Rescue financing: Helping hand for entities in distress

By Avinash Kumar Khard, HSA Advocates

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.

Avinash Kumar Khard
HSA Advocates

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.

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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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