Interim Finance in Creditor-Oriented Bankruptcy Codes: A Study in the Context of Insolvency & Bankruptcy Code,India

Abstract

This study examines interim financing with specific reference to the Insolvency and Bankruptcy Code, 2016 (IBC) in India. Interim financing is recognized as relevant to the successful outcome of the bankruptcy process. Internationally, bankruptcy regimes are considered robust if they contain enabling provisions allowing interim financing. IBC, hailed as creditor-friendly legislation, authorizes the insolvency professional (IP) to raise interim finance during bankruptcy. However, despite enabling legislation, the segment remains challenging. This study, through a qualitative methodology, examines the issues of mobilizing interim finance under the IBC. First, through a theoretical lens, this article discusses the importance of recognizing the distinct dimensions of interim financing under creditor-oriented regimes, like IBC, relative to the more established debtor-in-possession (DIP) financing model in the US (a debtor-friendly bankruptcy regime). This article argues that interim financing under creditor-oriented bankruptcy regimes faces certain inherent limitations (like lower lender motivation due to a lack of relationship banking or control/governance opportunities) relative to DIP financing, which primarily stems from who controls the firm during bankruptcy (IP or the corporate debtor). Through an interview method, this article then examines some specific issues in raising interim finance under the IBC. This research finds a lack of repayment visibility (quantum & timelines), narrow perception of interim finance and subtle differences between the objectives of the IP and lenders (resolution vs. recovery) are some practical impediments. From a normative perspective, this article suggests that improvements in IBC efficiency would improve takeout visibility to lenders. Greater stakeholder engagement will help alleviate conflicts and broaden the perspectives on the ultimate objectives of interim finance. Additionally, this article suggests learnings from the DIP model include a more early (ex-ante) consideration of interim finance (including potential sources). This article also calls for regulatory clarification on the inclusion of funding from the CoC in the technical definition of interim finance.

Keywords

Interim Financing Bankruptcy Financing Post-commencement Financing Post-petition Financing Rescue Financing

Interim financing during the bankruptcy process remains a critical issue vital to firm survival (Dahiya et al., 2003; World Bank, 2016). Internationally, bankruptcy laws exhibit heterogeneity in design (Blazy et al., 2017), often categorized in terms of their legal orientation (debtor-friendly or creditor-friendly; Acharya & Subramanian, 2009) or outcomes (reorganization or liquidation-oriented; Rodano et al., 2016). However, in either of the regime or outcome, the availability of interim finance is vital for ensuring the continued operations of the corporate debtor (World Bank, 2016), and lack of funds often poses a significant barrier to the efficiency¹ of the bankruptcy process (Dou et al., 2022). The subject in certain countries has garnered academic interest for decades (for instance, debtor-in-possession [DIP] financing in the USA; refer Senbet & Wang, 2012; Skeel, 2004; Triantis, 2020).

Interim financing, also known as post-commencement financing (refer World Bank, 2016) or rescue financing (refer Gurrea-Martinez, 2022b; Reserve Bank of India [RBI], 2017), is when lenders extend fresh finance to the insolvent entity/corporate debtor upon the commencement of or during bankruptcy (World Bank, 2016). Broadly, it refers to a form of external financing required to be raised by an insolvent entity lacking internal resources to maintain its going concern status and asset value (Insolvency and Bankruptcy Board of India [IBBI] & International Finance Corporation [IFC], 2020). Interim finance supports the survival of insolvent entities through successful reorganization or going concern sale in liquidation (World Bank, 2016). Enabling interim finance legislation indicates a robust insolvency regime (World Bank, 2020a). For motivating lenders to provide interim finance, bankruptcy laws typically prioritize their repayments over other creditor claims from reorganization or liquidation proceeds (Gurrea-Martinez, 2022a; Senbet & Wang, 2012).

A significant portion of literature has focused on DIP financing in the US (for instance, Dahiya et al., 2003; Li & Wang, 2016; Skeel, 2004; Triantis, 2020). DIP financing is prevalent in the US, where the existing management remains in control of the corporate debtor (debtor-in-possession), and court-approved financing (Dhillon et al., 2007) is granted under Chapter 11 of the US Bankruptcy Code (Dahiya et al., 2003; Mohan & Wadhwa, 2022; Senbet & Wang, 2012). The US is considered to have the world’s most developed debtor-friendly regimes (Jackson & Skeel, 2013; Morawska et al., 2020) equipped with a comprehensive system of DIP financing (Gurrea-Martinez, 2022b). DIP finance has become an integral part of the US bankruptcy process, with over half of the bankrupt firms in the US having availed of such financing (Eckbo et al., 2022; Li & Wang, 2016; Triantis, 2020). Literature has also examined the importance of DIP financing to the overall efficiency of the bankruptcy process (refer Dahiya et al., 2003; Elayan & Meyer, 2001).

However, it seems a priori, relatively lesser, is known about the dimensions of interim finance in creditor-oriented or creditor-friendly bankruptcy regimes (CFRs) such as the Insolvency and Bankruptcy Code (IBC, 2016)² in India. Under CFRs, the management is usually suspended, and ‘control rights are transferred to a firm’s creditors’ (Acharya & Subramanian, 2009, p. 4950). The court or the Committee of Creditors (CoC), as the case may be, appoints an Insolvency Professional (IP)³ to oversee the affairs of the corporate debtor, an arrangement increasingly known as creditor-in-possession (Mohan & Wadhwa, 2022). However, during such time, the corporate debtor continues to require funds to meet various expenses while awaiting its fate of reorganization or liquidation. Based on the degree of insolvency, a corporate debtor might need to rely on interim financing to maintain its operations (IBBI & IFC, 2020).

Further, raising interim finance for insolvent entities is often challenging for reasons including the high-risk perception by lenders, the availability of funds at high interest rates and security requirement (IBBI & IFC, 2020). The situation is further made complex by existing lenders’ unwillingness to provide fresh funding or even approve the mobilization of external financing without any viable reorganization plan. Hence, these complexities can prevent the corporate debtor from getting timely financing, affecting its going concern status.

Hence, against this backdrop, this article examines the subject of interim finance under the IBC. India promulgated the landmark IBC in 2016, often hailed as a creditor-oriented piece of legislation (IBBI & IFC, 2020; RBI, 2017). This article aims to identify issues in mobilizing interim finance under IBC and offer normative thoughts for developing the market. Parallelly, this article explores whether there can be learnings from the more established (Cooper et al., 2021) DIP financing in the US and whether, due to differing orientations of the insolvency regimes, interim finance under IBC has inherent differences (advantages or limitations) when compared to DIP financing. The primary objectives of this study are, therefore, to: (1)

discuss whether interim financing in creditor-oriented regimes (in the context of IBC) has distinct dimensions when compared to interim finance in debtor-friendly codes (in the context of DIP financing in the US) (RQ 1);

(2)

identify practical issues/challenges in raising interim finance under the IBC in India (RQ 2);

(3)

offer normative thoughts for deepening the interim finance market in India (RQ 3).

