TMI Blog2020 (2) TMI 398X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was assigned as zero, as per the two Valuation Reports submitted by the Valuers. 3. The CIRP process of the CD spring into action on 03.04.2018, by order of Hon ble Bench of NCLT. The Financial Creditors claimed ₹ 1073 crores under the Resolution Process. The COC meeting dated 26.12.2018 recorded the liquidation value of ₹ 111 crores after deducting the CIPR cost of ₹ 13 Lacs. The Resolution Plan of RA (Consisting of consortium of ARCIL, Shamrock and Intas) was approved by COC on 1.01.2019 and 72.25% majority voted in favor of the plan. 4. The 7% dissenting Applicant filed this application seeking the following prayers: i. that it be declared that the Resolution Plan of the First RA (a consortium of Asset Recovery Company (India)Limited, Shamrock Pharmachemi Private Limited) which had been voted in favour of the COC members on 26.12.2018 is unlawful and is against the principles and tenets of the Bankruptcy Code; ii. that in the alternative, the successful Resolution Applicant of ARCIL Consortium (First RA) be extended an opportunity to improve their plan value to match with the intrinsic value of the CD pertaining to the tangible and intangibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owth product. There is no question of having such a low value for the plant machinery and the Intangible assets could never have been valued at zero value. 7. One of the members of RA (being INTAS had expressed their intention to buy Bavla Unit for ₹ 150 crores saddled with all statutory dues/debts/out standings and now the value ascribed for both units being ₹ 80 crores. 8. The CD is a financially distressed company which has going concern surplus which has not been preserved at all as the business of the CD is not sold at the real intrinsic value (Intrinsic value mean both tangible and Intangible assets). Under the pretext of resolution process, the assets of CD are attempted to be transferred for a much lower amount than market value of asset . 9. The Resolution plan indirectly paves way for the wealth transfer to the particular class viz: Resolution Applicants at the cost of all other stake holders and creditors of CD. 10. There is no uniform parameter adopted for payment to Financial Creditor 11. Under the pretext of warning letters dated 12.08.2016 issued to CD by US food Drug Administration (USFDA), the intangible asset of CD has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g deterioration of value of ANDAS if the warning letters were not cleared. From COC minutes dated 19.10.2018 and 13.08.2018 state that members consented to make payment of USD 245600/- towards GDUFA fee to retain license for export to US Europe for which license retained for export to 63 countries. Still the Intangible assets were not given any value. 15. There are several key factors for valuating pharmaceutical companies such as follows; a) Discounted cash flow b) Forward P/E Ratio c) Strategic Exit Factors d) Biosimilar v/s Generics e) Risk-Adjusted Net Present Value (NPV) 16. In a pharmaceutical company, if the Intangible assets are not valued, the entire valuation of the said pharmaceutical company will be drastically affected. 17. No proper explanation offered for the inordinate delay in submission of valuation reports of both CIRP valuers. Submissions of Resolution Professional: 1. The RP is not supporting any particular applicant, nor does he have anything against any other party to CIRP and is contesting the present MA on a limited issue of the allegations leveled against the RP. 2. Despite the valuation reports being shared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the valuation exercise was undertaken by the registered valuers in accordance with internationally accepted valuation standard after physical verification of inventory and fixed assets of the CD. After receipt of the resolution plans, the RP has to provide the fair value and liquidation value to COC. If two estimates are significantly different, the RP can appoint another registered valuer so that the average of the two closest estimates can be considered as fair liquidation value. 7. The role of RP is limited to share the values with COC members. The valuers to be appointed shall be registered valuers and regulated by IBBI as notified by the Code. 8. The COC ratified the appointment of two Valuers. M/s Rakesh Narula co. has conducted valuation in more than 100 companies and Delta valuers appraisers LLP has conducted multiple Insolvency valuations. (a) There is no process specified in the CIRP Regulations on format and manner in which the valuation reports are to be received by the RP from the valuers. Before the 8th meeting of COC held on 19th October 2018, the valuers shared their reports in PDF form with the RP and this fact was duly intimated to the COC membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismiss the reports of registered valuers. 17. The rectification of warning letters required a capex around ₹ 20 crores. 18. Only two Resolution Plans were received for CD. The liquidation value or fair value conducted by valuers was never revealed to the bidders (except Omkara ARC who was part of COC and had access to valuation reports. 19. The Minutes of COC dated 01.11.2018, 14.11.2018, 04.12.2018 24.12.2018 recorded the discussion of rationale of valuation, the bidders provided justification of providing a certain value to the CD based on their diligence and risk perception such as the market for carbepenem becoming very challenging and price of carbepenem having fallen. Submissions of Committee of Creditors (COC): 1. The COC is constituted under Sec.21 of the Code and comprises of all Financial creditors of CD. The COC is required to carry out decisions for working of CD through voting. 2. The most significant role of COC in Sec.30 in relation to voting on resolution under Sec30(2) requires COC to approve a plan by not less than 66% of voting share of financial creditors, after considering feasibility and viability. 3. COC is vested wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal for approval under Section 31 of the Code. 2. It is within the four corners of Sec.31 that this Hon ble Tribunal exercises jurisdiction in deciding whether to approve or reject the plan. 3. Valuation of CD is dependent on the potential commercial profit/cash flow that can be earned by commercializing the products manufactured in that unit. The end products manufactured by the CD has seen a decline in commercial potential over the last few years due to increasing competition in the market, thus affecting pricing and ability of players to take market share. Hence the potential return on capital invested for any incoming investor has consequently declined. 