Mumbai: A month after 11 out of 12 companies came under the management control of interim resolution professionals (IRPs), teething issues have cropped up in the resolution process in areas such as interim financing and the role of the resolution professionals. In particular, lenders are reluctant to allow interim loans from other creditors as they fear losing charge over the assets.
Under the Insolvency and Bankruptcy Code (IBC), a resolution professional, who is appointed to carry out the resolution process, is allowed to raise interim finance and grant rights over the debtor’s property if it is approved by the committee of creditors.
Typically, interim funding is a short-term working capital loan borrowed at a higher interest rate and secured with a first charge on the firm’s assets, giving it priority over other lenders in recovery.
Asset reconstruction companies such as Edelweiss ARC and Phoenix ARC are quoting 15-22% for a six-month interim loan with the right of first charge, said two people aware of the matter.
“Interim funding requirement is around Rs50 crore to Rs200 crore for each company. We are looking at cases where we already have prior exposure in these companies," said Eshwar Karra, chief executive officer, Phoenix ARC Pvt. Ltd. However, in cases such as Essar Steel Ltd, the IRP is looking to raise at least Rs1,000 crore.
Lenders are questioning the purpose of borrowing such large amounts as they fear losing control over cash flows, said bankers handling these cases.
They also want to ensure that these funds are not used for any related-party transactions.
“Where is the need for fresh funding when the company has been running without the help of any external funding so far?" asked a senior official of a public sector bank.
“Instead, the resolution professional can reduce the interest payment due to the lenders," the official added.
In Essar Steel’s case, the resolution professional had also requested its lenders to stop diverting a portion of fund flows towards debt obligations, a practice called tagging, the Economic Times reported on 1 September.
Resolution professionals argue that without interim funding, the company could face the threat of shutting down. Money is needed to preserve the value of the company by running it as a going concern, said a consultant at one of the big four audit firms who is handling bankruptcy cases.
“Despite the priority given to interim finance by the Code, the existing lenders have been extremely reluctant in releasing interim finance," said a report by EY India on implementing the bankruptcy code. “In case there is an external financier who is ready to provide interim finance, it still has to be approved by the committee of creditors that has not been an easy process. Lenders would need to consider the larger implications of the benefits to be derived via interim finance in the interest of the business – rather than being only concerned about dilution of the security available to them."
In some cases, lenders are also upset with resolution professionals acting on their own without taking the approval of the committee of creditors, said two people involved in the matter.
That said, lenders are not opposed to interim funding in all cases.
In the Alok Industries Ltd case, for instance, the creditor committee has given the approval to raise Rs150 crore as interim funding. The resolution professional is currently negotiating with Edelweiss ARC over the pricing of the loan, according to two people familiar with the matter.
“Lenders need to develop confidence over the RPs and this will come with their performance over a period of time," said Sitesh Mukherjee, partner at law firm Trilegal.
“Meanwhile, financial creditors should ensure that they do not impede the resolution process," he added.