Liquidation Value in Insolvency

Liquidation value is the estimated realizable value of the assets of a corporate debtor if it were liquidated on the insolvency commencement date. It is a hypothetical valuation benchmark used during the corporate insolvency resolution process, not the actual sale proceeds from liquidation.

How it is determined

Under Regulations 27 and 35, the resolution professional appoints two registered valuers to determine fair value and liquidation value independently.

• Each valuer estimates liquidation value after physically verifying the corporate debtor's inventory and fixed assets and applying internationally accepted valuation standards.
• If the two estimates are significantly different, the resolution professional may appoint a third registered valuer. The average of the two closest estimates is then taken as liquidation value.

Role in the resolution process

Liquidation value gives the committee of creditors a benchmark for comparing a resolution plan with the likely outcome of liquidation. It also supports the statutory payment safeguards under Section 30(2)(b).

• Operational creditors must receive at least the higher of the amount payable in liquidation under Section 53 or the amount they would receive if plan proceeds were distributed according to Section 53 priorities.
• Dissenting financial creditors must receive at least the amount that would be payable to them under the Section 53 liquidation waterfall.
• Liquidation value is not, by itself, a compulsory minimum for the total value of every resolution plan.

Difference from actual liquidation proceeds

Liquidation value is a valuation estimate made during CIRP, whereas actual proceeds arise only if liquidation occurs. Actual realization may differ because of market conditions, sale timing, asset quality and liquidation costs.