4. The regulatory action by the drug authorities from developed markets has led to substantial loss in value of companies. Such actions impact existing sales and impacts further approvals. 5. The CD has filed Abbreviated New Drug Application (ANDA) in 201314 and are still awaiting approval from USFDA.The commercial potential of these drugs is limited. 6. USFDA had undertaken inspection of Bavla Vapi units in March 2014 and thereafter issued a warning letters in 28.09.2015, there was re-inspection in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine to add Glove ports, interlocking of doors and extension of LAF (Class A) in 2-3 areas. This will require a period of 12 months to restart the facility for manufacturing as the required modification is to be completed and requalification of the area, water systems, calibration, media fill is required to be undertaken. (f) Formulation facility in the Bavla unit was designed and executed by Biopharmex, Israel based company as Turnkey project. Project of approximately INR 4-5 crores is pending, therefore, Biopharmexhas blocked passwords of Building Management system and Process equipment. 11. Further, during the Diligence, there were certain observations which were made pertaining to the operation, land, sales of the Bavla unit which are as follows; (a) Normalized Working capital is not available, and the operating losses have to be funded by Intas to the tune of INR 25 crore, till the unit becomes fully operational and self-sustaining; (b) Additional capex of INR 30 crore was estimated by the Intas technical team to get the asset operational and able to supply to the regulated markets as pert GMP standards; (c) Out of the total Bavla land: - 10 % of the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are already in the field of Pharmaceuticals and have experience and expertise to revive both the units. (v) Business projection for the next 3 years is given in detail and sets out of projections for the ongoing products in concern their sales, volumes etc., based on which the projections have been made and arrived at. These projections are in line with the existing assets on as is basis as well as the Capex that will be invested in the unit are in line with the previous track record of the Corporate Debtor when the Corporate Debtor was doing well and hence these projections are very much possible, realistic and conservative. (vi) The successful Resolution Applicant plan ensures that the both units of the Corporate Debtor, i.e. Vapi and Bavla unit is revived and the business is maintained. Further, the jobs of the employees/ workmen in Vapi unit shall continue and the consenting employees /workman of Bavla Unit shall be transferred to Intas without any break or interruption in service and the same is specified in the said plan. 17. The applicant never raised any grievance pertaining to valuation or slump sale of Bavla unit during the COC meetings. 18. Intas is acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome to an independent conclusion that the Resolution plan is not in violation in provisions of the IBC. 9. It is the duty of adjudicating authority to exercise the judicial powers and discretionary powers vested in it to call for any information as if may require to satisfy itself that any particular resolution plan is compliant with the provisions of the IBC. 10. There exists enough material on record to suggest that there is some amount of confusion as to the valuation of intangible assets of the CD and it cannot be prejudicial to any person / entity / stake holders if adjudicating authority exercises its discretion and jurisdiction to call for an independent valuers report in a sealed cover. Submissions of the Promoter: 1. The CD has two plants which are operative and the valuers have valued an entire Company s plant and machineries at Fair Market Value (Avg.) of ₹ 44 crores and Liquidation Value (Avg.) of ₹ 26 crores, which in the past valued by bank s (Joint Lender Form) appointed valuer consistently thrice (2013, 2015 and 2016) at Fair Market Value (Avg.) of ₹ 536 crores and Liquidation Value (Avg.) of ₹ 441 crores. 2. The present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its SDR Discussion Documents (Refer page no. 9) prepared for the banks. Hereto annexed and marked Exhibit D is SDR Discussion Document prepared by E and Y in February, 2016. The Valuation Evidence Valuation Report and Methods Valuation report submitted by two registered valuers appointed by the Resolution Professional; Reports submitted by the Mr. Rakesh Narula and Company Current Assets; 1. The valuer has based their opinion on the information as available in peroxisomal financials as on 31.03.2018 and other details as provided by the management. The working valuation is tabulated as follows; Particulars Amount as per financials as on 31stMarch, 2018 Fair Value (Rs. Liquidation Value (Rs.) A. Intangible Assets 20,576.22 NIL NIL B. Non-current Investment 4.75 16.61 16.61 C. Long- Term Loans and advances 8,803.21 NIL NIL D. Other non-current asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company is NIL. Reports submitted by the Delta Valuers and Appraisers LLP Basis /Method of Valuation Intangible assets Intangible assets Fair Value (Rs) Liquidation Value (Rs) Intangible Assets - - Intangible assets under Development - - Total - - The intangible assets comprise of Technical Knowhow and Process knowhow amounting to ₹ 13.47 crores and R Dcosts for molecules as Intangible assets under development amounting to ₹ 192.28 crores. However, the FV and LV have been considered as zero since the company has received a warning letter from USFDA authorities for its products and plants. The warning letter has kept approval of ANDAs on hold and has also adversely impacted the company s exports to regulatory markets. The USFDA authorities can issue IMPORT ALERT at any time due to noncompliance of WARNING LETTER. In such cases exports would stop instantly and USFDA approvals to plant and products will be affected for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. 