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Interim Finance in CIRP: Legal Framework, Regulatory Mechanisms, and Judicial Precedents
Introduction
The introduction of the Insolvency and Bankruptcy Code, 2016 marked a transformative shift in India’s approach to corporate insolvency and debt resolution. Among the various provisions designed to facilitate the Corporate Insolvency Resolution Process (CIRP), the mechanism of interim finance stands out as a critical element that ensures business continuity during the resolution period. When a corporate debtor enters insolvency proceedings, it faces an immediate and pressing challenge: maintaining operations while navigating the complex terrain of creditor claims, asset preservation, and eventual resolution or liquidation.
Interim finance addresses this fundamental challenge by providing a structured framework through which companies undergoing CIRP can access necessary funding to continue operations, meet working capital requirements, and cover the substantial costs associated with the resolution process itself. The significance of this provision extends beyond mere financial support; it represents the legislative intent to preserve the going concern value of enterprises, thereby maximizing returns for all stakeholders involved in the insolvency proceedings [1].
The framework governing interim finance under the IBC reflects a delicate balance between multiple competing interests. On one hand, it recognizes the urgent need for operational funding to prevent asset deterioration and value erosion. On the other, it establishes safeguards to protect existing creditors whose claims might be subordinated to new financing arrangements. This balance is achieved through a carefully designed priority structure, approval mechanisms, and oversight provisions that collectively ensure interim finance serves its intended purpose without compromising the fundamental principles of insolvency law [2].
Understanding interim finance requires examining not just the statutory provisions but also the regulatory framework established by the Insolvency and Bankruptcy Board of India (IBBI) and the evolving jurisprudence developed through tribunal and appellate decisions. The practical application of these provisions has revealed both the strengths and limitations of the current framework, prompting ongoing discussions about potential reforms and improvements.
The Conceptual Foundation of Interim Finance in Insolvency Law
The concept of interim finance, also referred to as debtor-in-possession financing in some jurisdictions, serves a dual purpose within insolvency proceedings. Primarily, it enables the corporate debtor to maintain operational continuity during the CIRP period, which typically extends for a maximum of 330 days including any extensions. Without such financing, most companies entering insolvency would face immediate closure, resulting in rapid asset deterioration, employee displacement, and ultimately, minimal recovery for creditors [3].
The legislative design of interim finance under the IBC incorporates several distinctive features that differentiate it from conventional corporate borrowing. First, interim finance enjoys super-priority status, meaning it ranks ahead of most other claims in the distribution waterfall during liquidation proceedings. This prioritization is essential to incentivize lenders to provide funding to distressed companies that would otherwise be considered unacceptable credit risks under normal commercial circumstances.
Second, the raising of interim finance is subject to specific approval requirements depending on the stage of CIRP and the party exercising control over the corporate debtor’s affairs. During the initial phase when an Interim Resolution Professional (IRP) manages the company, certain powers exist to raise limited interim finance. However, once a Resolution Professional (RP) is appointed and the Committee of Creditors (CoC) is constituted, more substantial interim financing arrangements require explicit CoC approval through a prescribed voting threshold.
Third, the creation of security interests over the assets of the corporate debtor in favor of interim finance providers is subject to additional safeguards, particularly when such assets are already encumbered by existing creditor claims. This prevents the dilution of secured creditor positions without their knowledge or consent, thereby maintaining the integrity of the existing capital structure while facilitating new financing.
The practical necessity of interim finance becomes evident when examining the typical financial condition of companies entering CIRP. Most such companies suffer from depleted working capital, strained supplier relationships, and limited access to conventional credit channels. The CIRP process itself generates significant costs including professional fees, operational expenses, and statutory payments that must be met regardless of the company’s financial difficulties. Without interim finance, Resolution Professionals would find it nearly impossible to maintain operations, preserve asset values, or create conditions conducive to meaningful resolution attempts.
Statutory Provisions Governing Interim Finance
Definition and Classification as Insolvency Resolution Process Costs
The Insolvency and Bankruptcy Code, 2016, establishes the foundational framework for interim finance through several interconnected provisions. Section 5(13) of the IBC provides the statutory definition of “insolvency resolution process costs,” which explicitly includes the amount of any interim finance raised and the costs incurred in raising such finance. This definitional inclusion is significant because it automatically grants interim finance the priority status associated with CIRP costs in the distribution waterfall established under Section 53 of the Code [1].
