Data as an Insolvency Asset in the Digital Age: Balancing Data Valuation and Asset Maximization under the IBC and DPDP Act

Abstract: 

In an increasingly digital economy, data has emerged as a valuable asset, akin to physical and financial assets. With the advent of the Digital Personal Data Protection (DPDP) Act, 2023, and the existing framework of the Insolvency and Bankruptcy Code (IBC), 2016, there arises a critical intersection of data rights, valuation, and insolvency resolution. This essay examines the classification of data as an asset in insolvency proceedings, explores methodologies for its valuation, and discusses the challenges of balancing creditor interests and data protection under the IBC and DPDP frameworks. It aims to provide a roadmap for insolvency professionals and policymakers on the prudent treatment of data in the digital era.

Introduction:

The transformation of data from mere information to a commercially exploitable asset has led to a paradigm shift in how insolvency regimes view intangible resources. In India, while the IBC provides a mechanism for the resolution of distressed entities, it lacks express provisions on the treatment of data. Simultaneously, the DPDP Act lays down the legal contours for personal data protection. The dual mandate of maximizing asset value for creditors and upholding data protection rights necessitates a nuanced approach to data treatment during insolvency.

Understanding Data as an Asset: 

Data, whether personal or non-personal, structured or unstructured, can drive significant commercial value. Customer databases, behavioural analytics, proprietary algorithms, and user-generated content are now core components of a company’s valuation. Recognizing data as an asset involves considering its utility, exclusivity, and monetization potential. However, such recognition must be balanced against the legal rights attached to the data, particularly under the DPDP Act which prioritizes consent, purpose limitation, and data minimization.

Valuation Challenges and Approaches: 

Valuing data requires interdisciplinary tools involving legal, technological, and economic assessments. Methods such as cost-based, income-based, and market-based valuation can be used, each presenting unique challenges:

• Cost-based valuation considers the expenditure incurred in generating or acquiring the data.

• Income-based valuation estimates the future cash flows data can generate.

• Market-based valuation relies on comparable data sales in the market.

These valuations must also take into account the shelf-life, accuracy, and compliance status of data under the DPDP Act.

Legal Framework under IBC and DPDP Act:

The IBC aims at asset maximization and timely resolution, empowering Resolution Professionals (RPs) to manage and dispose of assets. However, in the absence of explicit provisions on data, RPs face ambiguity in monetizing data-centric assets. The DPDP Act imposes obligations on data fiduciaries regarding lawful processing, storage, and transfer of personal data, potentially restricting such transfers during insolvency resolution.

For instance, selling a customer database without proper anonymization or consent may attract penalties under the DPDP Act, even if the objective under IBC is to recover maximum value. Hence, harmonization of both laws is essential.

Balancing Conflicting Objectives: 

To balance creditor interests with privacy rights, the following measures are essential:

• Privacy Compliant Due Diligence: RPs must conduct data audits to ensure compliance with DPDP obligations before marketing data assets.

• Anonymization and Minimization: Where feasible, anonymized data can be monetized without infringing privacy laws.

• Judicial Interpretation and Precedents: Courts should evolve jurisprudence guiding RPs on the lawful use and sale of data.

• Regulatory Coordination: A joint mechanism between the Insolvency and Bankruptcy Board of India (IBBI) and the Data Protection Board could help resolve conflicting mandates.

  
  

Recommendations and Way Forward:

1. Statutory Amendment: IBC should explicitly recognize data as an asset class, with appropriate guidelines for its handling.

2. Valuation Standards: SEBI or ICAI may introduce valuation standards specifically for data assets.

3. Data Trustee Role: Appoint data trustees during insolvency to safeguard data subjects’ rights.

4. Training and Awareness: RPs and stakeholders must be trained on legal and technical aspects of data management.

Conclusion:

In the digital age, data is not merely a by-product of business—it is business. Recognizing and responsibly harnessing its value during insolvency can enhance creditor recoveries while upholding individuals’ data rights. As India strides towards a data-driven economy, coherent integration of the IBC and DPDP Act is imperative for a balanced and future-ready insolvency ecosystem.

References:

1.     Insolvency and Bankruptcy Code, 2016, Ministry of Law and Justice, Government of India.

2.     Digital Personal Data Protection Act, 2023, Ministry of Electronics and Information Technology.

3.     World Economic Forum, ‘The Value of Data’ (2021), outlining data as a key economic asset.

4.     PwC Report on ‘Data Valuation: Understanding the Worth of Data Assets’ (2020).

5.     Justice B.N. Srikrishna Committee Report on Data Protection Framework (2018).

6.     European Union General Data Protection Regulation (GDPR) and its influence on Indian data laws.

7.     IBBI Guidelines and circulars regarding valuation under the IBC.

8.     NITI Aayog Discussion Paper on Artificial Intelligence and Data Management (2018).

This article is authored by Priyanshu Chaturvedi, who participated in the “Law Over Coffee” (Edition 1) workshop organized by Lets Learn Law. The views and opinions expressed in this piece are solely those of the author.