2020 (2) TMI 398 - Tri - Insolvency and Bankruptcy

Approval of Resolution plan - Whether the adjudicating authority has the jurisdiction of judicial review and appoint an independent valuer to conduct fresh valuation of Intangible assets of CD? - Whether there is any error apparent on the face of valuation reports submitted by the two registered valuerscontrary to the accounted balance sheets of the CD for the year 2018? HELD THAT - Upon perusal of the warning letters supra, it can be said that warning letters contemplate corrective actions and state that the compliances with CGMP, FDA may withhold approval of any new applications or refusing admission of articles manufactured by CD at Bavla and Vapi units. No record has been placed that these bans were actually imposed and in the absence of the ban, the value of the Intangible assets cannot be zero. The warning letters were only pertaining to drugs export to US and the CD has been exporting drugs to other countries worldwide. It is not the case that CD is exporting the drugs manufactured only to US. The reasoning of the two registered valuers in assigning a NIL value to the intangible assets of CD is absolutely untenable. The Valuation exercise was conducted on certain assumptions that warning letters negate the value of such assets. There was no reasoning provided by the Valuers whether these warning letters prescribe the risk factors and are subject to certain remedy or curative measure/precautionary steps envisaged to be carried out by the proposed Resolution applicant. The Valuers has not referred to any method of valuation in their report, no comparison was drawn of valuing the intangible assets of other Pharmaceutical Companies particularly in relation to the Domestic and International standard of valuation of such Intangible assets worldwide. A critical assessment of risk faced by warning letters ought to have been carried out in the light of available market expectation - Valuation is not exact science and court cannot disregard such report, unless there is a patent error. Thus, assigning nil value to Intangible assets is an error on the face of the two Valuation Reports and hence a fresh valuer needs to be appointed to the limited extent of providing a fair value of Intangible assets. There is no element of fraud but only compares the value assigned to the intangible assets in the financial statement for the year 2017 2018 with the Information Memoranda and claims that this is an error apparent on the face of it. I conclude that the Warning letters issued by the USFDA is curable and entails the steps for compliance therein - it is ordered that the Resolution Professional take steps to appoint a fresh Valuer with a limited scope of valuing the Intangible asset considering the International standard of Valuation of a Pharmaceutical Company and submit his report within a period of two weeks of receipt of the order copy and the COC is directed to reconsider the valuation submitted by the third Valuer. Application disposed off.

Summary

Issues Involved:
1. Whether fresh valuation of intangible assets can be ordered due to dissenting judgment.
2. Whether the Resolution Plan failed to maximize the assets of the Corporate Debtor (CD).
3. Whether the valuation process was conducted appropriately.
4. Whether the interests of all stakeholders were balanced.
5. Whether the adjudicating authority has the jurisdiction to appoint an independent valuer for fresh valuation.

Detailed Analysis:

1. Fresh Valuation of Intangible Assets:
The application was filed by a dissenting financial creditor who was aggrieved by the approval of the Resolution Plan by the Committee of Creditors (COC), citing a stark contrast in the value of assets shown in the balance sheet and the valuations by the appointed valuers. The Judicial Member ordered a fresh valuation, while the Technical Member dissented. The Tribunal concluded that the adjudicating authority has the jurisdiction of judicial review and can appoint an independent valuer to conduct fresh valuation of intangible assets, as per Section 60(5)(c) of the IBC and the ratio laid down in the judgment of the Hon’ble Supreme Court in the case of Essar Steel India Limited.

2. Maximization of Assets:
The dissenting financial creditor argued that the Resolution Plan failed to maximize the assets of the CD, resulting in a significant haircut for financial creditors and undervaluation of assets. The Tribunal noted that the valuation of intangible assets was reduced to zero due to USFDA warning letters, which was deemed untenable. The Tribunal emphasized that the value of intangible assets of a going concern making profits even during CIRP cannot be stripped under the premise of warning letters. Thus, the Tribunal ordered a fresh valuation to ensure better valuation of CD as a going concern.

3. Valuation Process:
The Resolution Professional (RP) and COC defended the valuation process, stating it was conducted in compliance with the Code and CIRP regulations, and no concerns were raised by COC members during the process. However, the Tribunal found that the valuation reports did not provide a proper explanation for assigning a nil value to intangible assets and lacked a critical assessment of risk due to warning letters. The Tribunal concluded that there was an error on the face of the valuation reports, necessitating a fresh valuation.

4. Interests of Stakeholders:
The dissenting financial creditor contended that the Resolution Plan did not balance the interests of all stakeholders, including operational creditors and employees. The Tribunal referred to the judgment in Essar Steel India Limited, which emphasized that the COC must consider maximizing the value of assets and balancing the interests of all stakeholders. The Tribunal found that the COC did not adequately address the valuation of intangible assets, impacting the interests of stakeholders. Therefore, a fresh valuation was ordered to ensure a fair assessment of the CD's value.

5. Jurisdiction of Adjudicating Authority:
The Tribunal concluded that it has the jurisdiction of judicial review and can appoint an independent valuer for fresh valuation of intangible assets, as per Section 60(5)(c) of the IBC and the ratio laid down in the judgment of the Hon’ble Supreme Court in Essar Steel India Limited. The Tribunal emphasized that judicial review is limited to ensuring that the COC has taken into account key features of the Code, such as maximizing the value of assets and balancing the interests of all stakeholders.

Conclusion:
The Tribunal ordered the Resolution Professional to appoint a fresh valuer with a limited scope of valuing the intangible assets considering international standards of valuation of a pharmaceutical company. The fresh valuation report is to be submitted within two weeks, and the COC is directed to reconsider the valuation submitted by the third valuer. The Miscellaneous Application was disposed of with this direction.