The classification of interim finance as part of CIRP costs means that such financing takes precedence over virtually all other claims against the corporate debtor, including those of secured financial creditors, operational creditors, and shareholders. This super-priority status serves a crucial function in making interim finance commercially viable for potential lenders. Without such priority, few financial institutions or investors would be willing to provide funding to companies in active insolvency proceedings, given the inherent risks and uncertainties involved.
Beyond interim finance itself, Section 5(13) encompasses several other categories of expenses within CIRP costs. These include fees payable to Resolution Professionals, expenses incurred in running the business as a going concern, costs incurred by government authorities in facilitating the resolution process, and other costs as may be specified by the IBBI. This comprehensive definition ensures that all essential costs associated with conducting a meaningful CIRP are afforded appropriate priority, thereby preventing the process from being derailed by funding shortages.
The legislative intent behind granting super-priority to CIRP costs, including interim finance, is rooted in the recognition that successful resolution requires adequate resources. If creditors could prevent the raising of interim finance or if such finance was subordinated to existing claims, the entire resolution process would become unworkable. The corporate debtor would be unable to maintain operations, asset values would deteriorate rapidly, and the prospects for successful resolution would diminish significantly. By prioritizing these costs, the IBC creates an environment where resolution efforts can proceed with necessary financial support.
Powers and Responsibilities of Interim Resolution Professionals
Section 20 of the IBC delineates the management responsibilities and powers of the Interim Resolution Professional concerning the operations of the corporate debtor. Under Section 20(1), the IRP is mandated to make every endeavor to protect and preserve the value of the property of the corporate debtor and manage its operations as a going concern. This fundamental obligation establishes the context within which the power to raise interim finance must be understood and exercised.
The specific authority to raise interim finance is provided under Section 20(2)(c), which states that the IRP has the authority to raise interim finance, subject to an important caveat regarding security interests. The provision specifies that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property. This protection ensures that existing secured creditors are not prejudiced by new financing arrangements that could dilute their security positions [4].
However, Section 20(2)(c) also contains a crucial exception to the consent requirement. It provides that no prior consent of the creditor shall be required where the value of the encumbered property is not less than twice the amount of the debt secured against it. This exception recognizes situations where substantial equity exists in charged assets, making additional encumbrances commercially reasonable without necessarily disadvantaging existing secured creditors. The two-times threshold provides a clear, objective standard that balances the need for financing flexibility against creditor protection concerns.
The practical application of Section 20 powers during the IRP phase is generally limited to raising interim finance for immediate operational necessities and urgent requirements. IRPs typically exercise these powers conservatively, focusing on maintaining minimal operations rather than undertaking substantial new financing arrangements. This cautious approach reflects both the temporary nature of the IRP’s role and the pending constitution of the CoC, which will eventually assume primary decision-making authority over significant financial matters.
Committee of Creditors’ Approval Requirements
Once the Committee of Creditors is constituted and a Resolution Professional is appointed, the framework for raising interim finance undergoes a significant shift in terms of approval requirements. Section 28 of the IBC addresses this transition by specifying actions that require CoC approval, including matters related to interim finance. This provision represents a critical check-and-balance mechanism, ensuring that major financial decisions affecting the corporate debtor are subject to creditor oversight [5].
Section 28(1)(a) explicitly requires that the Resolution Professional shall not raise any interim finance in excess of the amount as may be decided by the CoC in their meeting without obtaining prior approval. This means the CoC essentially sets a limit or threshold for interim financing, and any amount beyond this predetermined limit requires specific CoC authorization. The approval threshold for such decisions is generally sixty-six percent of the voting share, consistent with the IBC’s approach to significant decisions affecting the CIRP.
Similarly, Section 28(1)(b) requires CoC approval for creating any security interest over the assets of the corporate debtor. This provision complements the interim finance approval requirement by ensuring that the manner in which such finance is secured also receives creditor scrutiny. Together, these provisions create a robust framework where both the quantum of interim finance and the security arrangements supporting it are subject to collective creditor decision-making through the CoC mechanism.
The rationale behind requiring CoC approval for interim finance beyond a certain threshold is multifaceted. First, it ensures that creditors, who have the most substantial economic interest in the outcome of CIRP, exercise meaningful control over decisions that could affect recovery rates and resolution prospects. Second, it prevents Resolution Professionals from taking unilateral financial decisions that might benefit some stakeholders at the expense of others. Third, it creates accountability and transparency in the interim financing process, as all significant arrangements must be disclosed to and approved by the CoC.
