Summary: The Insolvency and Bankruptcy Code (IBC) 2016 represents a significant shift in India’s approach to corporate insolvency, introducing the concept of rescue financing to support struggling businesses. Rescue finance, or interim financing, provides essential funds to companies during insolvency to maintain operations and preserve value. The IBC offers a legal framework prioritizing such funding, granting it super-priority status and allowing the creation of security interests. Despite its potential, India faces challenges including conflicts of interest, a limited pool of financiers, and unclear regulatory guidelines. Innovations like pre-packaged insolvency resolutions and lessons from international frameworks, such as the US Chapter 11 model and European court approval mechanisms, offer valuable insights. Successful cases like Benani Cement and Alok Industries highlight the effectiveness of timely rescue finance. However, India needs clearer policies, incentives for financiers, and regulatory improvements to strengthen this market. A well-developed rescue finance system is crucial for economic stability and corporate health, requiring coordinated efforts from legislators, financial institutions, and regulators to enhance the IBC’s effectiveness and support India’s economic resilience.
Introduction
In India’s attempts to solve corporate insolvency and advance economic development, the Insolvency and Bankruptcy Code, 2016 (IBC) marks a turning point. The IBC’s main addition is the idea of temporary funding, sometimes known as rescue financing, which seeks to give struggling businesses the money they need to carry on running during the insolvency process. The present situation of rescue finance in India is investigated in this paper together with its achievements, difficulties, and possible inspirations from abroad systems to improve the mechanism even more.
The Idea of Rescue Funding
Rescue finance—also referred to as interim financing or bridge financing—is the infusion of fresh money into struggling business debtors to enable them negotiate the insolvency process while maintaining their worth as going concerns. Under Section 5(15), the IBC defines temporary finance as any financial debt generated by the corporate debtor during the pre-packaged insolvency resolution process time or by the resolution professional during the insolvency resolution process period.
During the crucial phase of insolvency resolution, rescue funding primarily aims to give businesses the required liquidity to pay staff, keep supplier connections, run operations, and meet other basic needs. This will help to maximise the possibilities for a good turn around and protect the value of the company’s assets.
Legal Framework and Essential Provisions
The IBC enables corporate debtors, resolution specialists, and interim resolution experts to raise interim funds to keep the business running. Crucially, providers of such financing give first priority over all other debts of the corporate debtor since they enjoy first instance rights of payback as part of resolution expenses. Potential lenders are encouraged by this super-priority position to grant troubled businesses much-needed money.
Moreover, the resolution professional has the power to establish security interests on unrestricted corporate debtor property and, with creditor approval, on existing encumbered property as well. By allowing interest payments for the whole Corporate Insolvency Resolution Process (CIRP), the India’s Insolvency and Bankruptcy Board (Liquidation Process) (Amendment) Regulations, 2018, have further bolstered the position of interim financiers.
Recent Advancements and Creativity
Rescue funding has seen some creative developments in the scene of Indian insolvency. Through “pre-bankruptcy settlements,” certain lenders and investors have begun providing rescue money into companies even prior to their declaring bankruptcy. Under the IBC, this strategy helps to avoid the protracted CIRP process.
Through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, the Pre-Packaged Insolvency Resolution process for Micro, Small & Medium Enterprises (MSMEs) is a major development in this area. This system lets business debtors keep management rights while creditors work on resolutions and engage with investors. The change also brings funds generated for such pre-packaged insolvency settlement under temporary financing.
Case studies and success tales
Several stories show how well rescue money helps businesses remain as operational concerns. One especially good example is Benani Cement Limited’s insolvency issue. A member of the Committee of Creditors (CoC) raised rescue money totalling Rs. 100 crores after banks declined funding for working capital needs. This investment guaranteed the company’s ongoing survival and helped it to finally flourish.
Likewise, Alok Industries’s survival throughout the insolvency period was much aided by CoC-approved super-priority interim funding of Rs. 150 crores given by Edelweiss. Following acquisitions by Reliance Industries Limited and JM Financial Asset Reconstruction Company helped the business to flourish once more.
These examples show how prompt rescue fund injections not only enable businesses to escape the short term but also open the path for their long-term recovery and expansion.
Problems in the Indian Setting
Though there are possible advantages, the creation of a strong rescue financing market in India will not be without difficulty. Conflic of interest between current creditors and rescue financiers is one of the main problems. Since it pushes them down the IBC under the IBC, existing creditors are frequently unwilling to let super-priority status rescue debtors. This resistance might result in unwarranted liquidation of business debtors, against the aim of the Code to keep businesses as going concerns.
