An Ambitious Manufacturing Company Became Insolvent Due To Economic Sanctions

Introduction

A Company was looking forward to creating its name in Iran & other middle east countries through its product from its dedicated manufacturing facility.

However, it started suffering losses after the receiving country suffered economic sanctions.

The company struggled to stay afloat & could not service its debts. It became a Non-performing asset account with the banks & other financial institutions.

The Situation

• The major plant & machinery were specific to its nature & was set up only for manufacturing the specific end-product.
• The creditors wanted to carry out an insolvency resolution process & hence appointed us to estimate the realizable value of the plant & machinery assets.
• The company was in a shutdown condition since 2012 and all the machines were in a poor condition.
• The valuation procedure included site visits, fetching quotations, and collecting other relevant data on the machines for estimating the value of the assets & submission of the report.

Complications/The challenges we faced

• We were provided only with the list of machines that were installed at the site.
• No additional info was provided by the company or any of the financial institutions.
• Collecting relevant price data & employing the right valuation process required a lot of effort & creativity for delivering a satisfactory result.

The questions we asked

• How to arrive at the valuation of all the assets in the limited time of 1 week?
• How to get all the quotations for machines & depict the weight of the machines?
• What assumptions are to be taken if we can’t fetch the quotations from the market or we can’t depict the weight of these machines?
• Will the scrap value suffice the need of the financial institutions?

What we did

After several discussions held internally, we managed to conduct the exercise & provide the valuation in a limited time while ensuring that the interest of the lender is safeguarded.

Our answers

• We decided to conduct the valuation through the Cost approach by getting the CAPEX cost of the same capacity plant
• By the virtue of all the known vendors in the market, we got the weight of each machine through their general specifications written in the manuals.
• The assumptions adopted while valuing the scrap value of the plant & machinery have correctively sufficed the need of the financial institutions.

Also Read, Valuation of Steel Plant

1. Why did the manufacturing company become insolvent?

The company became insolvent primarily due to economic sanctions imposed on the country where it planned to expand operations. These sanctions disrupted business activities, leading to continuous losses and inability to service debts.

2. How do economic sanctions impact businesses financially?

Economic sanctions can restrict trade, payments, and market access, severely affecting revenue streams. For export-oriented manufacturing companies, this can result in declining cash flows and eventual financial distress.

3. What happens when a company becomes a Non-Performing Asset (NPA)?

When a company fails to repay its loans, it is classified as an NPA by banks. This triggers recovery actions, including insolvency proceedings and asset valuation to recover dues.

4. Why is asset valuation important during insolvency?

Asset valuation helps creditors determine the realizable value of plant and machinery. This is crucial for decision-making in insolvency resolution, liquidation, or recovery planning.

5. What challenges are faced in valuing distressed manufacturing assets?

Key challenges include lack of data, poor condition of machinery, limited market comparables, and time constraints. In this case, even basic machine details and pricing data were difficult to obtain.

6. Which valuation approach is used for plant and machinery in insolvency cases?

The cost approach is commonly used, where the replacement cost of similar assets is estimated and adjusted for depreciation and condition.

7. What is scrap value in asset valuation?

Scrap value refers to the residual value of machinery when it is no longer usable for operations. It becomes relevant when assets are outdated, damaged, or cannot be sold as operational units.

8. How do valuation firms complete assessments with limited data?

Valuation firms rely on market expertise, vendor inputs, technical manuals, and reasonable assumptions to estimate asset values, ensuring that creditor interests are protected.