IBC (2016) has a relatively limited track record; however, the volume of cases has been significantly increasing. The effectiveness and efficiency of the IBC are being especially debated (refer IBBI, 2021), and time, cost, and outcomes (determinants of creditor recovery rate) are critical measures of the efficiency of bankruptcy codes (refer World Bank, 2020a). Lack of interim finance can significantly influence bankruptcy outcomes (refer World Bank, 2016). Therefore, the author expects this study to be helpful to researchers, practitioners and policymakers from a law design perspective and in understanding the nature of interim financing under the IBC.

This study contributes to the literature on interim finance and more extensive debate on the efficiency of bankruptcy codes (refer IBBI, 2021). First, distinguishing between interim financing under two different insolvency regimes, this study finds that DIP financing has distinct dimensions from interim financing under IBC in terms of framework, lender motivations, timing, takeout priority, and court intervention. Hence, any direct comparison between the two forms of financing from a normative perspective needs to be made cautiously. Towards RQ1, this article offers the proposition that while there are learnings and inspirations drawn from the more established DIP model (given that over half of the insolvent firms in the US have availed of DIP financing), interim financing under CFRs (in the context of IBC) faces certain inherent limitations, like lower lender motivations (on account of a lack of relationship banking, control & governance opportunities). These primarily stem from who remains in control of the corporate debtor during bankruptcy (creditor-in-control vs. debtor-in-possession). Hence, under the two codes, the depth of the interim finance market is expected to be vastly different, given that these are different lender-motivating factors. Therefore, this article suggests that appreciating such intrinsic differences between interim finance under two distinct regimes is vital before examining the nature and dynamics of interim finance under IBC. This article asserts the importance of analyzing interim finance under IBC through the lens of the creditor-controlled regime under which it operates in India. Against this backdrop, this study, through a qualitative methodology (interviews), identifies and discusses the specific issues while raising interim finance under the IBC (RQ 2).

This study then finds a lack of visibility on repayments (quantum & timelines), narrow perception of interim finance (as a stop-gap arrangement) and subtle differences between the objectives of IPs and lenders (resolution vs. recovery) as some specific practical impediments to the interim finance market under IBC (resulting in limited supply and often high-interest rates of interim financing). Towards RQ3, this article suggests that the development of the interim finance market is linked to the overall improvement in the efficiency of IBC, and that the compression of Corporate Insolvency Resolution Process (CIRP) timelines would provide greater takeout visibility (quantum & timelines) to interim finance providers. Further, greater stakeholder engagement can help alleviate conflicts during CIRP and broaden perceptions of the ultimate objectives of IBC and interim finance in the bankruptcy process. Additionally, learnings from the DIP model include a more early (ex-ante) consideration of interim finance (including identification of potential sources), preferably before triggering bankruptcy, to avoid starving the corporate debtor of funds during bankruptcy. This article also calls for greater regulatory clarification on the inclusion of CoC funding (even if extended as an advance or non-interest-bearing) in the technical definition of interim finance.

The remainder of the article is organized as follows: The next section discusses the research methodology. An overview of interim finance under the IBC follows. A discussion on DIP financing in the US and the differences between the two forms of interim financing is presented next. The findings of the qualitative study with respondents are detailed in the subsequent sections. This article then concludes with a discussion, followed by some research limitations.

METHODOLOGY

The methodology chosen for this study is qualitative⁴, given that it is essential for directly assessing various perspectives and practical challenges in raising interim finance in India.

For the first objective, secondary data sources have been relied on by analyzing the literature⁵ on interim financing (and DIP financing for comparative focus) and interpreting the relevant provisions of the IBC.

For the second objective, interviews have been conducted with IPs (mostly telephonic, considering the convenience of respondents) to understand the practical issues/challenges while raising interim finance under the IBC. Parallelly, lenders were engaged to assess their perspectives. Based on the respondent’s schedule, a format in the form of questions (open as well as closed-ended questions) was sent in advance (primarily as an interview guide). However, in most cases, due to respondent time constraints, interviews were conducted without circulating a guide in advance. Respondents were then briefed on the research objectives and asked to provide their perspectives on (a) the importance of interim finance to the IBC process, (b) whether they have faced difficulty in raising interim finance, (c) the nature of issues if any faced in raising interim finance from both external as well as CoC side and (d) improvement areas in their opinion.

Interviews were held with 12 respondents (10 IPs and 2 lenders) with experience in CIRP cases (some professionals have experience in handling over 15 CIRP cases). Initial two respondents with significant expertise in CIRP cases were identified and approached out of professional contacts of the author. Upon request of the author, these respondents offered names and contact details of some potential interviewees, with the criteria being (a) experience and (b) inclination to participate in this research project. The author then contacted the potential respondents directly, and those who finally agreed to participate were interviewed and formed part of this study sample. The respondents were free to deviate from the structure of the questions during the interview and answer in their own words (in an open-ended manner), offering any fresh perspectives they wished to share. Due to the nature of their profession, all respondents requested anonymity, which the author assured to facilitate sharing of open views. A response summary was shared with the respondents, asking them to revert if they observed discrepancies in their responses.

Qualitative designs have relatively lesser sample size requirements⁶ than quantitative research primarily due to ‘focus on meaning (and heterogeneities in meanings), which are often concerned on the how and why of a particular issue, process, situation, subculture, scene or set of social interactions’ (Dworkin, 2012, p. 1319). While primarily being a qualitative study, after a point, many of the feedback themes remained similar, with most respondents reporting challenges in raising interim finance under the IBC in India.

Finally, toward objective 3, findings from literature and primary sources have been integrated to offer some thoughts to strengthen the interim finance market.

IBC AND INTERIM FINANCE PROVISIONS

India promulgated the IBC in 2016, before which it primarily relied on the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and The Recovery of Debts and Bankruptcy act, 1993 for the resolution of corporate defaults (for a perspective on these laws, refer Kulkarni, 2017; Visaria, 2009).

Broadly under IBC, any person⁷ (IBC, s 6) may refer a defaulting company within defined default thresholds (IBC, s 4) to the national company law tribunal (NCLT) for commencement of the corporate insolvency resolution process (CIRP). Upon admission by NCLT, (a) the existing board of the corporate debtor stands suspended (IBC, s 17); (b) the court appoints an IP for the preservation of value and for managing the operations of the corporate debtor as a going concern (IBC, ss 16,17); (c) a standstill or moratorium period is imposed (IBC, s 14) and (d) the CoC has to approve the resolution plan submitted by the resolution applicant (IBC, s 30). In the event of a lack of a viable resolution plan (or non-approval by the CoC), the corporate debtor is referred for liquidation (IBC, s 33). However, while the process appears sequential, the CoC may choose to liquidate the company in the initial phases of the CIRP, and ‘timely liquidation is preferred over fruitless resolution proceedings’ (refer Nair & Sahoo, 2022).