The insufficient number of financial institutions ready to offer temporary funding is still another major obstacle. Many possible lenders are reluctant to provide money to businesses who have already defaulted on their debts. Furthermore limiting the pool of possible rescue financiers are Reserve Bank of India (RBI) regulation limitations on financial service providers, meant to minimise their risk exposure and non-performing assets (NPAs).
Furthermore difficult are the lack of clear rules for the substantive meaning of interim funding under the IBC. This uncertainty can cause creditors seeking super-priority status for their money to engage in pointless litigation and non-judicious procurement of temporary funds.
In the framework of pre-packaged settlements, unsecured and operational lenders usually object to such agreements since they usually support large financial creditors. The purchase of pre-packaged settlement arrangements and the required rescue money can be hampered by this conflict of interest between several types of creditors.
Motives derived from global frameworks
International legal systems provide insightful analysis that helps India to solve these problems and improve the mechanism for rescue financing.
Under Chapter 11 of the US Bankruptcy Code, the debtor-in–possession (DIP) financing model of the United States presents fascinating ideas including the “Roll-Up Strategy” and “Cross-collateralization Strategy.” Although these approaches have flaws, they offer concepts for motivating current creditors to contribute rescue money.
Particularly Sweden and Italy, European countries stress the need of court approval and the function of insolvency practitioners in generating rescue funds. This strategy guarantees improved control of stakeholder interests and balance of them.
Court rulings such as Re Attilan Group LTD. help to construct Singapore’s legal environment, which offers useful ideas for granting super-priority financing. These include making sure the money is in the best interests of current creditors, proving an inevitable need for rescue money, and draining other financing sources.
Ideas for Development
There are numerous steps one can take to encourage a strong rescue financing sector in India:
Striking a balance between the interests of third-party financiers, current creditors, and other stakeholders will help the legislature and the Insolvency and Bankruptcy Board of India (IBBI) to This can entail implementing an Italian-style judicial approval mechanism whereby judges’ evaluation and approval of rescue financing plans is of great importance.
1. Explicit policies and legal clauses: Instant direction on the substantive meaning of interim funding under the IBC, practical sources of such finance, and matching interest rates is much needed. Clear legal rules can help to prevent needless litigation and aid to restrict rescue funds to real and practical circumstances.
2. Incentive building: Mere super-priority classification could not be enough to draw rescue funders. Legal clauses ensuring a minimum return even in case of liquidation should be given thought since they provide superior security to save financiers.
3. Reaching Pre-Packaged bankruptcy Resolution: MSMEs should progressively extend their pre-packaged bankruptcy resolution process to include every corporate person covered by the IBC. Still, measures should be taken to defend the rights of unsecured creditors who might object to such resolutions.
4. Innovative Strategies: With suitable protections against possible exploitation, strategies like enhancing the current claims of lenders who pump further funds to a higher level on the payback cascade could be investigated.
5. Platforms like the “Marketplace for Interim Finance” suggested by the National E-Governance Services Ltd. (NeSL) should be encouraged and constantly updated to enable simple access to data about possible rescue financiers and their terms.
6. Regulatory Coordination: It is absolutely vital for the financial sector authorities to cooperate. Strategies meant to solve non-performing assets (NPAs) can help to indirectly support the rescue finance market.
In essence,
Effective insolvency resolution and economic growth depend on rescue financing in major part. Though it is still in its early years, the Indian rescue financing sector has great potential for expansion. The success tales of businesses like Alok Industries and Benani Cement Limited show how well timely rescue finance works.
Still, issues including unclear policies, regulatory constraints, and stakeholder conflicts of interest must be resolved. India can build a more strong and efficient rescue funding system by basing specific changes on international frameworks.
Beyond individual businesses, the evolution of a functional rescue finance market has broad ramifications. It can support general economic stability, talent retention, market competition, and job creation. Legislators, officials, financial institutions, and other interested parties must thus coordinate their activities. The dedication of the Insolvency and Bankruptcy Board of India to advance the bridge financing industry is encouraging. This must be matched, though, by actions of other financial authorities and market participants. India can fully utilise rescue finance by tackling the present difficulties and applying the recommended enhancements, thereby enhancing its bankruptcy solving mechanism and promoting economic resilience. Maintaining company health and economic stability would depend increasingly on a strong rescue finance system as the Indian economy develops and confronts fresh difficulties. Therefore, it is absolutely necessary that market players, legislators, and officials cooperate to improve this essential instrument in the framework of insolvency and bankruptcy of the nation.
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