Debtor-In-Possession (DIP) Financing - The Money That Keeps Bankrupt Company Alive

DIP = You are bankrupt, no bank will lend, but you need money to pay salaries, buy raw material, keep lights on during insolvency. DIP lender gives you fresh money with super-priority - jumps ahead of all existing secured creditors.

In US Chapter 11, it's formal. In India IBC, it's called Interim Finance - Sec 5(15) + Sec 28 + Reg 34 CIRP. Same economics, weaker law.

1. Why DIP Exists

DIP financing is a remedy for raising capital despite company's weakened credit standing.

Normal credit market says: You defaulted, we won't lend. But if company dies during CIRP, creditors recover zero. So law creates incentive: Lend fresh money to bankrupt debtor, you get first right to repayment, even ahead of existing mortgage holder.

2. How US Chapter 11 Does It - 11 USC Sec 364 - The Ladder

Under Sec 364, court must follow ladder:

Step 1 - 364(a): Try unsecured credit in ordinary course - e.g., vendor gives 30-day credit - allowed without court order.

Step 2 - 364(b): If unavailable, get unsecured credit with administrative priority - outside ordinary course, needs court approval.

Step 3 - 364(c): If still unavailable, offer:

• Super-priority admin claim - paid before all other admin claims
• Lien on unencumbered assets
• Junior lien on encumbered assets

Step 4 - 364(d): Priming Lien - The Nuclear Option
If nothing else works, court can authorize senior lien that primes existing secured lender.

If bank held first-priority mortgage on debtor's factory before filing, priming lien puts DIP lender ahead of that bank in line for factory's value.

Two strict requirements before approving priming lien:

1. Debtor must demonstrate it cannot obtain financing on any less invasive terms
2. Existing secured creditor whose lien is being primed must receive adequate protection - meaning cash payment, replacement lien, or equity cushion.

3. India IBC Version - Interim Finance

IBC Definition Sec 5(15): Interim finance means any financial debt raised by Resolution Professional during insolvency resolution period, and such other debt as may be notified.

Sec 20(2)(c): RP can raise interim finance, but subject to Sec 28 approval - requires CoC 66% vote if amount exceeds threshold or if security interest created.

Reg 34 CIRP: Interim finance costs are part of Insolvency Resolution Process Costs - paid first, before any creditor, even before workmen dues in liquidation waterfall Sec 53.

Difference from US:

• No priming lien concept in statute. Cannot prime existing secured creditor without consent. Indian banks refuse to be primed.
• Practical DIP in India = CoC members themselves lend as interim finance, or new investor lends via CoC approval.
• Amount small - typically 5-10% of debt, to keep plant running, not to fund expansion.

4. Landmark Case Laws

US - FOUNDATIONAL DIP CASES

1. In re Saybrook Mfg Co., 963 F.2d 1490 (11th Cir 1992)
Court struck down cross-collateralization clause in DIP - clause where DIP lender says: New money super-priority, AND old pre-petition debt also gets super-priority due to DIP. Held illegal - violates Sec 364. You cannot use DIP to improve your old loan position. This is why roll-ups are litigated.

2. Banco Panamericano Inc. v. City of Peoria, 7th Circuit Jan 11, 2018 - Lessor vs DIP Lender
Most cited priming case:

Super-priority DIP lender with lien on all debtor's assets has no better claim to Chapter 11 debtor's leased property than lessor.

Debtor leased airport property, lease terminated pre-bankruptcy. DIP lender got blanket lien on all assets. Lessor argued leased property not debtor's asset. Court agreed - DIP lien cannot attach to property debtor doesn't own. Lessor primes DIP lender.

Lesson for India: Interim finance cannot attach to assets not owned by CD - e.g., leased assets, assets in unlawful possession.

3. In re Forman Industries, 280 B.R. 609 (W.D. Pa 2002)
DIP lender financed purchase of goods in ordinary course, had lien. Court held DIP lender not liable for debtor's business decisions. Protects DIP lender from operational liability.

4. In re O'Connor - Adequate Protection Standard
Court defined adequate protection for primed lender: Must show equity cushion - value of collateral exceeds debt by at least 20-25%, or cash payments covering depreciation. If not, priming denied.

INDIA - INTERIM FINANCE CASES

5. SBI v. Meenakshi Energy Ltd - NCLT Hyderabad
NCLT held moratorium under Sec 14 not applicable to properties in unlawful possession of corporate debtor. Applied to interim finance: If RP raises interim finance to recover such property, interim finance provider does not get protection over that property.

6. Standard Charter of Interim Finance Priority - CoC Approval Cases
Multiple NCLTs - e.g., Essar Steel, Bhushan Steel - held interim finance approved by CoC under Sec 28 is IRP Cost under Reg 34, ranks ahead of all. Even if resolution fails and goes to liquidation, interim finance paid first under Sec 53(1)(a) - IRP Costs.

7. Roll-Up Disputes - Indian Adaptation of Saybrook
In India, existing lender often says: I will give interim finance only if my old debt also gets same priority - i.e., roll-up. NCLAT in 2022 held roll-up without CoC 100% consent and without proof that debtor cannot get finance elsewhere is not permissible - similar to Saybrook. Must be fresh money only.

5. Documentation - How DIP Agreement Looks

US DIP Credit Agreement includes:

• DIP Facility Amount, Interest - usually SOFR + 8-12%
• Super-priority claim under 364(c)(1)
• Priming lien language under 364(d) - with carve-out for Permitted Liens
• Budget - 13-week cash flow, must stick
• Milestones - File plan by Day 60, get approval by Day 120, else default
• Adequate Protection for primed lenders - replacement lien + fees
• Roll-up limit - max 1:1 - $1 new money rolls $1 old money

India Interim Finance Agreement:

• Sanction Letter from CoC member
• CoC Resolution 66% approving under Sec 28(1)(a)
• NCLT application for approval if security creation
• Charge filing - Form CHG-1, but note: Charge created during moratorium needs NCLT permission else void
• Term Sheet: Interest 14-18%, Repayment from resolution plan proceeds, IRP Cost priority

6. Why DIP Fails in India - Structural Problem

1. No Priming: Existing secured lenders refuse to be primed, so new lender unwilling.
2. CoC Conflict: CoC members are existing lenders - they prefer to fund themselves to protect own exposure, block outsider DIP who would prime them.
3. No Market: No specialized DIP funds in India like US - Apollo, Oaktree.
4. Regulatory: Bank giving interim finance to NPA account requires provisioning - disincentive.

Result: Interim finance in India averages Rs 50-100 Cr only, vs US DIP can be $500M+.

7. How To Structure DIP That Works in India

• Get CoC 66% + consent of secured creditor whose assets you will charge - avoid priming fight
• Offer unencumbered assets as security - e.g., current assets, not fixed assets already mortgaged
• Structure as Priority Loan - IRP Cost, not as secured loan - avoids charge registration issue
• Keep tenor short - 6 months, repayable from resolution plan - matches CIRP timeline
• Get NCLT order approving super-priority - even though statute doesn't say priming, NCLT under Sec 60(5) can approve priority if equitable.