Why are valuation experts crucial in bankruptcy litigation?
It is an unfortunate fact that thousands of American companies file for bankruptcy every year. In 2023, we saw 18,926 businesses file for bankruptcy, 40.39% higher than the bankruptcy filings in 2022.
Each bankruptcy filing would involve arranging the sale of assets, transferring assets to creditors to settle debts, and allocating leftover funds to all shareholders. Every party can have a different view of an asset’s value. At the same time, bankruptcy proceedings are the last opportunity to recover investments and the credit extended to these companies. Hence, disputes and litigations are highly likely to arise in bankruptcy proceedings.
The main role of Valuation experts in bankruptcy litigation is bringing all parties on the same page about an asset’s value. Let’s read the role of a valuation expert in bankruptcy litigation in this article. Read on to learn more!
Valuation expert’s role in bankruptcy arbitrations and litigations
You may not always need to file lawsuits to resolve conflicts that arise in bankruptcy proceedings. It is always advisable to first try to find a solution through mediation and negotiations. If negotiations break down, then you can approach the courts to resolve the disputes. These are two very different scenarios that can considerably change a valuation expert’s role in bankruptcy proceedings.
Hence, we will explore valuation experts role in bankruptcy mediations and arbitrations versus litigations.
Mediations and arbitrations
When a party hires a valuation expert in bankruptcy-related mediations and arbitrations, the expert will adopt an advisory role to help the client understand the financial implications of various possible outcomes and assist in developing settlement proposals.
In this role, they provide damage calculations for various claims, present scenario analysis, and help the client prepare rebuttals to valuation-related arguments made by opposing parties.
If all parties in a bankruptcy-related dispute cannot find a consensus regarding the value of an asset or a group of assets, they may come together to hire a single valuation expert. Sometimes, the designated mediator or arbitrator may hire a valuation expert.
In such cases, the valuation expert must provide an unbiased assessment of all company assets and propose a fair value allocation to all equity interests. Instead of trying to guide one client to a favorable outcome, in this scenario, they must try to bridge gaps between parties through valuation insights.
Litigations
The insights of valuation experts for bankruptcy litigation may be asked for by the plaintiff, the defendant, or the court itself. When an expert is hired by the plaintiff or the defendant, they must collaborate with the legal team to prepare a credible testimony that supports the client’s claims.
The legal team will also prepare the valuation expert to respond to cross-examination by the opposing party’s lawyers.
As per Rule 706 of the Federal Rules of Evidence, the court can appoint a willing expert witness to which all parties agree. If a valuation expert is appointed as an expert witness under this rule, the expert must share their findings with all parties. Any party may also depose the expert, and in response to their deposition, any opposing party may cross-examine them.
Why do insights of valuation experts for bankruptcy litigation proceedings matter?
Some of the important tasks undertaken by a valuation expert in bankruptcy proceedings are as follows:
Asset valuation
We can divide bankruptcy proceedings into the first part, which is arranging the sale of assets, and the second part, which is settling all claims.
The role of valuation experts is crucial in the first part, i.e. arranging the sale of assets. In bankruptcy proceedings, buyers may try to take unfair advantage of the urgent need for liquidity to secure an unreasonable discount on asset prices. This can reduce the funds available for settling claims between various stakeholders. In such cases, valuation experts can protect the interests of company stakeholders by helping the company make compelling counterarguments.
The valuation expert’s contributions are even more valuable when complex assets like patents, software, brand names, and franchises are being sold.
Value allocation to different equity interests
Shareholders do not receive money in bankruptcy proceedings as they are paid after creditors. If a company’s assets can only cover debts or fall short of covering debts, the shareholders will lose their investments. However, in some rare cases, the funds left over after paying creditors will be distributed among shareholders.
If the company has a simple, single equity class system, each shareholder’s receivable will be the leftover funds multiplied by their percentage ownership. However, if a company issues various kinds of equity interests, it is challenging to allocate value to each equity interest accurately.
A valuation expert like Eqvista, who regularly deals with complex security valuations and 409a valuations for equity compensation, will know how to accurately interpret documents related to each equity interest issued and allocate value appropriately across different equity interests.
Damage calculations
If you provide significant credit to a debtor who later decides to file for bankruptcy, you need to estimate potential settlement amounts to manage your own long-term financial obligations and short-term working capital requirements.
Estimating potential settlement amounts is a challenging and time-consuming task. It requires bankruptcy assessments which may not be equipped or have the bandwidth to perform bankruptcy assessments. If that is the case, relying on a valuation expert whose damage calculations can assist your financial planning is prudent.
Furthermore, if you believe your debtor misrepresented facts and figures or committed some other form of fraud, a valuation expert can help recover the damages from such fraud. By analyzing email communications, quotations, ledgers, invoices, internal reports, tax returns, and auditor’s reports, they can help you quantify the damage and leverage your claims if they get disputed in bankruptcy litigations.
Solvency analysis
Solvency analysis involves studying a company’s cash flows and financial obligations to determine how long and how well a company can stay solvent, i.e. keep with its long-term and short-term debts. This kind of financial analysis comes a step prior to filing for bankruptcy and can even help a company avoid bankruptcy.
By performing solvency analysis, a valuation expert can help you identify which debt repayments and revenue streams must be prioritized to stay afloat for longer. This analysis can also help a company decide when to file for bankruptcy and when to propose debt reorganization plans.
When a company wants to implement a debt reorganization plan, it must convince all stakeholders of its ability to repay its obligations under the new proposed terms. Presenting solvency projections under different terms and scenarios can help companies make a compelling case for their stakeholders.
Eqvista- Accurate bankruptcy assessments for smooth claim settlements!
A valuation expert’s role in bankruptcy proceedings depends on the stage at which they are hired and who hires them. If they are hired prior to filing for bankruptcy, their role is to perform solvency analysis to estimate how long a company can stay afloat, under what kind of debt reorganization it can stay, and if it needs to file for bankruptcy.
Once a company files for bankruptcy, a valuation expert ensures that assets are not sold at unfair discounts. When disputes over claim amount and priority arise, creditors may hire a valuation expert to present damage calculations in front of designated arbitrators or a court of law. Similarly, debtors may hire valuation experts to make counterarguments.
Are you involved in bankruptcy proceedings? Eqvista’s valuation experts can fortify your claims through our accurate and credible valuation reports to ensure a smooth settlement. Contact us to know more!