1. Legal Principles and ratio cited in recent judgement of Hon ble Supreme Court in In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta Ors. (2019 SCC Online SC 1478) Thus, it is clear that the limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned, the parameters of such review having been clearly laid down in K. Sashidhar (supra). 43. However, Shri Sibal exhorted us to hold that K. Sashidhar (supra) missed a very vital provision of the Code which is contained in Section 60(5) of the Code. Section 60(5) reads as follows: 60. Adjudicating Authority for corporate persons xxx xxxxxx (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of- (a) any application or proceeding by or against the corporate debtor or corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see 75 that the Committee of Credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Other non-current assets 15 5.11 1,479.31 56,095.79 67,475.38 b. This was the basis for valuation in the information memorandum, contrary to that the valuers as appointed by the Resolution Professional assigned nil value to the intangible assets on the sole premise that warning letters dated 28.09.2015 and 12.08.2016 were issued by the US FDA authorities can issue IMPORT ALERT at any time due to noncompliance of the same. c. The applicant filed warning letters issued to CD and the warning letter contemplates as follows: The U.S. Food and Drug Administration (FDA) inspected your manufacturing facilities: Vapi, Plot 41/42, Phase 1 -GIOC District Valsad Pardi, from May 18-22, 2015; and Belva, 300 Village Kerala, Bavla, Kerala Nalsarovar Road, Ahmedabad District, from August 3-14, 2015. This warning letter summarizes significant deviations from current good manufacturing practice (CGMP) for active pharmaceutical ingredients (API). Because your methods, facilities, or controls for manufacturing, proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... document themthrough a change control review process. Furthermore, you did not place samples from any of the batches produced through modified processes in your stability monitoring program to assess the effects of these changes on the quality of your API throughout the expiry period. In your response you referenced stability data from batches not manufactured using the modified processes discussed above. Your response is inadequate because you do not have stability data to demonstrate that your API meets specifications throughout its expiry period. Bavla Facility (FEI: 3008117347) 1. Failure to adequately investigate and document out-of-specification results and implement appropriate corrective actions. Your firm routinely re-tested samples without documented justification and deleted analytical data. Our Inspection found that you did not adequately investigate failing or atypical results. Although you obtained failing results in 2014, you did not initiate and document investigations for those failing results until July 2015. In addition, the conclusions of your investigations lacked supporting data. Your firm's response a tributed all unauthorized retesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Your response states that this area of your facility was (b)(4) and that the (b)(4) had (b)(4). Nonetheless, our investigators found a batch record inside this area demonstrating that you had been conducting manufacturing operations in this space as recently as August 2, 2015 - one day prior to the beginning of the inspection. Conclusion Deviations cited in this letter are not intended as an all-inclusive list. You are responsible for investigating these deviations, for determining the causes, for preventing their recurrence, and for preventing other deviations in all your facilities. If you are considering an action that is likely to lead to a disruption in the supply of drugs produced at your facility, FDA requests that you contact CDER's Drug Shortages Staff immediately, at drugshortages@fda.hhs.gov, so that FDA can work With you on the most effective way to bring your operations into compliance with the law. Contacting the Drug Shortages Staff also allows you to meet any obligations you may have to report discontinuances or interruptions in your drug manufacture under 21 U.S.C. 356C(b) and allows FDA to consider, as soon as possible, what actions, if any, may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iefing them on the proposal made in the Resolution Plan submitted by them and requested them to leave the COC for further consideration . 2. The members of the COC requested the Chairman to consult Mr. Vijay Kriplani, Technical Advisor of the Company as to whether nonclearance of warning letter so far had deteriorated the value of the ANDAs and the company so much. The chairman took note of the same. 3. COC meeting dated 04.12.2018, further observed that the valuation report has been received from the valuers. The COC members took note on the same and requested the chairman to share the reports with them. 4. The COC meeting on 24.12.2018 and 26.12.2018 has also discussed about the valuation update as follows: - the Chairman apprised the members of the COC that the Final Signed copy of the valuation report of Rakesh Narula and Co. has been received and soft copy of the same is circulated to the COC members. He added that the discussion on the value of the Current Assets in the valuation report of Delta Valuers is pending. Hence, he had called the representative of Delta Valuers to discuss in the meeting of COC. The Chairman invited and greeted Mr. Kushal Merchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, it can be said that 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. Conclusion: The Counsel for the Applicant conceded that 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. Be that as it may, the reasoning of the Valuers for ascribing the nil value is absolutely untenable in the interest of maximizing the assets of the CD. The value of Intangible assets of a going concern making profits even during CIRP cannot be stripped of under the premise of warning letters. No legal rights of any of the parties is affected if the exercise of fresh valuation is carried out, at best would assist the better valuation of CD as a going concern, though there were only two Resolution applicants willing infuse funds and revive the CD ..... X X X X Extracts X X X X X X X X Extracts X X X X
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