In practice, the interaction between Section 20 and Section 28 creates a two-tiered system. During the initial IRP phase, limited interim finance can be raised under the IRP’s inherent powers, subject to the security interest limitations discussed earlier. Once the RP is appointed and the CoC is functional, more substantial interim financing arrangements require CoC approval, with the specific thresholds and approval mechanisms determined by CoC decisions in accordance with the Code’s voting requirements.
Priority and Treatment in Distribution Waterfall
The treatment of interim finance and other CIRP costs in the distribution of proceeds from asset realization is governed by Sections 52 and 53 of the IBC, which establish clear priority rules applicable in liquidation scenarios. These provisions are crucial because they ultimately determine the practical effectiveness of interim finance as a tool for facilitating CIRP by assuring potential lenders of their priority status.
Section 52 deals specifically with secured creditors in liquidation proceedings and their options for dealing with their security interests. Section 52(8) contains a particularly important provision regarding CIRP costs. It states that the amount of insolvency resolution process costs, due from secured creditors who realize their security interests independently, shall be deducted from the proceeds of any realization by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate [6].
This provision means that even secured creditors who choose to enforce their security interests outside the liquidation framework must contribute toward CIRP costs, including any interim finance that was raised during the resolution process. This ensures that CIRP costs, being essential for attempting resolution, are borne proportionately by all creditors who ultimately benefit from the resolution attempt, whether successful or not. The provision prevents secured creditors from avoiding their share of CIRP costs by opting to realize their security independently.
Section 53 establishes the complete distribution waterfall for liquidation proceeds, and Section 53(1)(a) places insolvency resolution process costs at the very top of this priority structure, mandating that such costs be paid in full before any other claims are satisfied. This super-priority status is absolute and applies regardless of the nature or timing of other creditor claims. The provision states that CIRP costs, which include interim finance and the costs of raising such finance, take precedence over secured creditors, workmen’s dues, employee claims, operational creditors, and all other stakeholders.
The practical implication of this priority structure is profound. It means that interim finance providers have a virtually guaranteed position in terms of recovery, subject only to the availability of sufficient assets in the liquidation estate. This assurance is essential for attracting interim financing from external sources, as lenders need certainty regarding their ability to recover their advances even if the resolution attempt ultimately fails and the corporate debtor enters liquidation.
The combination of Sections 52 and 53 creates a comprehensive framework ensuring that CIRP costs, including interim finance, receive consistent priority treatment regardless of how the insolvency proceedings conclude. Whether through successful resolution, where such costs are typically factored into the resolution plan, or through liquidation, where they receive first priority from asset realization proceeds, interim finance providers have clear legal protection for their advances.
Regulatory Framework Under IBBI Regulations
Regulation 29: Asset Sales During CIRP
The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, provide detailed operational guidelines for implementing the IBC’s provisions regarding CIRP. Regulation 29 specifically addresses the sale of assets outside the ordinary course of business, which often becomes necessary for generating funds to meet interim finance requirements or other CIRP costs when operating cash flows are insufficient.
Regulation 29(1) empowers the Resolution Professional to sell unencumbered assets of the corporate debtor, other than in the ordinary course of business, if the RP is of the opinion that such sale is necessary for better realization of value under the facts and circumstances of the case. However, this power is subject to an important quantitative limitation: the book value of all assets sold during the CIRP period under this provision cannot exceed ten percent of the total claims admitted by the Interim Resolution Professional [7].
This ten percent limitation serves multiple purposes. It prevents excessive asset stripping during CIRP that might leave insufficient assets for meaningful resolution or fair distribution to creditors. It ensures that the core business and significant assets remain intact for potential resolution applicants to evaluate and incorporate into their proposals. It also creates a clear boundary for the RP’s unilateral asset disposal authority, beyond which creditor approval becomes necessary.
Regulation 29(2) requires that any sale of assets under this provision must receive approval from the CoC by a vote of sixty-six percent of the voting share of the members. This approval requirement ensures creditor oversight of significant asset disposal decisions and prevents potential conflicts of interest or value destruction through improvident sales. The sixty-six percent threshold reflects the IBC’s general approach to major decisions, requiring substantial creditor consensus rather than simple majority approval.
