Super priority lending (also known as rescue financing) has been recognized in many jurisdictions. In India, it has now been expressly covered, to some extent, under the Insolvency and Bankruptcy Code, 2016 (IBC). It falls under the realm of “interim finance”, which is provided during the corporate insolvency resolution process of an Indian corporate debtor under the IBC. Lenders generally provide super priority lending or rescue financing to provide bridge funding or interim financing for reviving a viable borrower from the distressed situation while having a priority in repayment of such financing over existing lenders.
The IBC was enacted to amend and consolidate the existing laws relating to reorganization and insolvency resolution. The IBC was subsequently amended to further strengthen the insolvency resolution regime. Empowering the Reserve Bank of India (RBI), by amending the Banking Regulations Act, 1949, to issue directions to the banks to initiate the insolvency proceedings in respect of a default by a debtor was another significant step to improve the insolvency resolution process under the IBC.
Super priority lending under IBC: Interim finance (including interest) has been given a superior priority status over debts due to all other creditors under the IBC. It is raised by the interim resolution professional, or resolution professional on behalf of the corporate debtor to meet its operational cost. Interim finance (including interest) will be a part of the corporate insolvency resolution cost and will have priority over payment to other creditors if the resolution plan is approved or if the liquidation process has been commenced. Interest payable on interim finance has recently been expressly included within the corporate insolvency resolution cost. Many lenders in India may find interim financing to the corporate debtor an opportunity to utilize their funds while taking certain commercial risks.
Super priority lending outside IBC: Indian legislation does not contemplate or regulate a super priority financing outside the scope of IBC unlike the laws of certain other jurisdictions that expressly provide for this. For example, the US Bankruptcy Code addresses the issue of super priority status to the new set of lenders who are providing finance to companies in distress. RBI does not restrict the lenders to accept the super priority status of a new set of lenders, investors or promoters) who intend to inject the debt (including quasi equity) into a distressed company. Though a corporate debtor may apply to the National Company Law Tribunal (NCLT) for its blessing on a Scheme of Arrangement (scheme), which may provide preferences (in terms of structured repayment of their loans and debts) to the new lenders, investors or promoters over the existing lenders. However, such a scheme is required to be approved by multiple stakeholders and authorities.
Key issue: Lenders in India are generally not amenable to giving a super priority status to the new lenders, investors or promoters, who intend to inject the debt (including quasi equity) into a viable corporate debtor and to rescue them over a period of time. Lenders are also reluctant to defer their charge, and agree an early repayment of the debt of the new lenders, investors or promoters ahead of repayment of their loan on account of commercial and operational issues taking precedence over legal issues. Consequently, new lenders, investors or promoters find it difficult to structure their funding to the distressed company, and to protect their investments, which consequently push the lenders to take the distressed company into compulsory insolvency before the NCLT.
Way forward: In the great majority of cases filed before the NCLT, resolution plans have neither been submitted by the resolution applicants nor approved, and most of these cases will eventually slip into liquidation with the value of the corporate debtor being left unprotected. Therefore, the need of the hour is that the lenders should be amenable to super priority lending structure, and if the same is not acceptable to them, they may at least consider deferring their charges ranking on a pari passu basis with the new lenders, investors or promoters (who intend to inject the capital/quasi equity into the distressed company), which will make the investment of the new lenders, investors or promoters more attractive, and maximize the value of the assets of the distressed companies in line with the objective of the IBC.
Avinash Kumar Khard is an associate partner at HSA Advocates. HSA is a full service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata
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