Interim Finance – A Source of Operational Funding under IBC

Interim Finance – A Source of Operational Funding under IBC

July 25, 2022 Admin
interim finance Interim Resolution Professional Resolution professionals cirp interim finance funds

Interim finance is defined as financial debt raised by Interim Resolution Professional/Resolution professionals, as the case may be, during Corporate Insolvency resolution processes according to the provisions of the Insolvency and Bankruptcy Code, 2016. The funds allow the insolvent company to remain operational and/or to meet the CIRP costs while undergoing the Corporate Insolvency Resolution Process (CIRP). 


The Security Factor:

Access to adequate cash is one of the most important factors in running insolvent enterprises or in successfully restarting the day-to-day operations of the Corporate Debtor and recent amendments in the Code, 2016 have made it simpler to get such funds. Under the Insolvency and Bankruptcy Code, interim financing, including accrued interest, has been accorded a higher priority than all other creditors' debts: it is considered a part of the cost of corporate insolvency resolution and takes precedence over other creditors.

Interim Finance – A Source of Operational Funding under IBC

Can an Interim Finance Provider create security Interest on the asset of the Corporate Debtor?

In section 20(2) of the Insolvency and Bankruptcy Code, 2016 it has been specified that “ (c) to raise interim finance provided 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: 

Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.”


Can the provider of Interim Finance put a claim?

Up to the extent interim finance lender is owed at the start of the liquidation, they are secured by the provisions of the Insolvency and Bankruptcy Code, Since interim finance amount, as well as interest, is included in the costs of liquidation, it may be settled much like other operating expenses such as professional fees, which are paid as part of the liquidation cost. Though the interim finance provider doesn’t have collateral rights over assets, their super-priority status removes the necessity for security. The cost of interim financing accrues and increases until the amount is entirely paid. Before beginning any distribution, the liquidation procedure requires that a list of the stakeholders and the money owed to them be submitted to the adjudicating body.


What are the risks for the Interim Finance Providers?

 As interim finance is included in the insolvency resolution process cost, its payment is treated on an equal footing with other charges of this nature, such as RP fees.

Nearly all of a corporate debtor's assets are encumbered in distressed businesses. In such cases, there might not be much left over to distribute from the liquidation estate (an estate formed out of all assets of the corporate debtor) when the moratorium that is in place during the insolvency process is lifted. Lenders, therefore, risk the chance of not getting their money back if the liquidation estate proves inadequate.   



Due to the lower number of players providing interim finance, interim finance funds are issued at interest rates that are higher than the market rate. Interim finance has the “superiority” status in the pecking order of creditors. Lenders are eligible for interest payments even after the process of liquidation is begun and also receive preferential treatment during it.


Provisions relating to IF during CIRP and Liquidation

The Insolvency Resolution Process Costs is defined to mean those costs indicated in section 5(13) of the Code read with regulation 31 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. It includes the amount of any interim finance along with the cost of raising such finance, fee and expenses of interim resolution professional or resolution professional ratified/approved by the committee of creditors, fee of the authorised representative representing a class of creditors, cost incurred for running the corporate debtor as a going concern, the amount due to suppliers of essential goods and services, etc.

According to section 5(15) of the Insolvency and Bankruptcy Code, 2016, interim finance includes any financial debt raised by the RP in the course of the resolution process or by the CD while the pre-packaged resolution process may be in progress, and such other debt as may be notified. IBC includes specific provisions for the resolution professional to obtain interim funding in order to manage the company's operations as a going concern, protect the value of the company's assets, and ultimately develop a workable resolution strategy. All interim funds are categorised by the IBC as "insolvency resolution process costs" (or "IRPC"). The first priority in a resolution plan or liquidation is the payment of the IRPC.

IBC entails a time-bound mechanism for resolving insolvency – in 180 or a maximum period of 330 days. During this period a moratorium suspending all legal proceedings are suspended is put in place.

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