Interim finance is gaining traction as a high-yield credit avenue under the Insolvency and Bankruptcy Code (IBC) of 2016. This form of financing provides essential support to stressed companies during the insolvency resolution process. While it offers significant opportunities, it also poses challenges that investors and lenders must navigate. This article explores the legal and regulatory framework, current market trends, and the opportunities and challenges associated with interim finance under the IBC.
Legal and Regulatory Framework
Definition of Interim Finance
Under Section 5(15) of the IBC, interim finance refers to the financial debt raised during the insolvency resolution process. It plays a crucial role in ensuring that the distressed entity can continue its operations and meet essential expenses, such as employee wages and day-to-day operational costs.
Empowerment of Resolution Professionals
Sections 20 and 25 of the IBC empower the resolution professional to raise interim finance with the approval of the Committee of Creditors (CoC). This approval is vital for ensuring that the financing aligns with the interests of all creditors and stakeholders involved in the resolution process.
Security for Raising Interim Finance
Before the CoC is formed, the interim resolution professional can raise interim finance against the debtor’s unencumbered assets. Once the CoC is established, any security interests over the debtor’s assets require CoC approval. This requirement ensures that the interests of all creditors are considered in the decision-making process.
Priority of Repayment
Interim finance enjoys a “super-priority” status under Section 53 of the IBC. This means that in the event of liquidation, interim finance must be repaid before other debts. However, lenders remain cautious, as interim finance repayments are subject to specific time constraints, such as occurring before liquidation or the completion of the moratorium period.
Opportunities in Interim Finance
High-Yield Potential: Interim finance is characterized by its high yield, making it an attractive investment option for lenders looking to achieve superior returns.
Limited Competition: The interim finance market currently has a limited number of players, creating opportunities for lenders to establish a strong foothold in this niche.
Support for Distressed Companies: By providing crucial funding, interim finance can facilitate the operational continuity of distressed companies, ultimately benefiting stakeholders and the economy.
Clarity Post-CoC Formation: The optimal time for investors to engage in interim finance is typically after the formation of the CoC and the approval of a resolution plan. At this stage, there is greater clarity regarding the quality of the resolution application and the potential for successful recovery.
Challenges in Interim Finance
Despite its opportunities, interim finance presents several challenges:
Non-Judicious Use of Funds: It is essential that interim finance be utilized strictly for critical operational expenses. Misuse of funds can lead to disputes with creditors, resulting in complications in the resolution process.
Lack of Unencumbered Assets: Many stressed companies may not have sufficient unencumbered assets available to secure interim finance, limiting their ability to raise necessary funds.
Uncertainty in Stressed Entities: Investing in distressed companies carries inherent risks due to low cash flow and potential liquidation, making interim finance a high-risk endeavor.
CoC Approval Delays: Delays in CoC approval for interim finance can pose significant risks. If the approval process takes too long, it can jeopardize the debtor’s operational stability, leading to irreversible damage.
Conclusion
Interim finance is emerging as a vital high-yield credit avenue under the IBC, characterized by its super-priority status and CoC-sanctioned borrowing. While the potential for significant returns exists, lenders and investors must remain vigilant regarding the associated risks, including delays in insolvency resolution and the quality of secured assets. To optimize outcomes, the ideal investment strategy is to enter the interim finance market after CoC formation and the approval of a resolution plan, where there is a clearer understanding of the resolution’s viability and quality. By carefully navigating the opportunities and challenges of interim finance, investors can play a crucial role in supporting distressed entities while achieving their financial objectives.
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