IBC is a time-bound mandate requiring the closure within 330 days from the insolvency commencement date, including the normal 180-day timeframe and an extension granted for general delays, including litigation (IBC, s 12). Over 4,000 companies in India have since been referred to IBC, with approx. 45% having exited the process (refer Sahoo, 2020). Post-IBC, from a 136 (2016) ranking on the Insolvency Score Index, India’s ranking improved to 52 in 2020 (refer World Bank, 2020a).

India has introduced specific interim finance provisions under the IBC allowing IPs to raise interim finance. Interim finance is defined under IBC as any financial debt raised by an IP during the CIRP period and other debt that may be notified (IBC, s 5[15]). Interim finance can enable the IP to ‘protect and preserve the value of the property of the corporate debtor and manage its operations as a going concern’ (IBC, s 20). Even prior to CoC formation, the IP can raise unsecured loans without any requirement of creditor approval (IBC, s 20[2][c]). Raising secured loans is, however, subject to the prior consent of the concerned creditors secured by such encumbered property unless the value of the property exceeds twice the value of the debt (IBC, s 20[2][c]). Post CoC formation, the IP may raise interim financing with prior approval and a monetary limit set by the CoC (IBC, ss 25[2], 28).

Interim finance is allowed to form part of CIRP costs (IBC, s 5[13]). In the event of a reorganization, CIRP costs get the highest takeout priority over other debts of the corporate debtor in the resolution plan (IBC, s 30[2]). In the event of liquidation, CIRP costs along with liquidation costs (including interest on interim financing for 12 months or interest from the period of liquidation commencement date till actual repayment, whichever is lower) are given the highest takeout priority in the waterfall mechanism (IBBI & IFC, 2020; IBC, s 53).

The World Bank recognizes this priority status of the interim loan as good insolvency practice in their Insolvency Framework Index⁸. India has scored 1 (out of 1) on enabling legislation authorizing credit access post-commencement of insolvency (World Bank, 2020b).

PART 1: DIP FINANCING

DIP financing under the US Bankruptcy Code (11 USC⁹) has received considerable interest in the literature, being a prominent mode of interim financing with active growth since the 1990s (Senbet & Wang, 2012). DIP financing is prevalent in the debtor-friendly bankruptcy regime of the US, where ‘the existing management of a firm filing for Chapter 11 frequently retains control over the business operations and the reorganization process’ (Dahiya et al., 2003, p. 262)¹⁰. The popularity of the DIP model is evident, with over half of bankrupt corporations in the US having availed of DIP financing (Li & Wang, 2016; Triantis, 2020). The alternative funding option is loans without security or super-priority status (thereby not requiring court intervention). However, the availability of such loans is few and far between situations of bankruptcy where there are limited viable alternatives (refer Dahiya et al., 2003; Diers et al., 2019).

DIP financing is a particular type of financing (Triantis, 2020) extended to firms filing for reorganization under Chapter 11 of the US Bankruptcy Code. Section 364 (a) of the US Bankruptcy Code governs DIP financing and permits insolvent corporate debtors to obtain unsecured credit during the bankruptcy process in the ordinary course of business. Any exceptions require prior approval from the bankruptcy court (11 USC, s 364[b]). Some scholars have therefore described DIP financing as court-approved financing for Chapter 11 filings (refer Dhillon et al., 2007). DIP facilitates debt financing during bankruptcy and provides ‘troubled company a new start albeit under strict conditions’ (Senbet & Wang, 2012, p. 261). In most cases, a DIP arrangement is already in place upon bankruptcy filing (Skeel, 2004).

Typically, lenders to DIP financing are the pre-petition lenders themselves (Eckbo et al., 2022) but may also include fresh investors such as private equity and hedge funds (Li & Wang, 2016). However, since many lenders would be unwilling to finance an insolvent firm, Section 364 of the US Bankruptcy Code offers ‘superior seniority and enhanced security’ (refer Senbet & Wang, 2012, p. 274) to lenders as motivation to extend finance to bankrupt entities. Under the US Bankruptcy Code, in the event of the unsuccessful raising of unsecured finance by the corporate debtor, the court may authorize the raising of DIP finance with (a) priority over all administrative expenses (11 USC s 364[c][1]), a feature routinely provided to DIP lenders in the US (refer Cooper et al., 2021; Eckbo et al., 2022); (b) first lien on unencumbered assets (11 USC, s 364 [c][2]); (c) junior lien on encumbered assets (11 USC, s 364[c][3]) or (d) priming lien, implying ‘a senior or equal lien on the property of the estate that is subject to lien’ (11 USC, s 364[d]). With these enabling provisions, the US has a robust DIP finance regime with super-priority offered to interim finance providers (Gurrea-Martinez, 2022a; RBI, 2017).

DIP financing is typically for the short-term liquidity needs of the insolvent corporate debtor (Li & Wang, 2016) and usually takes the form of a revolving line of credit (refer Eckbo et al., 2022; Skeel, 2004). A recent study by Eckbo et al. (2022), presenting new evidence on the structure of DIP loans, examined a dataset of DIP loans availed by 359 large firms (between 2002 and 2019). They found that 82% of DIP loans were from revolving facilities, with an average loan maturity of 10 months. This study also found that pre-petition lenders provide most of these loans, and priming lien dominates the DIP financing landscape.

There has been significant discussion in the theoretical and empirical literature on DIP financing. On analysis of the extant literature, the author finds that the debate is broadly centred around the following themes: (a) types of firms that receive interim financing, (b) the relevance of DIP finance for the bankruptcy process and outcomes and (c) implications of DIP finance on control and governance of firms. A perspective based on these themes is analyzed below.

Types of Firms that Receive DIP Financing

Some scholars have empirically analyzed the firms that are more successful in raising DIP finance. DIP finance flows more easily to firms that are larger¹¹, have better operating performance (and therefore higher chances of emergence from bankruptcy), have more unencumbered assets¹², are facing temporary liquidity issues¹³, have low cash holdings¹⁴, have high working capital needs, and are not in declining industries (refer Dahiya et al., 2003; Dhillon et al., 2007; Elayan & Meyer, 2001; Li & Wang, 2016).

