Interim finance during CIRP.

In most of the cases of CD under insolvency, the CD is either facing negative cash flows or the operations are closed. It’s very difficult to envisage a company under insolvency with positive cash flows. It’s only companies with negative cash flows face difficulty in meeting their obligations and slip into insolvency.

As per the Code and regulations, IRP/RP is broadly responsible for the follow;

1. Execution of Corporate Insolvency Resolution Process in accordance with the provisions of the Code & Regulations thereof.

2. Manage the CD as a going concern, if it has not stopped operations prior to the date of commencement of insolvency.

Following are the provisions of the Code in respect of the interim finance;

# Section 5(15) “interim finance” means any financial debt raised by the resolution professional during the insolvency resolution process period;

# Section 20. Management of operations of corporate debtor as going concern. -

(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.

(2) For the purposes of sub-section (1), the interim resolution professional shall have the authority-

• (a)......

• (b)......

• (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.

# Section 28. Approval of committee of creditors for certain actions. -

(1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely: -

• (a) raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting;

• (b) create any security interest over the assets of the corporate debtor;

• …….

• ……..

(2) The resolution professional shall convene a meeting of the committee of creditors and seek the vote of the creditors prior to taking any of the actions under sub-section (1).

(3) No action under sub-section (1) shall be approved by the committee of creditors unless approved by a vote of sixty-six per cent. of the voting shares.

(4) Where any action under sub-section (1) is taken by the resolution professional without seeking the approval of the committee of creditors in the manner as required in this section, such action shall be void.

(5) The committee of creditors may report the actions of the resolution professional under sub-section (4) to the Board for taking necessary actions against him under this code.

# Regulation 2A.(ea) “liquidation cost” ( Liquidation Process Regulations) under clause (16) of section 5 means-

• (i) fee payable to the liquidator under regulation 4;

• (ii) remuneration payable by the liquidator under sub-regulation (1) of regulation 7;

• (iii) costs incurred by the liquidator under sub-regulation (2) of regulation 24;

• (iv) costs incurred by the liquidator for preserving and protecting the assets, properties, effects and actionable claims, including secured assets, of the corporate debtor;

• (v) costs incurred by the liquidator in carrying on the business of the corporate debtor as a going concern;

• (vi) 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;

• (vii) the amount repayable to contributories under sub-regulation (3) of regulation 2A;

• (viii) any other cost incurred by the liquidator which is essential for completing the liquidation process:

Provided that the cost, if any, incurred by the liquidator in relation to compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013), if any, shall not form part of liquidation cost.

In a fairly good number of cases, CoC is reluctant to approve interim finance. This puts the IRP/RP in a precarious situation, as he is responsible to carry out certain statutory duties under the Code besides managing the CD as a going concern. Author is of the opinion that CIRP Regulations should have enabling provision (similar to Liquidation process regulations), that the FC with the biggest vote share will provide interim finance, as estimated by IRP /RP, with interest @ MCLR + 2%.

# Regulation 2A. Contributions to liquidation costs.( Liquidation Process Regulations)

(1) Where the committee of creditors did not approve a plan under sub-regulations (3) of regulation 39B of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall call upon the financial creditors, being financial institutions, to contribute the excess of the liquidation costs over the liquid assets of the corporate debtor, as estimated by him, in proportion to the financial debts owed to them by the corporate debtor.

Note;-  The above provisions of the Code & Regulations speaks of interim finance for Management of operations of CD as a going concern. The Code as well as Regulations are silent for the situation where the CD is not a going concern and the operations of the CD stopped prior to the DOC of insolvency.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.