Regulation 29(3) provides an important protection for purchasers of assets sold under this provision. It states that a bona fide purchaser of assets sold under Regulation 29 shall have free and marketable title to such assets, notwithstanding the terms of the constitutional documents of the corporate debtor, shareholders’ agreements, joint venture agreements, or other documents of similar nature. This provision addresses a common concern in distressed asset sales: the risk that pre-existing contractual restrictions might cloud the title transferred to purchasers, thereby deterring potential buyers and depressing realization values.
The practical interaction between Regulation 29 and interim finance requirements is significant. When a corporate debtor lacks sufficient operating cash flows to meet CIRP costs or interim finance obligations, the RP may utilize Regulation 29 to sell non-core or surplus unencumbered assets, using the proceeds to fund the resolution process. This provides an alternative or supplement to external interim financing, particularly in cases where attracting external lenders proves difficult due to the specific circumstances of the corporate debtor or broader market conditions.
Regulation 31: Components of CIRP Costs
Regulation 31 provides comprehensive detail regarding the various elements that constitute “insolvency resolution process costs” under Section 5(13)(e) of the IBC. This regulation is crucial because it clarifies which specific expenses qualify for the super-priority status accorded to CIRP costs under the Code’s distribution provisions. Understanding these components is essential for Resolution Professionals managing budgets and for potential interim finance providers assessing their priority position relative to other expenses.
Under Regulation 31, CIRP costs include amounts due to suppliers of essential goods and services under Regulation 32. This ensures that critical suppliers who continue providing necessary inputs during CIRP despite the corporate debtor’s financial distress receive priority treatment for their post-commencement supplies. Such priority is essential for maintaining supplier confidence and ensuring continued supply of essential goods and services necessary for keeping the corporate debtor operational during the resolution period.
The regulation also specifically includes fees payable to authorized representatives under sub-regulation (8) of Regulation 16A, along with out-of-pocket expenses of authorized representatives for discharge of their functions under Section 25A. These provisions recognize the role of authorized representatives in facilitating collective action by similarly situated creditors, particularly operational creditors who might otherwise lack effective voice in CIRP proceedings.
Regulation 31 further includes amounts due to persons whose rights are prejudicially affected on account of the moratorium imposed under Section 14(1)(d). This category addresses situations where the broad moratorium protecting the corporate debtor from legal proceedings inadvertently prejudices third-party rights in ways that merit compensation as part of CIRP costs. The inclusion of such amounts reflects the principle that the societal benefit of facilitating corporate resolution should not come at the unfair expense of innocent third parties whose rights are collaterally affected.
Critically, Regulation 31 specifies that expenses incurred on or by the Interim Resolution Professional to the extent ratified under Regulation 33, and expenses incurred on or by the Resolution Professional fixed under Regulation 34, form part of CIRP costs. This covers the substantial professional fees and operational expenses that Resolution Professionals incur while managing the CIRP process. The ratification and fixing mechanisms under Regulations 33 and 34 ensure that such expenses are subject to appropriate scrutiny while providing reasonable certainty to professionals regarding compensation for their services [8].
Finally, Regulation 31 includes a catch-all provision for other costs directly relating to the corporate insolvency resolution process and approved by the committee. This flexibility allows the CoC to recognize and approve additional legitimate expenses that may not fit neatly into the specified categories but are nonetheless essential for conducting an effective resolution process. However, the requirement for CoC approval ensures that this flexibility is not abused and that creditors retain ultimate control over what expenses receive priority treatment.
The comprehensive nature of Regulation 31 provides clarity to all stakeholders regarding which expenses qualify as CIRP costs and thereby receive priority treatment in distribution. For interim finance providers, this clarity is particularly important because it defines which other obligations will share the super-priority status with interim finance advances. While all CIRP costs receive priority over other creditor claims, among CIRP costs themselves, the specific priority may depend on the nature and timing of the obligations, making precise categorization essential.
Judicial Interpretation and Landmark Decisions
CoC’s Responsibility for Professional Fees and Costs
The question of who bears responsibility for CIRP costs, particularly when the corporate debtor lacks sufficient internal resources, has been the subject of several important tribunal decisions. These judgments have clarified the obligations of CoC members and established important precedents regarding the financing of resolution proceedings when the corporate debtor cannot self-fund the process.
