The Insolvency and Bankruptcy Code (IBC) of 2016 was introduced to resolve financial stress in companies while maintaining them as going concerns. One key tool to achieve continuity of going concern is interim finance. IBC allows stressed entities to raise necessary funds during the insolvency resolution process to keep the debtor operational and to fund crucial expenses like employee wages and daily operations. This note explores the regulatory framework, market trends, opportunities, and challenges related to interim financing.
Legal and Regulatory Framework
Under Section 5(15) of the IBC, interim finance refers to financial debt raised during the insolvency resolution process. Sections 20 and 25 empower the resolution professional to raise interim finance, with the approval of the Committee of Creditors (CoC), once formed. However, restrictions apply, such as limits on creating security interests over the debtor’s encumbered assets.
Security for Raising Interim Finance
Before the CoC is formed, interim finance may be raised by the interim resolution professional, but only against unencumbered assets of the debtor. Once the CoC is formed, security interests over any assets require the CoC's approval.
Priority of Repayment
Interim finance enjoys a “super-priority” status under Section 53 of IBC, meaning it must be repaid before other debts in the event of liquidation. Despite this, lenders remain cautious, as interim finance repayments are limited to certain periods, such as before liquidation or completion of the moratorium.
Challenges
Opportunities in the interim finance market are good as it is high yield/high-risk debt and there are currently a limited number of players. However, challenges remain, such as:
- Non-judicious Raising of Interim Finance: Interim finance should only be used for essential expenses, and improper use can be contested by creditors.
- Lack of Unencumbered Assets: Stressed companies often lack unencumbered assets to secure interim finance.
- Uncertainty in Stressed Entities: Low cash flow and liquidation risks make it a risky investment.
- CoC Approval Delays: The CoC may hesitate to approve interim finance, leading to delays that can jeopardize the resolution process, and by the time approvals and documentation are done the damage to the debtor may be irreversible.
Conclusion
Interim finance is emerging as a high-yield, credit avenue. Super priority status and CoC-blessed borrowing keep much better protected. However, lenders/investors should be aware of potential risks like delays in insolvency resolution and security quality deterioration. The right moment to invest is typically after CoC formation and resolution plan approval, when there is some clarity about the quality of the resolution application and the prospect of resolution.
Disclaimer: Views are personal
Authored by: Asif Iqbal, General Counsel, Vivriti Asset Management
_20241224162505_original_image_35.webp)
