Resolution professionals tap third-party funding to run sick companies in short term

Third-party litigation financing is increasingly becoming a new instrument in the hands of the resolution professionals (RPs) of bankrupt companies, as they explore ways to fund operations till a new owner takes over the company or the assets get liquidated.

In December, the RP of a Faridabad-based firm that owns a shopping mall and has a debt of over Rs 300 crore, raised interim finance to run the day-to-day operations even as the company was going through the corporate insolvency resolution process (CIRP).

During the CIRP period, to keep the bankrupt company a ‘going-concern’, the RP has to make payments such as professional fees, payments to workmen and towards the maintenance of the plant and machinery among others. In most cases, such expenses are taken care of by the lenders. However, when the lenders are unwilling to allocate funds to run the bankrupt company, the RP leans on third parties for interim finance.

When the resolution plan is approved or a company goes into liquidation, such costs, including the remuneration of the insolvency professional, take precedence for payment over secure financial creditors or any other lenders.

“Financing to run the insolvency process is known as debt-in-possession and it is a very popular instrument in the hands of resolution professionals in developed markets such as the US and UK, Australia and Canada,” said Kundan Sahi, chief executive, LegalPay, which provides such funding. “We are targeting the mid-market segment where the requirements for such funds are between Rs 10 lakh and Rs 5 crore.”

In October, the RP of Bengaluru-based Yashomati Hospitals raised an undisclosed amount from LegalPay to run it as a going concern until the hospital found a new promoter through the insolvency process.

According to Ashish Chhawchharia, partner & head of restructuring services at Grant Thornton Bharat, third-party interim finance in CIRP would work in mid-size companies with certain assets to back the funding.

“One of the problems faced by the resolution professional to keep the company as a going concern is lack of funds to run the operations. Often the CoC is not willing to put more money on the table and in that situation, third-party funding for such CIRP cases is a welcome option, since this is for the short term and also has super-priority,” said Chhawchharia.

As per the latest report by the Insolvency & Bankruptcy Board of India, there had been 4,708 CIRP cases till September 2021 since the Insolvency and Bankruptcy Code came into force. Of these, 421 have resulted in the approval of the resolution plan and 1,419 cases were referred for liquidations.

“We are currently advising a couple of funds, including one from Singapore, willing to invest in the companies admitted under the insolvency resolution process” for debtor-in-possession financing, said Nishith Dhruva, managing partner of law firm MDP & Partners. “Even after the usual delay, there is still a certainty towards the recovery and that is something investors are willing to bet on. Most investors are willing to invest in manufacturing or infrastructure companies with good land parcels or small and-mid-sized real estate companies.”