However, small firms with relatively not-so-healthy operating performances also get DIP financing, and the same largely depends on the type of DIP lender. Li and Wang (2016) noted there are two distinct types of DIP financiers, namely ‘Loan to Loan (LTL) lenders’ (‘pre-petition secured bank lenders’; p. 122) and ‘Loan to Own (LTO) lenders’ (‘activist investors comprising hedge funds or PE funds’; p. 122). Each has differing motivations for providing DIP financing. Li and Wang found LTL lenders target borrowers with whom they have had a prior lending relationship, who are under-collateralized and enjoy a relatively better operating performance. In contrast, LTO lenders target small firms (not necessarily with sound operational performance), are over-collateralized and are not bank-dependent. LTO is also known as loan and control financing (refer Skeel, 2004), where the objective at times is to transfer control to the DIP lender as an outcome of the reorganization process.

Importance for Bankruptcy Process and Firm Survival

A sub-stream of literature on DIP has debated the overall usefulness of DIP financing to the bankruptcy process. DIP financing improves reorganization prospects (refer Dahiya et al., 2003; Eckbo et al., 2022; Elayan & Meyer, 2001) and improves the ex-post efficiency of the bankruptcy process (by shortening the time taken to emerge from bankruptcy in resolution or liquidation (refer Dahiya et al., 2003; Elayan & Meyer, 2001). Scholars have also noted that successful emergence from Chapter 11 is more likely with LTL lenders (refer Dahiya et al., 2003).

Scholars have also noted that DIP finance resolves information asymmetries between insiders and outsiders of distressed firms. Dhillon et al. (2007) noted that illiquid firms get DIP financing during reorganization while insolvent firms do not. DIP financing is considered an effective signalling device of confidence in a firm’s financial reorganization prospects (refer Triantis, 2020), as evidenced by positive stock price responses following announcements (Dhillon et al., 2007; Elayan & Meyer, 2001). Elayan and Meyer (2001) recorded a higher positive signalling effect of DIP financing for the first round of DIP financing for small firms, large DIP loans, loans availed from existing lenders and loans from banks (relative to non-banks). Scholars have also noted that DIP lending reduces excessive firm risk-taking due to ex-post creditor control of the firm exercised by interim finance providers (through covenants or influence on management). The authors noted that such creditor control has also led to an increase in reorganizing entities for going concern sales (Senbet & Wang, 2012).

However, while DIP financing has benefits, there have also been criticisms, with some scholars observing the relationship with bankruptcy outcomes as tentative (refer Triantis, 2020). Important criticisms are that DIP financing induces firms to invest in risky projects and projects with negative returns (overinvestment). However, Dahiya et al. (2003) found no empirical evidence supporting this hypothesis. Further, DIP lenders can also be too keen to liquidate the firm, given their priority status in takeout (Skeel, 2004). There has also been criticism that existing lenders use the DIP framework to enhance the security of their existing loans by advancing fresh financing, which can be detrimental to other secured creditors (Skeel, 2004; Triantis, 2020). DIP lenders can also, at times, depress healthy risk-taking (Skeel, 2004) since they have fixed upside potential and, therefore, little incentive, which can, however, be modified by including upside potential in DIP contracts (Senbet & Wang, 2012). Lastly, in cases where DIP financing is provided by LTO lenders (refer Li & Wang, 2016), outside bids get suppressed since LTO lenders aim to take control during reorganization (refer Skeel, 2004).

Implication on Control/Governance of Firms

Perhaps the most significant implication of DIP financing is the impact on governance outcomes and control of distressed firms. From being a stop-gap financing arrangement to meeting the insolvent debtor’s liquidity needs, ‘the DIP loan agreement has become the single most important governance lever in many Chapter 11 cases’ (Skeel, 2004, p. 1906). Lenders often use DIP to monitor and govern the firm during reorganization through influence on management and the use of covenants in the loan agreement (Eckbo et al., 2022; Senbet & Wang, 2012; Triantis, 2020). Even though the debtor remains in control of the firm, ex-post creditor control during reorganization is exercised by creditors through DIP financing (including insisting on management change), thereby balancing the debtor-friendliness of the insolvency regime (Skeel, 2004).

Li and Wang (2016), examining a sample of Chapter 11 filings, recorded that the extent of governance outcome depends on the nature of DIP lenders. Greater involvement and governance improvements are recorded by LTO lenders as they participate more intensely in the restructuring process (often, they are the final buyers in the reorganization plan identified upfront before the petition). LTL lenders, in contrast, while becoming the most senior lender, try to ‘influence restructuring of the firm through the use of covenants and debt contracts rather than governance channel’ (Li & Wang, 2016, p. 135). Li and Wang, however, did not find any role for LTL lenders in active governance interventions. Overall, DIP financiers can either steer a successful reorganization or emerge as the largest equity shareholder through loan conversion once the firm is out of bankruptcy.

DISTINCT DIMENSIONS OF INTERIM FINANCING UNDER IBC: SOME COMPARISONS WITH DIP FINANCING

Interim financing in CFRs implies financing where the existing management does not retain control of the firm, and an IP is appointed to manage the firm during bankruptcy. Bankruptcy regimes of several countries, such as the UK, Germany, New Zealand, Hong Kong, Australia, Kenya and Denmark, are considered CFRs (refer Cho et al., 2014; Davydenko & Franks, 2008; Heitz & Narayanamoorthy, 2020). However, bankruptcy regimes differ in severity (refer Morawska et al., 2020). Not much literature has focused on the distinct dimensions of interim financing under CFRs relative to DIP financing. Both forms of financing have their similarities and differences. Similarities include certain liquidity infusion objectives to maintain going concern status. Both are for the short term and enjoy priority in terms of takeout. Both play a crucial role in supporting the bankruptcy process, and interim financiers typically become the most senior class in the waterfall mechanism (Li & Wang, 2016).

However, the above analysis reveals significant differences between DIP financing in the US and interim finance under CFRs (in the context of IBC), given the distinct nature of the underlying bankruptcy codes. Under IBC, an IP manages the corporate debtor’s affairs upon the suspension of the existing board under the guidance of the CoC. The IP under IBC is primarily a ‘facilitator who invites feasible resolution plans without deciding itself that the corporate debtor must be liquidated, restructured, sold as a going concern’ (Mohan & Wadhwa, 2022, p. 30). Hence, an implication for prospective interim finance lenders under IBC is that they are now dealing with an independent officer (IP) rather than the pre-petition management of the firm (DIP) under Chapter 11 of the US Bankruptcy Code.

