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.