Non-availability of interim finance a big impediment in success of CIRP: IBBI chairperson
Insolvency and Bankruptcy Board of India (IBBI) chairman Ravi Mittal has highlighted the difficulty companies undergoing corporate insolvency resolution process find in raising interim finance.
Raising concern over the creditors reluctance to offer interim finance to corporate debtors, Mittal says that for a distressed company, interim finance is not only a requisite to meet the insolvency resolution process costs, but to provide for regular payments made for availing critical input supplies.
He also highlights the fact that in cases where creditors do offer interim finance, they do so only to meet the process costs, which may not be adequate to sail the company through its reorganisation.
The chairperson cites a survey which says that in around 85% of the cases, amounts less than Rs 5 crore were raised as interim credit, which may suggest that the said funds were likely utilised to cover the process costs only.
“Considering the level of uncertainty and risk, the lenders remain apprehensive of lending amounts to a company already under stress,” says the IBBI chairperson in a write-up published in the quarterly newsletter of IBBI.
Mittal argues that existing lenders should come forward to provide such funds, as they are the beneficiaries to the higher chances of resolution and higher resolution amount being high in waterfall priority, so their interest in the outcome runs much deeper than an independent financier; and they have much better access to the information about the business of the corporate debtor.
“As the Code matures, it is expected that there will be an increased awareness among the lenders about the benefits of raising interim finance during CIRP as a measure to attempt the resolution of the CD and saving it from going into liquidation,” he says.
He also says that the Code looks upon CoC to set the highest level of standards in its conduct and performance to best assess the viability and feasibility of CD’s business and facilitate revival of the CD.
Incentives offered
Mittal also pointed out various steps taken by the government and the regulators to incentivise offering of such finance.
“The Code safeguards the interests of the creditors by providing that while raising interim finance, no security interest shall be created over any encumbered property of the CD, without the prior consent of the creditors, whose debt is secured over such encumbered property,” he says.
He also pointed out that to encourage interim finance, the IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations) were amended to include ‘interest on interim finance for a period of twelve months or for the period from the liquidation commencement date till repayment of interim finance, whichever is lower’ in the liquidation costs.
The Insolvency and Bankruptcy Board of India (IBBI/Board) released a discussion paper (June 14, 2022) that reviewed the provisions of interim finance and suggested that the liquidation cost may include the interest on interim finance till the same is actually repaid. This move is aimed at facilitating and encouraging the CoC members to make adequate funding arrangements for running the CD as a going concern.
The Reserve Bank of India (RBI) also acknowledged the need of interim finance facilitated under the Code and provided for relaxation of provisioning norms for treatment of such finance provided by the banking institutions.
The Prudential Framework for Resolution of Stressed Assets issued in June 2019 provides that any interim finance extended by the lenders to debtors undergoing insolvency proceedings under the Code, may be treated as ‘standard asset’ during the corporate insolvency resolution process (CIRP).
Also read: Corporate insolvency and the need for an interim moratorium in India