While several technical differences exist between the two and a complete legal analysis is outside this study’s scope (for comparison of priority levels offered to interim finance lenders in 30 jurisdictions, refer Gurrea-Martinez, 2022a), some differences between interim finance under DIP and CFR (IBC) are as follows:

Conceptual Basis for Raising Interim Finance

At the very outset, interim financing in the DIP model is reorganization funding under Chapter 11 filings (often tied up by lenders as part of an overall reorganization objective). In contrast, there are no separate chapters for reorganization and liquidation under the IBC. Liquidation or reorganization is an outcome of the CIRP. While both have similar objectives, their respective natures differ. While DIP and interim financing are vital to successful outcomes of the bankruptcy process, interim finance under IBC is often positioned more as CIRP funding or to meet CIRP costs. While DIP financing has the perspective of a larger reorganization plan, interim financing under IBC has a higher uncertainty element, whether the firm will be reorganized or pushed into liquidation. This uncertainty element and differences in perspective often dampen lender confidence to extend interim financing under IBC.

Timing of Raising Interim Finance: Upfront Vs. During CIRP

DIP financing in the US is often tied up upfront before admission to bankruptcy (refer Skeel, 2004). Most DIP financing is raised upfront or early in the bankruptcy process, within the first 30 days of Chapter 11 filings (refer Dahiya et al., 2003; Triantis, 2020), as part of the proposed restructuring/reorganization of the corporate debtor. Skeel (2004) noted, ‘entering Chapter 11 without financing in place is a recipe for trouble’ (p. 1918). However, in the CFRs, in the context of the IBC, there are no separate chapters for reorganization/liquidation, unlike in the US Bankruptcy Code. There is often no upfront visibility on the emergence of reorganization or liquidation, the outcomes that emerge during the CIRP. Hence, the IP evaluates the mobilization of interim financing during the CIRP, subject to the monetary limit set by the CoC.

Court Approved Vs. Creditor-driven Process

DIP financing is a court-approved process proposed by lenders while filing Chapter 11 applications (Dahiya et al., 2003). In contrast, under IBC, the IP has the authority to raise interim finance within the monetary limits set by CoC. Further, under DIP, courts have significant power, including ordering priority over all administrative expenses (11 USC, s 364[c][1]) and granting a priming lien to DIP lenders (11 USC, s 364[d]). The same means offering ‘a senior or equal lien on assets that are already subject to a lien’ (Dahiya et al., 2003, p. 263). ‘DIP financing effectively allows the court to strip seniority, covenants, and collateral from existing debt’ (Senbet & Wang, 2012, p. 250). However, under interim finance in IBC, no such power is vested with the courts or IP unless approved by the CoC; the law only provides repayment priority status in the waterfall mechanism. It does not comment on security except for unencumbered assets or, unless otherwise authorized by the CoC, for encumbered assets. Hence, DIP lenders get significantly more protection under the US, prioritizing repayments and security (refer Eckbo et al., 2022; Gurrea-Martinez, 2022a).

Motivation to Lend in DIP Vs. Interim Finance (Relationship Lending)

Relationship lending has been a motive for DIP lenders, especially in lending by pre-petition secured lenders (Li & Wang, 2016). However, relationship banking under creditor-oriented codes such as IBC may become irrelevant where the IP is in control of the corporate debtor and the existing management is suspended. Hence the motivation of the lender is somewhat diminished in creditor-oriented codes. For better-off insolvent companies with prospects of reorganization, lenders may wish to continue to provide interim financing to maintain a relationship during reorganization and beyond. Hence, from a relationship point of view, lenders have a greater incentive to provide interim financing in debtor-friendly codes.

Motivation to Lend in DIP vs. Interim Finance (Governance & Control)

DIP lenders increasingly play a governance role in offsetting the debtor-friendliness of bankruptcy codes. Li and Wang (2016) observed that governance is a primary motivation for DIP lenders, especially LTO lenders. Many times, the intent of the LTO lender is decided in advance and to transfer the ownership control of the corporate debtor as the outcome of the reorganization process (refer Triantis, 2020). Hence, the literature has argued that these lenders have greater control and governance oversight (Li & Wang, 2016). However, under interim finance in CFRs (like IBC), where an IP is appointed by the court or the CoC (as the case may be), there is little control/governance motivation but priority on payment. The IP remains in charge of the firm, and the interim finance lender can, at the most, stipulate covenants. Hence, to a large extent, the screening benefit of DIP financing (refer Senbet & Wang, 2012) is reduced under interim finance under IBC, given the IP is an independent professional in charge of running the affairs of firms under court or CoC supervision. As noted by Skeel (2004), the court-appointed administrator is likely to dominate governance in bankruptcy even if bankruptcy framework provides DIP financing (p. 1933).

PART II: KEY FINDINGS ON PRACTICAL ISSUES AND CHALLENGES IN RAISING INTERIM FINANCE UNDER IBC

The following broad themes emerge from the interviews with the IPs:

From an Importance Viewpoint

Most respondents felt interim finance to be very important for maintaining the corporate debtor as a going concern and protecting the value of its assets. However, some respondents differentiated between interim finance and funds raised from the CoC, the latter more in nature of advance by CoC members and not strictly interim finance (no interest cost or separate financing agreements)¹⁵. However, this study has looked at the aggregate requirement during the entire CIRP (a broader view of interim finance). Therefore, the question posed to respondents was whether funding during the CIRP (from an external lender or any form of funding/advances from the CoC) is vital to the bankruptcy process. Most respondents observed that interim finance is crucial for the CIRP to enable the IP to meet critical CIRP costs. Therefore, they attempt to present the status of cash flows of the corporate debtor and the need for interim finance early in the CIRP (during the first or first few CoC meetings). One respondent, however, mentioned that due to numerous milestones to be achieved by the IP in the initial phases of the CIRP, the subject is raised during subsequent CoC meetings. Further, CoC also requires financial data, which can take time to compile.

Ease or Difficulty in Raising Interim Finance

Most respondents expressed that they have faced significant problems raising interim finance (whether from external lenders, CoC or both) for their respective CIRP cases. One respondent described the process of raising interim finance as More than very difficult, while another described it as Next to impossible. One respondent shared, IPs face difficulty raising funding for even the most basic expenses in the CIRP. The issues are faced both from the external/fresh lenders and the CoC sides. On analysis of the responses, the difficulties encountered in raising interim finance can be classified into the following themes: (a) lack of willingness of external lenders to lend fresh funds to the corporate debtor, resulting in the narrowness of the market; (b) lack of support of the CoC to provide interim finance to the corporate debtor and (c) lack of CoC willingness to provide approvals for raising interim finance (from external lenders).

Some respondents felt that even when lenders show preliminary interest, the due diligence and sanction process takes unduly long (since lenders are potentially evaluating lending to an insolvent debtor), even after which the CoC often rejects, citing a lack of internal approvals. One respondent shared his experience: It takes significant time to convince external lenders to provide interim finance for CIRP cases. The CIRP timeline would have significantly advanced by that time, defeating the very purpose of interim finance. Further, respondents reported there are limited suppliers, and interim finance, if any, is available at significantly high interest rates and often with a demand for incremental security, which is challenging to seek lender approvals for (especially in situations of low expected recoveries).