In the matter of Aqua Omega Services Pvt. Ltd. vs Great United Energy Pvt. Ltd. decided by NCLT Mumbai-I on October 31, 2018, the tribunal addressed a situation where the Resolution Professional’s fees remained unpaid due to insufficient funds in the corporate debtor’s accounts. The tribunal examined the relevant provisions of the CIRP Regulations and held that as per Regulation 33 and Regulation 34, it is the responsibility of the Committee of Creditors to make payment of the Resolution Professional’s costs.
In that particular case, the CoC consisted of a sole financial creditor, ICICI Bank. The tribunal specifically directed ICICI Bank to make payment of the Resolution Professional’s costs along with IRP expenses, which had been ratified by the CoC. This decision established an important precedent: when CIRP costs cannot be met from the corporate debtor’s internal resources, the CoC members, particularly financial creditors, may be required to fund these costs to ensure the resolution process can continue [9].
The Aqua Omega decision was significant because it addressed a practical challenge frequently encountered in insolvency proceedings. Many corporate debtors entering CIRP have exhausted their liquid resources and cannot generate sufficient cash flows to meet even basic operational expenses, let alone professional fees and other CIRP costs. Without a mechanism to compel creditors to fund these costs, the CIRP process would stall, potentially causing the corporate debtor to deteriorate further and reducing ultimate recoveries for all stakeholders.
Proportionate Sharing of CIRP Costs Among CoC Members
Building upon the principle established in Aqua Omega, the National Company Law Appellate Tribunal (NCLAT) further refined the framework for CoC members’ contributions to CIRP costs in the matter of Committee of Creditors M/s. Smartec Build Systems Pvt. Ltd. vs B. Santosh Babu & Ors., decided on January 10, 2020. This case involved a dispute regarding payment of fees to an Interim Resolution Professional who had acted during the resolution process but was not permitted to continue as Liquidator.
The NCLAT agreed with the observations made by the Adjudicating Authority (NCLT) that the Committee of Creditors is responsible for paying the fees and costs incurred by the Interim Resolution Professional who acted during the resolution process beyond 30 days until the date of liquidation, despite not being allowed to continue as Liquidator. This judgment reinforced the principle that CIRP costs, including professional fees, are obligations that ultimately fall upon the creditor community when the corporate debtor cannot bear them.
Perhaps the most significant development in this area came with the NCLAT’s decision in Newogrowth Credit Pvt. Ltd. vs Resolution Professional, Bhaskar Marine Services Pvt. Ltd. & Ors., decided on December 10, 2020. This judgment established a specific formula for allocating CIRP cost obligations among multiple CoC members. The tribunal held that a CoC member is required to bear their share of CIRP costs in proportion to their voting share and the period during which they were members of the CoC.
This proportionate allocation principle addresses situations where the CoC composition changes during CIRP, either through claim transfers or other mechanisms. By linking contribution obligations to both voting share (which reflects the relative size of creditor claims) and membership duration, the Newogrowth Credit judgment created a fair and predictable framework for distributing CIRP cost responsibilities among creditors. The decision recognized that creditors with larger claims or longer involvement in the resolution process have correspondingly greater obligations to ensure the process remains adequately funded [2].
These judicial developments collectively establish that while CIRP costs nominally rank as obligations of the corporate debtor and receive super-priority in distribution, the practical responsibility for funding these costs, when the corporate debtor cannot do so, falls upon the creditor community through the CoC mechanism. This framework ensures that resolution processes do not fail due to funding shortages while maintaining fairness among creditors through proportionate allocation of cost-bearing obligations.
Implications for Interim Finance Practices
The judicial precedents regarding CoC responsibility for CIRP costs have important implications for interim finance practices. If CoC members are ultimately responsible for ensuring CIRP costs are met, this creates both opportunities and challenges for interim finance arrangements. On one hand, it suggests that CoC members have strong incentives to approve reasonable interim finance arrangements from external sources, as such financing may be preferable to direct contributions from their own resources.
On the other hand, the established principle that CoC members bear ultimate responsibility for CIRP costs when internal resources are insufficient might reduce the willingness of external parties to provide interim finance in certain situations. If external lenders believe that CoC members will eventually be compelled to fund CIRP costs anyway, those lenders might demand higher interest rates or more favorable security arrangements to compensate for the perceived risk that CoC members might seek to minimize external borrowings.
