Interim Finance and Insolvency Resolution Process Costs

A company in insolvency still needs money: to pay wages, buy raw material, keep the lights on and pay the professionals running the process. Few lenders will advance money to an insolvent business unless they are sure of repayment. The Code solves this by treating interim finance and the other costs of the process as insolvency resolution process costs, which are paid ahead of every other debt, both under a resolution plan and in liquidation. This note explains interim finance, the components of process costs and their priority.

1. Interim Finance

• Section 5(15). Interim finance means any financial debt raised by the resolution professional during the insolvency resolution process period, and such other debt as may be notified.
• Purpose. To provide working capital to keep the corporate debtor a going concern during the process, preserving its value for resolution.
• Who provides it. Usually the existing financial creditors, sometimes prospective resolution applicants or specialised lenders, attracted by the priority it enjoys.
• Power to raise, section 20(2)(c). The interim resolution professional may raise interim finance, but no security interest may be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over it, unless the value of the property is at least twice the amount of the debt secured on it.
• Approval, section 28(1)(a). Once the committee of creditors is formed, the resolution professional cannot raise interim finance in excess of the amount decided by the committee without its prior approval by 66 per cent.

Figure 1: Raising interim finance

2. Insolvency Resolution Process Costs, Section 5(13)

Figure 2: Components of process costs

• Statutory heads. (a) the amount of any interim finance and the costs incurred in raising it; (b) the fees payable to any person acting as resolution professional; (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern; (d) any costs incurred at the expense of the government to facilitate the insolvency resolution process; and (e) any other costs as may be specified by the Board.
• Regulation 31. The CIRP Regulations add amounts due to suppliers of essential goods and services during the moratorium, amounts due to a person whose rights are prejudicially affected by the moratorium on recovery of property, such as a lessor, expenses of the interim and resolution professionals, the fee and expenses of authorised representatives, and other costs directly relating to the process and approved by the committee.
• Fees of the professional. The interim professional's fee is fixed by the applicant, and the resolution professional's fee by the committee, under the IBBI's regulations, and costs must be disclosed to the committee.

3. Salaries during the Process

• Sunil Kumar Jain v Sundaresh Bhatt, 2022. Decided on 19 April 2022, the Supreme Court held that only the wages and salaries of workmen and employees who actually worked when the corporate debtor was a going concern during the CIRP are process costs under section 5(13)
• No automatic inclusion. The duty of the professional under section 20 to keep the debtor running does not mean that all wages for the CIRP period are process costs; if the debtor could not be run as a going concern despite best efforts, other wage claims are dealt with under section 53(1)(b) and (c) in liquidation.
• Provident fund and gratuity. The Court also held that provident fund, gratuity and pension funds are kept outside the liquidation estate under section 36(4), and workmen are entitled to them in full (Topic 34)

4. Priority of Process Costs

Figure 3: Process costs come first at every stage

• Resolution plan, section 30(2)(a). Every resolution plan must provide for the payment of insolvency resolution process costs in priority to the payment of other debts of the corporate debtor.
• Appeal, section 61(3)(iv). An appeal against an approved plan lies if the process costs have not been provided for repayment in priority to all other debts.
• Liquidation, section 53(1)(a). The process costs and the liquidation costs are paid in full before any other creditor receives anything.
• Effect. This priority, sometimes called super-priority, is what makes interim finance possible; a lender to a company in CIRP is repaid before even secured creditors whose security existed earlier.

5. Practical Issues

• Scarcity of funds. Interim finance markets in India are still developing, and many processes are run with minimal funding or with contributions from the committee of creditors.
• Contribution by creditors. Where the debtor has no cash, the committee may decide that its members contribute to the costs in proportion to their voting share, recovering them later as process costs.
• Control of costs. Because process costs reduce what creditors finally receive, the committee scrutinises fees and expenses, and the IBBI requires disclosure of costs.
• Liquidation. In liquidation, the liquidator may also raise finance with the approval of the stakeholders and the regulations, and liquidation costs rank with process costs (Topic 58)

6. Frequently Asked Questions

Why would anyone lend to a company in CIRP?

Because interim finance is part of the insolvency resolution process costs, which must be repaid in priority under any resolution plan and in full first in liquidation. The lender therefore ranks ahead of all existing creditors.

Are salaries of all employees during the CIRP process costs?

No. In Sunil Kumar Jain (2022), the Supreme Court held that only wages and salaries of workmen and employees who actually worked while the debtor was run as a going concern during the CIRP are process costs.

Can a resolution plan defer payment of process costs?

No. Section 30(2)(a) requires process costs to be paid in priority to all other debts, and failure to provide for them is a ground of appeal under section 61(3)(iv).

7. Related Topics

• Topic 30: Managing the Corporate Debtor during CIRP. Running the business.
• Topic 34: Workmen and Employees' Dues. Wages and funds.
• Topic 57: Section 53. The waterfall mechanism.