A few respondents reported their experience of raising funds as challenging but mixed from the CoC side (implying the same is case specific). One respondent distinguishing interim financing from CoC funding (mentioning the latter is more like an advance), surmised that proper positioning and explanation of budget estimates to CoC are essential for raising interim finance. However, this respondent reported that raising funds from the CoC for running companies is relatively more straightforward (than shut companies). However, a respondent observed that CoC does not like to fund going concern costs and only prefers to finance basic CIRP costs. Another respondent shared that while there had been little experience raising external finance, the CoC (comprising one lender with majority control) provided finance for one of his CIRP cases¹⁶. This respondent also voiced difficulty in raising interim finance from the CoC but was also of the view that it is obligatory on the part of the existing CoC (a sentiment not necessarily echoed by most respondents). Another perspective that emerged is that while it is challenging to raise interim finance, in the case of a competitive term sheet received from an external lender, the CoC should not object to providing approvals for the same (however, the same may depend on the CoC composition).

External Lenders and Interim Finance

The majority of respondents observed that external lenders are often not very keen on participating in providing interim finance (the market lacks depth and is dominated mainly by NBFCS). Any financing, if available, is at high interest rates and requires security, which the IP cannot arrange without CoC approvals (challenging to obtain given the security is already encumbered to CoC members). Most respondents agreed that it is challenging to raise interim financing from external lenders (especially for shut companies). Still, raising funds for companies with large asset bases and some operating cash flows is relatively more straightforward. Respondents perceived the following reasons as to why external lenders are not keen on providing interim financing (a) lack of visibility on their loan repayment/takeout due to (i) uncertainty on reorganization or liquidation outcome, (ii) uncertainty on the timing of the closure of the CIRP (reorganization or liquidation) due to several factors, including judicial delays, due to which lenders have no visibility on when their interim finance loan will get repaid¹⁷ and (iii) high CIRP costs and relatively low expected recoveries from reorganization or liquidation proceeds; (b) lack of financing/participation from the CoC, which makes external lenders more cautious about providing interim finance as CoC participation has a signalling effect on existing lender confidence in the prospects of the insolvent debtor; (c) lack of approvals from CoC members and (d) lack of ability of the corporate debtor to provide security/collateral over and above the priority takeout status of the loan.

Existing Lenders/CoC and Interim Finance

Most respondents expressed that the first port of call for raising interim finance is always existing lenders who enjoy superior knowledge about the corporate debtor. While the lack of visibility of loan takeout also applies to CoC lenders, some additional themes emerged. These include (a) the unwillingness to throw good money after bad, (b) the composition of the CoC and the specific nature of the CoC lender¹⁸, (c) CoC perception and limited perspective of interim finance as a stop-gap arrangement for financing CIRP costs, (d) lack of a broader and more holistic view of interim finance in management of the value of debtor’s assets and to the CIRP (e) lack of interest given the IP rather than promoters is in charge of the company. A respondent observed, Interim finance increases CIRP costs, which existing lenders find difficult to process since they are cost sensitive and would like to keep a cap on costs, which becomes more important, especially when there is no cash flow visibility. Further, firm-specific features (level of assets, running status, reorganization prospects) have a role in the CoC’s interest in providing interim finance. As a respondent shared, Overall difficult to raise interim finance, but more so for those corporate debtors who are financially weaker not having sufficient asset-based or operating cash flows visibility. However, a respondent felt that while CoC considers financing basic CIRP costs, they are unwilling to finance going concern expenses (such as salaries, etc.) as they believe such payments were delayed even before CIRP. Therefore, it is not their responsibility to bear the same.

Normative Feedback from Respondents

Respondents were also asked whether they would like to offer suggestions that could deepen the interim finance market in India. Many respondents felt that while the enabling legislation is well-meaning, there are significant barriers to the process of raising interim finance. The suggestions varied but were broadly CoC and regulatory-based. From a CoC perspective, some respondents suggested that the CoC needs to decide whether they wish to maintain the corporate debtor as a going concern at the outset. As one respondent surmised, Keep it as a going concern or shut it down. Value starts deteriorating. If CoC choose, they must provide interim finance for the CIRP, and the law needs amendment accordingly¹⁹. Similarly, another respondent felt, CoC wishes to bear the benefits of the IBC process without taking responsibility for the provision of funds and needs to have a broader perspective. At the same time, a respondent felt that CoC has too much power: IP has to answer, all responsibility and no authority and, therefore, there needs to be greater regulatory oversight and court discretion on the CoC. While some felt it should be compulsory for the CoC to provide funds, a view emerged: CoC should not be forced, must remain a commercial decision and greater focus should be on developing market for stressed asset funding in India.

From a regulatory perspective, suggestions include an amendment to that law to directly allow the IP to raise interim finance (even with security) without needing CoC approval once the budget is approved and there is a shortfall of funds. Others include more support from the regulator by creating a corpus for providing funds for CIRP cases and greater coordination among financial regulators to enable lending to stressed companies (including clarification on provisioning norms for lenders providing funds to insolvent entities), including from overseas sources. Further, since NBFCs presently dominate the interim finance market, some respondents called for policy impetus to enable banks to provide interim finance. Additionally, regulatory clarity is required on the interest servicing of interim finance beyond the stipulated 12-month period in cases of delays in the liquidation process.

PERSPECTIVE FROM A FEW LENDERS

While this study primarily focused on perspectives of IPs, interviews were held with limited respondents to gauge some lender perspectives. One respondent was the Deputy General Manager of a large public sector bank in a department handling stressed loan accounts. For the Non-Banking Finance Company (NBFC) perspective, an interview was held with the Assistant Vice President of a leading NBFC. Their responses reaffirmed the stress of providing funds (interim finance or advances for CIRP costs) during the CIRP period.

The respondent felt that while the enabling legislation of interim finance law is well-meaning, there are practical challenges from a lender and CoC perspective. The respondent observed, Existing lenders who already have loan exposure to the corporate debtor are reluctant to provide interim finance as it essentially tantamount to throwing good money after bad, especially when there is little visibility of successful takeout through reorganization/resolution of the corporate debtor. Second, CoC is reluctant to prioritize cash flows, especially when interim finance is available at a high cost. One respondent observed that due to this high cost of interim financing, most of the proceeds from reorganization or liquidation would only go towards servicing the finance costs, leaving nothing for the lenders. Hence, interim financing only places an unnecessary burden on the CIRP from a cost perspective.

During the discussion, a fresh dimension that emerged was the inherent tension between the CoC and IP. A view emerged that upfront sanction of interim finance might not be advisable as the primary responsibility of the IP is to optimize the corporate debtor’s existing resources/cash flows (for instance, through diligent liquidation of the debtor’s inventory or realization from its commercial contracts). The respondent opined, Upfront raising of interim finance will not provide the IP (who is a third party, not the promoter of the company) any incentive to work towards generating cash flows from the available pool assets/resources. It may also negatively impact providing an incentive to the IP to prolong the CIRP.

