Page 23 - Bankruptcy and Reorganization Services

Typical bankruptcy situations requiring the determination of liquidation values include (but are not lim-
ited to)

 meeting the best interest of creditors test in a Chapter 11 plan of reorganization,

 helping Chapter 11 creditors decide whether to accept or reject the plan, and

 determining liquidation values in the context of Chapter 7.

Either a liquidation or going concern premise of value may be applied in the assessment of cash collat-
eral, adequate protection, and claims determination, as well as the evaluation of the solvency of a debtor
in the context of avoidance actions. Whether a liquidation or going concern premise of value should be
applied is a facts and circumstances determination.

Liquidation value is the value of the business assuming that operations are discontinued and the assets
are sold either (1) in place as a mass assemblage of assets (referred to previously as assembled group of
assets), or (2) on a piecemeal basis assuming the assets are to be employed in a new facility or location
(hereinafter referred to as "in transition on a piecemeal basis"). There are two general types of liquida-
tions on a piecemeal basis: orderly liquidation and forced liquidation. The main difference between the
two categories of piecemeal liquidations relates to the amount of time an asset is exposed to the market-
place.

A value estimate based on an assembled group of assets premise of value assumes assets are valued in
place. In other words, the assets are valued as they are currently installed and configured in existing fa-
cilities. Furthermore, it is presumed that the assembled group of assets is sold with normal exposure to
the secondary market.

Orderly liquidation is the value assuming the assets are sold in transition on a piecemeal basis with nor-
mal exposure to the secondary market. As such, costs associated with disconnecting, disassembling,
transporting, and redeployment of assets may impact the value estimate. The value estimate will be
based on the price that could be obtained from the orderly sale of the assets, and may include off-
balance-sheet assets such as intangible assets not reflected on the balance sheet, voidable preferences,
questionable payments to creditors, assets concealed by the debtor, and other causes of action. General-
ly, a one- to two-year liquidation period is assumed; however, the time period could be shorter or longer
if warranted by the circumstances. Regardless of the actual timeline, the ideal length of time is one that
enables the company to maximize the realized proceeds, after considering the costs to sell and carry the
asset.

Forced liquidation assumes the assets are sold in transition on piecemeal basis fn 2 as quickly as possible
rather than as a result of normal exposure to the assets’ normal marketplace. In this situation, assets are
usually sold by auction resulting in a lower selling price than those realized under other premises.

Although an assessment of the premise of value is often left up to the practitioner in non-bankruptcy en-
gagements, in a bankruptcy context, care should be taken to ensure that the intended premise both (1)
fits the facts and circumstances of the debtor’s operations and market conditions at the applicable valua-

fn 2 As with orderly liquidation, costs associated with disconnecting, disassembling, transporting, and redeploying assets may impact
the value estimate.

© 2020 Association of International Certified Professional Accountants 21