply for a non-distressed company in the same sector.

The terminal value assumption is more conservative. The perpetuity growth rate may be set at zero or even negative for a company in known structural decline.

Working capital and capex requirements are explicit. A distressed company may need significant capex to restore operations to a normal level; the fair value DCF has to reflect this.

The five patterns we see

Pattern one: asset-heavy companies (steel, infrastructure)

Liquidation value is high relative to fair value because the underlying assets — steel plants, power generation assets, real estate — have significant standalone resale value. Even at distressed-sale prices, the assets are worth meaningful amounts.

Fair value is also high, but the multiplier of fair value over liquidation value is typically 1.2-1.8x. The going-concern premium exists but is moderate.

Resolution plans for these companies are often financially driven: the bidder pays close to fair value (or sometimes liquidation value plus a small premium) and restructures the operating business afterwards. Bhushan Steel, Essar Steel, and Jaypee Infratech follow this pattern.

Pattern two: asset-light businesses (tech, services)

Liquidation value is low. The physical assets — laptops, office equipment, leasehold improvements — are minimal. Receivables and cash are the main items. Brand and customer relationships, which are the actual economic substance of the business, are valued at zero in liquidation.

Fair value can be much higher. A services or software business with strong customer contracts and brand recognition can have a going-concern value 3-10x its liquidation value.

Resolution plans for these companies are heavily dependent on the going-concern assumption holding. If the business operations deteriorate during CIRP — customers leave, employees depart — the fair value collapses. The 270-day CIRP timeline is itself a value-destruction factor.

Pattern three: broken supply chain

A manufacturing company whose primary input supplier has stopped supplying because of unpaid dues. The plant cannot operate. Customers have shifted to alternative suppliers. The 'going concern' is increasingly hypothetical.

Both liquidation value and fair value drop in this scenario. The fair value can drop more steeply than the liquidation value, because the going-concern assumption is now questionable. The two values converge as the operational distress deepens.

Resolution plans for these companies often face a fundamental question: is the business salvageable as a going concern, or is the asset-realisation route the only viable one? If a credible operational restart plan exists, fair value remains usable. If not, the resolution effectively defaults to liquidation value.

Pattern four: brand intact, operations stalled

A consumer-facing company with a strong brand but with operational problems — supply chain disruption, working capital squeeze, management turnover. The brand still has economic value; the operations are temporarily impaired.

Fair value remains meaningful because the brand asset survives the distress. A new operator who acquires the company through CIRP and resumes operations can re-establish the brand-driven revenue. Liquidation value, by contrast, would value the brand at zero, because a brand asset cannot be sold in a forced-sale of individual assets in the way that physical assets can.

Resolution plans in this category often produce surprisingly competitive bids, because incoming operators see the brand value clearly.

Pattern five: capital intensive infrastructure with stranded asset characteristics

Power plants without PPAs, ports with low traffic, highways with low toll collection. Both liquidation and fair value are low. The asset has no standalone resale buyer (the asset is location-specific and contractually constrained), and the going-concern operations do not generate enough cash to support fair value.

These are the hardest CIRP cases. Resolution plans are often haircuts of 70-90 percent. Some go to liquidation because no resolution plan provides sufficient value.

Where valuers earn their fee

The IBC valuer's job is harder than a normal-course valuer's job, for three reasons.

Information asymmetry. The corporate debtor's financial statements are often unreliable. Statements may have been restated. Off-balance-sheet liabilities may exist. The Resolution Professional has limited time to surface the full picture. The valuer is working with incomplete information.

Time pressure. The CIRP timeline is 270 days (with limited extensions). The valuations have to be completed early enough in the process to inform resolution plan submissions. Detailed DCF work that would take 8-10 weeks in a normal valuation context is compressed into 4-5 weeks.

The going-concern question itself. For some debtors, whether the going-concern assumption is sustainable is the most uncertain input. The fair value is materially different depending on whether key customers continue, key employees stay, and licenses remain in good standing. The valuer has to make judgments about these factors that are inherently uncertain.

What lenders and operational creditors should understand

Operational creditors who are entitled to receive at least liquidation value should pay attention to the liquidation valuation. If the liquidation value is being understated, the operational creditor floor is being understated. Operational creditors can challenge the valuation under the IBC framework, though the challenge process is itself time-consuming.

Financial creditors are more concerned with the fair value, because their realisation typically depends on the resolution plan price, which is anchored to fair value. A high fair value invites higher bids; a low fair value caps the resolution outcome.

Both groups have an interest in the valuations being defensible. A poorly-constructed valuation produces resolution plans that are either too low (creditors lose value) or too high (no bidder accepts). The system depends on the registered valuers doing their work properly.

What corporate debtors should know if they are heading into CIRP

Prepare the going-concern story. Document the operating contracts, the brand value, the customer relationships, the workforce continuity. The Resolution Professional and the valuers will use this material to argue for a higher fair value. Companies that enter CIRP with their operating narrative intact tend to attract better resolution plans.

Do not let operations deteriorate during the moratorium. Customer relationships are fragile. Once they break, fair value collapses. Maintaining operational continuity is in the corporate debtor's interest (and the creditors') even when the financial situation is being resolved.