However, a respondent mentioned lenders do consider creating a corpus to reimburse basic CIRP costs, which is different from raising interim finance at a high rate from the market. However, this is done case-to-case depending on the resolution’s visibility and internal approval received by the lenders.

DISCUSSION

The study indicates that interim financing is necessary from the IP perspective, and lack of financing leads to the inability to meet even basic costs, significantly delaying the CIRP. Most respondents who participated in this research have reported practical difficulty in raising interim finance due to limited interest from eternal lenders, and interim finance, if any, is available at high-interest rates (despite priority takeout assured by IBC). Some respondents observed that CoC funding (in the nature of an advance towards CIRP costs) could not be strictly classified as interim finance (often with no separate interest component or financing agreements). However, this study has conceptualized interim finance to include all aspects (whether from external lenders or CoC advances towards CIRP costs), as any lack of financing can significantly delay the CIRP. It is, however, recommended that the regulator may clarify this aspect to have a more homogeneous view of the inclusions in interim financing as defined under relevant sections of the IBC.

This study has shown that the primary hurdles in tying up interim finance (whether from existing or new lenders) are the lack of visibility of repayments/takeout attributed to (a) lack of upfront clarity on the outcome of CIRP cases (reorganization or liquidation), (b) limited visibility on the adequacy of reorganization/liquidation proceeds for takeout of CIRP costs and (c) lack of conviction on the timeline for the closure of CIRP, often delayed and extended beyond the timeline stipulated in the code. As Nair and Sahoo (2022) pointed out, most CIRP cases are running beyond the prescribed time limit (with resolution plan cases averaging 709 days for closure) while liquidation cases averaged 615 days for closure without the revival of the company). Lenders have no visibility on takeout and cannot extend perennial financing. As a respondent articulated, Judicial delays and lack of clarity on closure of CIRP is one of the main causes of lender discomfort to provide interim finance. The same leads to certain structural complications, including (a) the narrowness of the interim finance market and (b) the high cost of interim finance, leading to roadblocks in obtaining CoC approvals. At times, interim finance providers also request security, which is difficult to provide. Hence, interim finance success in India is linked to the larger issue of IBC efficiency²⁰. Any improvements in this area (reducing delays in the CIRP) would only increase lender confidence to participate and contribute to the effective functioning of the interim finance market.

Another significant impediment is the extent of support from the CoC and their perception of interim financing. The first call for raising funds for the CIRP is the CoC, and as indicated by respondents, IPs attempt to analyze the fund requirement early in the CIRP. Support from existing lenders is critical, the lack of which provides a negative signalling effect, making external lenders wary of financing the CIRP. CoC lenders are, however, said to be reluctant to provide finance for the CIRP or approvals to the IP for raising interim finance. Their reluctance has been primarily attributed to (a) hesitancy to throw good money after bad, having lost money to the corporate debtor and (b) hesitancy to add to the CIRP cost by approving external finance in the absence of clarity, on the extent of recovery from reorganization or liquidation proceeds.

Further, the perception of interim finance as just another addition to CIRP costs is a crucial contributing factor to the CoC’s reluctance to provide interim financing. One respondent observed, CoC lenders, having lost money to an insolvent corporate debtor, are cost-conscious and do not wish to add to the CIRP costs. Another respondent mentioned that IPs often have little choice but to finance critical CIRP costs from their sources and expressed anguish that the CoC seeks to benefit from the fruits of the IBC process without any responsibility. Further, another respondent reported difficulty raising finance for going concern costs, as existing lenders hesitate to advance funds beyond basic CIRP costs. The responses hint at a narrow perception of interim finance as just a stop-gap arrangement to finance basic CIRP costs (which lenders often try to minimize). Hence, greater engagement with lenders and all stakeholders on the broader objectives of IBC and interim finance (and its translation into asset value protection and ultimate lender recoveries) may contribute to resolving the perception issues to a large extent.

Further, subtle differences in objectives among stakeholders may also significantly contribute to the issue. CoC decisions are guided by the recovery motive (not typically unusual given their primacy in the mandate of recovery of debt extended to the corporate debtor), which is not the sole objective of IBC (refer Sahoo & Guru, 2020). The broader goals of IBC (reorganization and maximization of the value of the debtor’s assets) guide the IP (refer IBBI, 2021). This study, therefore, finds inherent tension in the perspectives of the CoC and IP (which then leads to conflict and a potential lack of participation by the CoC). The CoC may also lack the motivation to manage the enterprise and its fund requirements, given its status as secured lenders/creditors. However, due to the heterogeneity of stakeholder objectives, this underlying tension between the IP and CoC is fundamental to the code (as a collective resolution mechanism) and is difficult to alter. However, internationally, insolvency regimes incorporate interim financing as good insolvency practice. Hence, a deeper ex-ante consideration by lenders before triggering the code on the suitability of IBC (and its associated dimensions, including interim finance) to address their case-specific default issues could help align expectations with the broader objectives of IBC. The same could also help reduce the ex-post conflicts arising from divergent understandings and perceptions during the CIRP.

CoC heterogeneity may also play a role in the mobilization of interim finance. For instance, some respondents shared that interim funding is relatively easier to raise with a single lender CoC as opposed to multiple lenders, where no single lender takes the lead and each looks to the other for interim finance (although some respondents reported mixed experiences). IBC is a collective resolution process (Sahoo & Guru, 2020) with a broader perspective on balancing the claims of various categories of creditors rather than focusing on a single creditor. Further, the CoC constitutes creditors with varying views (some with more skin in the game) and little experience in running enterprises, being primarily secured lenders or creditors (for instance, homebuyers in real estate CIRP cases). Some lenders may also be unwilling participants in the IBC process (not as the triggering lender, but as an existing lender). However, while on the surface, the objectives of various lenders may appear to contrast, they need to be ultimately aligned with the goal of resolution and maximization of recoveries.

The profile of insolvent corporate debtors in CIRP cases (heterogeneity) can also impact the ease or difficulty of mobilizing interim finance during the CIRP, based on DIP literature and the feedback of some of the respondents to this study. For instance, this study has revealed that it may be more challenging to raise interim finance for shut companies or companies with poor cash flow visibility than for operating companies or companies with assets and cash flows. DIP literature has also shown that not all borrowers may be worthy of interim financing, and only relatively healthier companies get interim financing. Therefore, CIRP heterogeneity (the relative degree of insolvency of the corporate debtor) and CoC heterogeneity are essential considerations in interim finance. While studies in the DIP literature have examined these for their impact on interim finance, the same has yet to be systematically examined in the IBC context and would be suitable areas for further research.