The judicial framework also highlights the importance of early and transparent financial planning in CIRP proceedings. Resolution Professionals must assess funding requirements comprehensively and present clear proposals to the CoC regarding how CIRP costs will be met. CoC members, understanding their potential obligation to fund shortfalls, have incentive to scrutinize these proposals carefully and ensure that interim finance arrangements, if pursued, are on commercially reasonable terms.
Practical Challenges in Implementing Interim Finance Provisions
Reluctance of CoC Members to Approve Financing
Despite the clear statutory framework and supportive judicial precedents, practical implementation of interim finance provisions faces significant challenges. One of the most persistent issues is the reluctance of CoC members to approve interim finance, even when such financing is clearly necessary for maintaining operations and preserving asset values. This reluctance stems from multiple factors that create complex dynamics in CIRP decision-making.
First, CoC members, particularly financial creditors who typically dominate voting shares, often view interim finance as potentially diluting their recovery prospects. Even though interim finance ranks as CIRP costs and would receive priority only in liquidation scenarios, creditors may be concerned that additional liabilities will reduce the net asset value available for distribution or make the corporate debtor less attractive to potential resolution applicants. This concern is especially acute when the corporate debtor’s asset base is limited or when existing claims already exceed estimated asset values substantially.
Second, disagreements may arise among CoC members regarding the necessity, quantum, or terms of proposed interim finance. Different creditors may have varying risk appetites, time horizons, and strategic objectives regarding the resolution process. Some creditors might prefer to minimize further exposure and push toward liquidation, while others might favor more aggressive operational continuation requiring substantial interim finance. These conflicting interests can lead to protracted negotiations or outright rejection of financing proposals even when objective analysis suggests such financing is necessary.
Third, the judicial precedents establishing CoC responsibility for CIRP costs create a paradoxical disincentive in some situations. If CoC members know they will ultimately be required to fund CIRP costs proportionately if internal resources are exhausted, they might prefer to delay or minimize interim finance arrangements from external sources, planning instead to provide direct contributions only if and when absolutely necessary. This approach, while potentially reducing interest costs, can compromise the timeliness and effectiveness of the resolution process.
Fourth, concerns about potential liability for wrongful decisions may make CoC members excessively cautious about approving interim finance. If interim finance is raised but the resolution ultimately fails, creditors might face questions about whether such financing was prudent or whether it merely postponed inevitable liquidation while adding to total claims. This risk aversion can lead to suboptimal decision-making where CoC members reject beneficial financing proposals due to unfounded concerns about potential criticism or liability.
Information Asymmetry and Evaluation Challenges
Another significant practical challenge involves the information asymmetry between Resolution Professionals who possess detailed knowledge of the corporate debtor’s operations and financial condition, and CoC members who must evaluate interim finance proposals based on the information provided to them. This information gap can lead to misunderstandings, delays, or rejection of necessary financing proposals due to creditor concerns about the reliability or completeness of information presented.
Resolution Professionals must prepare detailed proposals justifying interim finance requirements, including cash flow projections, working capital assessments, and analysis of how the proposed financing will enhance resolution prospects or preserve value. However, creditors who lack operational expertise in the corporate debtor’s industry or who distrust the RP’s judgment may question these projections or demand additional analysis and guarantees that may not be feasible to provide.
The evaluation challenge is compounded in situations where the corporate debtor’s business is complex, operates in multiple segments, or faces rapidly changing market conditions. Creditors must make approval decisions within limited timeframes, often without the ability to conduct independent due diligence or verify the RP’s assumptions comprehensively. This creates pressure to either approve financing proposals based on incomplete evaluation or to reject proposals due to insufficient confidence in the underlying analysis.
Market conditions and broader economic factors further complicate evaluation decisions. During periods of economic stress or industry-specific challenges, creditors may be skeptical about the viability of continuing operations even with interim finance support. Conversely, during favorable economic conditions, creditors might be more willing to approve financing in the hope that improved market dynamics will enhance resolution prospects. These external factors, while relevant, can sometimes overshadow the specific merits of individual financing proposals, leading to decisions that may not optimize value preservation.
