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The Problem of Interim Finance
When a Company is under the Corporate Insolvency Resolution Process (CIRP) as per the Insolvency and Bankruptcy Code, its operations are run by the Interim Resolution Professional (IRP)/Resolution Professional (RP). The IRP/RP replaces the existing management and takes care of the affairs of the Company during CIRP.

The IRP/RP has to run the Company as a going concern till such time the Company can be resolved by way of a Resolution Plan approved by the Committee of Creditors (CoC) and further confirmed by the National Company Law Tribunal (NCLT), which is the Adjudicating Authority.

In case of some companies under CIRP, there are no income generating assets. There are only passive assets which can be sold. Alternately, the Company has income generating assets but the customers delay the payment.

Even in the above cases, the expenses to maintain the Company as a going concern and expenses on running its business have to be incurred. However, since there are no funds available with the Company, the IRP/RP has to go in for interim financing.

According to Section 5(15) of the Insolvency and Bankruptcy Code, "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.

Raising interim finance requires the prior approval of the CoC u/s 28 and further, no security interest can be created over any encumbered property of the Company (corporate debtor or CD) without prior consent of the creditors whose debt is secured over the said property. Further, creating security interest on the property of the CD requires the prior approval of the CoC u/s 28.

When a Company is under CIRP, no financier is willing to provide interim finance since he is not privy to the affairs of the CD. Hence, interim finance is sought only from the CoC members since they are privy to the affairs of the CD and also the interim finance and interest on interim finance are paid in priority to all other debts as insolvency resolution process costs.

However, in many cases, the CoC members who are mainly banks, refuse to provide any interim finance citing lack of approval from their Head Office. Even the remuneration of the IRP/RP the CoC members will not pay.

The Insolvency Professional (IP) acting as IRP/RP is stuck due to refusal of the CoC members to provide interim finance. He has to get the interim finance approved from the CoC and based on the approval, seek the interim finance amount from each member of the CoC individually and in case of non-cooperation, he has to approach the NCLT. Alternately, he can spend the amount of running expenses from out of his own pocket, and hope to be reimbursed once the funds are received by the CD.

There is a need to amend the Insolvency and Bankruptcy Code to make the CoC members jointly and severally responsible to provide interim finance to the CD in proportion to their admitted claims. Otherwise, the IPs who are financially sound and can fund the expenses of the CD upfront are in an advantageous position. IPs who are not financially so sound, get themselves replaced by the CoC.

To address this, Code is to be amended to fund the CD based on the budget (monthly, quarterly and half-yearly) to be prepared and submitted by the IRP/RP to the CoC, preferably in the 1st or 2nd meeting. Once the budget is approved, the CoC members can release interim finance in a periodical manner based on specific request by the IP in proportion to their voting share in the CoC.

It is always up to the CoC to verify the budget submitted before them and suggest modification to the same.

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