Finally, taking learnings from DIP financing, the literature has revealed that DIP lenders often tie up interim financing before or within weeks of referring the corporate debtor to bankruptcy. Accordingly, under IBC, the creditor triggering the CIRP may also plan upfront for interim financing, if necessary, by also engaging other lenders/stakeholders. For instance, an entity with sufficient assets or higher reorganization probability will find it easier to raise interim finance from lenders. Interim financing makes sense only for ‘supporting the reorganization of viable firms or enabling the sale of the business as a going concern in liquidation’ (World Bank, 2016, p. 99). Therefore, any attempts by the IP to raise interim funding (beyond basic CIRP costs) for unviable companies will meet with frustration. DIP literature has also shown that different lenders (LTO or LTL) have differing motivations for providing interim finance (Li & Wang, 2016). Hence, from a normative perspective, a thorough analysis at the outset may be done by the lender triggering the CIRP (equipped with information about the corporate debtor) on the prospects of the corporate debtor and the likelihood of reorganization/liquidation. A more upfront or early planning of interim finance during the CIRP and targeting relevant lenders/investors (depending on the profile of the corporate debtor) can save much-needed time and improve the efficiency of the CIRP. As Skeel (2004) noted in the context of DIP financing, ‘entering Chapter 11 without financing in place is a recipe for trouble’ (p. 1918).

CONCLUSION

There is little debate that interim finance is crucial to the bankruptcy process to aid in going concern, protection of the value of assets and reorganization efforts of the corporate debtor. The presence of timely funds during the CIRP can contribute to the overall efficiency of the IBC. This research started with a discussion on interim financing by comparing it with the DIP model. While interim financing in debtor- or creditor-oriented codes is essential from the effectiveness (refer IBBI, 2021) and efficiency perspective of bankruptcy codes, both have distinct dimensions from the conceptual lens, timing, process and lender motivation. The differences stem from the nature of the underlying insolvency codes (mainly those that manage the firm’s affairs during the bankruptcy process). Therefore, while there are benefits in comparing the two models, they need to be viewed in perspective. Under the two codes, the depth of the interim finance market will be vastly different, given the different lender motivating factors. Further, the significant protection granted to DIP lenders has contributed to the strong demand in the US (Skeel, 2004). It is, therefore, important to view problems of interim finance under IBC through the lens of the creditor-controlled regime under which the interim finance market operates in India.

This research then examined the practical issues faced in raising interim finance under the IBC. The lack of takeout visibility is a critical issue facing the interim finance market in India, thereby impacting lender confidence. Lack of clarity on bankruptcy outcomes (liquidation or reorganization), lack of visibility on timelines of closure for CIRP (attributed by many respondents to judicial delays) and perception of high CIRP costs relative to expected creditor recoveries are some other significant hurdles to raising interim finance. The degree of insolvency of a corporate debtor (reorganization prospects, operational status and level of assets) and the CoC composition also contribute to the interest in interim finance. Other important issues that emerged were a narrow perception/lack of appreciation of interim finance in relation to the ultimate objective of IBC and subtle differences in the goals of the CoC (guided by debt recovery) and the IP (guided by the broader objectives of IBC). The reluctance of the CoC to add to CIRP costs is also a contributing issue in the mobilization of interim finance.

While improvements in IBC efficiency should resolve some of the issues discussed in this study, increasing the understanding of the broader role of interim finance through engagement with all stakeholders can significantly improve the situation. Further, there is a need for deeper ex-ante reflection by lenders/creditors while triggering the IBC to align the lender’s objectives with the code to minimize ex-post conflicts during the CIRP. For instance, lenders may reflect on the broader resolution objective of the regulation (not just recovery), given the former entails other responsibilities, including planning for CIRP costs.

This study has also discussed the need for regulatory clarity on the inclusion of CoC advances in the technical definition of interim finance. Further, from a process perspective, raising interim finance early in the CIRP (as done in DIP financing) will improve the overall functioning of the IBC. There is a need for upfront planning for interim funds to meet CIRP costs and improve efficiency. Segregating cases based on the relative degree of insolvency of the corporate debtor can aid in taking the right approach for fund mobilization, including suitable lender identification (for instance, LTL or LTO). An initial assessment before admission in bankruptcy court or during the initial phases of the CIRP can save much time and effort in raising interim finance.

This study garnered several normative suggestions from the respondents. These include making CoC funding for CIRP costs mandatory, allowing the IP to raise interim finance without CoC approval and providing regulatory support for creating a corpus to provide interim finance to CIRP cases. However, there should not be a shortage of external lenders (without the need for regulatory intervention) if other structural issues (such as takeout visibility and the efficiency of IBC) are resolved. Other suggestions received included policy impetus to enable banks to lend interim finance. Further, interim financiers who face significant uncertainty in reorganization or liquidation scenarios may be offered some insurance support (if the liquidation value is ultimately inadequate to cover the CIRP costs).

To conclude, the insolvency process is complex due to several stakeholders with differing objectives. As noted by Li and Wang (2016), ‘conflicts of interest among different classes of creditors are most severe in bankruptcy’ (p. 135). Hence, lack of funds often paralyzes the bankruptcy process despite enabling legislation. Some respondents have suggested that too much responsibility lies with IPs and have called for greater regulatory oversight by the CoC. However, this article recommends that due to inherent differences in the objectives of various stakeholders, it is imperative to find a more balanced view within the extensive IP and lender community. Therefore, this article also recommends further engagement among the various stakeholders to reach a consensus on a possible solution.

LIMITATIONS

This study has primarily taken the IP perspective of interim finance under IBC, and several interesting perspectives have emerged. This study has also taken a few lender views. However, this research is limited by its reach (given the large universe of IPs and lenders). Further, given the heterogeneity of the lending and investing communities, future studies could engage a larger cross-section of lenders/investors to understand the normative suggestions that may emerge to improve the interim finance market in India. Further, while the author has attempted to get data on IBC cases that have availed interim financing to gauge correlation with outcomes, the same has been difficult to garner from published sources. Hence, a regulatory compilation of cases that have availed interim finance (whether from external lenders/investors or the CoC) will be helpful for further academic research on interim finance under the IBC.

Footnotes

DECLARATION OF CONFLICTING INTERESTS

The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

FUNDING

The author received no financial support for the research, authorship, and/or publication of this article.

NOTES

ORCID iD

Amol Baxi

Amol Baxi is presently pursuing a PhD (Management) at the Indian Institute of Foreign Trade (IIFT), New Delhi. His research interests are in law & finance, distress and bankruptcy. He holds a Master’s in Finance from Delhi University and possesses several years of post-qualification work experience in structured finance and stressed asset management.

e-mail: amolbaxi75@gmail.com

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