Structural Reforms and Proposed Solutions
Addressing these practical challenges requires a multifaceted approach combining regulatory clarifications, procedural improvements, and possibly legislative amendments. One proposal that has gained attention involves creating an automatic or presumptive interim finance mechanism similar to Regulation 2A of the IBBI (Liquidation Process) Regulations, 2016, which addresses contributions to liquidation costs.
Regulation 2A provides that where the CoC did not approve a plan under the relevant provisions, the liquidator shall call upon financial creditors who are financial institutions to contribute the excess of liquidation costs over liquid assets in proportion to the financial debts owed to them. This creates a clear, mandatory framework for funding liquidation costs when internal resources are insufficient. A similar provision for CIRP could establish that the financial creditor with the largest voting share has a presumptive obligation to provide or arrange interim finance as estimated by the Resolution Professional, subject to specified interest rates and terms.
Such a provision could specify that interim finance should be provided at a rate benchmarked to the State Bank of India’s Marginal Cost of Funds based Lending Rate (MCLR) plus a reasonable margin, perhaps 2%, ensuring that the financing terms are neither exploitative nor commercially unreasonable. The largest financial creditor would have the option to provide the financing directly or to identify alternative sources willing to provide financing on equivalent terms. This approach would reduce delays, ensure predictable financing availability, and address the collective action problems that often plague CoC decision-making on interim finance [3].
Another potential reform involves enhancing the information and analysis requirements for interim finance proposals. IBBI could issue detailed guidelines or formats for Resolution Professionals to follow when proposing interim finance, ensuring that CoC members receive comprehensive, standardized information to support informed decision-making. Such guidelines could specify required elements including detailed cash flow projections, sensitivity analyses, alternative scenarios, and clear articulation of how the proposed financing supports resolution objectives versus merely delaying liquidation.
Procedural reforms could also address timing issues by establishing presumptive timelines for CoC consideration of interim finance proposals. Currently, CoC meetings and decision processes can be time-consuming, creating situations where urgently needed financing is delayed while the corporate debtor’s condition deteriorates. Clear regulatory expectations regarding the timeframe within which the CoC must consider and decide upon interim finance proposals would create appropriate pressure for timely decision-making while still preserving creditor oversight rights.
Comparative Perspectives and International Practices
While the IBC’s approach to interim finance contains innovative elements, examining international practices provides useful context and potential insights for further development of India’s framework. Debtor-in-possession financing, as interim finance is known in many jurisdictions, has been a feature of insolvency systems in various countries for decades, with different approaches to priority, approval mechanisms, and creditor protection.
The United States Bankruptcy Code, particularly Chapter 11 reorganization provisions, contains detailed provisions regarding debtor-in-possession financing. US law allows bankruptcy courts to authorize post-petition financing with super-priority status, including granting liens senior to or equal with existing secured creditors under certain conditions. The threshold for such financing typically requires showing that the debtor cannot obtain credit otherwise, and that the terms are fair and reasonable. This judicial oversight model contrasts with India’s creditor-driven approach through CoC approval.
United Kingdom insolvency law, while not using identical terminology, provides mechanisms through which companies in administration can obtain financing for continuing operations. The UK approach emphasizes administrator discretion while recognizing that certain financing arrangements require creditor consultation or court approval depending on their terms and potential impact on existing secured creditors. The UK framework provides flexibility for administrators to take urgent actions while preserving oversight for decisions with significant distributional consequences.
European Union member states implement various approaches to financing companies undergoing restructuring or insolvency proceedings, with recent EU Directives encouraging member states to facilitate rescue financing by providing appropriate priority status and safe harbors for good faith financing that supports viable restructuring attempts. The EU framework recognizes the importance of interim finance for maximizing resolution prospects while maintaining core creditor protections.
Drawing from these international practices, several observations emerge that might inform India’s ongoing development of interim finance frameworks. First, most sophisticated insolvency regimes recognize the necessity of providing significant priority protection for rescue financing, with variations in exactly how such priority is structured and what approvals are required. Second, there is general recognition that some degree of flexibility is essential to accommodate the diverse circumstances of different insolvencies, arguing against overly rigid or prescriptive rules regarding interim finance.
Third, successful frameworks typically balance the need for decisiveness in authorizing necessary financing against the legitimate interests of existing creditors in preventing value transfers or unjustified dilution of their positions. Fourth, transparency and information disclosure are universally recognized as essential for enabling informed decision-making by creditors or courts evaluating interim finance proposals. These principles provide useful guideposts for evaluating potential reforms to India’s interim finance provisions.
Conclusion
Interim finance represents a critical component of the Corporate Insolvency Resolution Process under India’s Insolvency and Bankruptcy Code, 2016. The statutory and regulatory framework governing interim finance reflects careful attention to competing considerations: the need to maintain corporate debtor operations and fund the resolution process versus the protection of existing creditor interests and prevention of value transfers. Through provisions in the IBC, IBBI Regulations, and evolving jurisprudence, India has developed a multifaceted approach to interim finance that provides both enabling powers and appropriate safeguards.
The super-priority status accorded to interim finance through its classification as insolvency resolution process costs serves the essential function of incentivizing lenders to provide funding to distressed companies. Without such priority protection, the practical availability of interim finance would be severely limited, compromising the effectiveness of CIRP as a value-preserving resolution mechanism. The priority structure established through Sections 52 and 53 of the IBC ensures that interim finance providers receive preferential treatment in liquidation scenarios, thereby reducing lending risks to acceptable levels.
The regulatory framework established through IBBI Regulations provides operational detail that bridges the gap between statutory provisions and practical implementation. Regulations governing asset sales, CIRP cost components, and various procedural matters create a workable system for managing the complex financial dimensions of corporate insolvency. These regulations continue to evolve based on experience and stakeholder feedback, demonstrating the adaptive nature of India’s insolvency framework.
Judicial precedents, particularly those addressing CoC members’ responsibilities for CIRP costs, have significantly shaped the practical operation of interim finance provisions. By establishing that CoC members bear proportionate responsibility for ensuring CIRP costs are met when internal resources are insufficient, these decisions have created both accountability and predictability in the financing of resolution processes. The principles articulated in cases such as Aqua Omega Services, Smartec Build Systems, and Newogrowth Credit provide practical guidance for Resolution Professionals and creditors navigating funding challenges during CIRP.
Despite these positive developments, practical challenges persist in the implementation of interim finance provisions. The reluctance of CoC members to approve necessary financing, information asymmetries between Resolution Professionals and creditors, and collective action problems inherent in multi-creditor decision-making continue to create obstacles in many cases. These challenges underscore the need for ongoing refinement of the regulatory framework, potentially including provisions that create presumptive obligations for financing by the largest financial creditor or other mechanisms to ensure timely availability of necessary funding.
Looking forward, the continued evolution of India’s interim finance framework will benefit from attention to international best practices, empirical analysis of outcomes under current provisions, and stakeholder input regarding practical obstacles encountered in real-world insolvency proceedings. The ultimate objective must remain clear: creating a system where corporate debtors undergoing insolvency resolution can access necessary financing to preserve value, maintain operations, and maximize the prospects for successful resolution, all while protecting the legitimate interests of existing creditors and maintaining the integrity of the insolvency process.
The success of the Insolvency and Bankruptcy Code in achieving its transformative objectives depends significantly on the effective operation of supporting mechanisms like interim finance. As India’s insolvency ecosystem continues to mature, the interim finance provisions will undoubtedly undergo further refinement based on accumulated experience and evolving commercial realities. The foundational framework established through the IBC and supporting regulations provides a solid basis for this ongoing development, positioning India’s insolvency system to meet the complex challenges of corporate distress and resolution in a dynamic economic environment.
References
[1] Ministry of Law and Justice. (2016). The Insolvency and Bankruptcy Code, 2016. Government of India. https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
[2] Insolvency Tracker. (2020). Can a CoC member be asked to contribute towards CIRP cost? https://insolvencytracker.in/2020/12/18/can-a-coc-member-be-asked-to-contribute-towards-cirp-cost
[3] Insolvency and Bankruptcy Board of India. (2016). IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
[4] Committee on Insolvency Law Reforms. (2015). Report of the Bankruptcy Law Reforms Committee, Volume I: Rationale and Design. Ministry of Finance, Government of India. https://ibbi.gov.in/BLRCReportVol1_04112015.pdf
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[6] National Company Law Tribunal. (2018). Aqua Omega Services Pvt. Ltd. vs Great United Energy Pvt. Ltd. [MA 986/2018 IN CP (IB)-2104/MB/2018]. https://www.iiipicai.in/ckfinder/userfiles/files/Judgment-31-10-18-NCLT-Mumbai-Aqua-Omega.pdf
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