Debtor-In-Possession (DIP) Financing Compliance - Complete Guide

DIP Financing = New super-priority financing granted to company that is already in insolvency / restructuring proceedings to keep business alive - payroll, suppliers, operations - while negotiating plan.

It is the most critical financing in insolvency. Without DIP, company dies. With DIP, company gets chance to restructure.

Called:

• US: DIP under Bankruptcy Code Section 364
• Spain: Financiación interina y nueva financiación - Art 611-630 TRLC (Texto Refundido Ley Concursal after Law 16/2022)
• India: Interim Finance under IBC Section 5(15) + Reg 18, 28 IBBI
• UK: Rescue financing under Restructuring Plan

I. Legal Frameworks

A. US - Gold Standard - 11 U.S.C. § 364

Four tiers, in order of priority:

1. 364(a): Ordinary course unsecured - no court approval needed
2. 364(b): Outside ordinary course unsecured - court approval
3. 364(c): Super-priority / Secured by unencumbered assets / Junior lien on encumbered assets - if cannot get unsecured
4. 364(d): Priming Lien - Senior or pari passu lien on already encumbered assets - most controversial - requires proof cannot get financing otherwise + adequate protection to existing lienholder

B. Spain - TRLC Art 611-630 - After EU Directive 2019/1023

Spain introduced US-style DIP in 2022 reform:

1. Interim Financing (Financiación interina) Art 611:

• Financing needed before homologation to preserve going concern
• Granted during negotiation period after comunicación

2. New Financing (Nueva financiación) Art 612:

• Financing foreseen in restructuring plan

Protection:

• Predeductible (Crédito contra la masa) Art 242: Top priority, paid before all other claims except super-privileged labor
• Super-priority for new money: 50% of new financing granted by creditors who are not related parties = predeductible, 50% = general privileged Art 280 - Incentive
• Clawback protection Art 631: New financing cannot be challenged as detrimental if plan homologated

Requirement for compliance:

• Must be necessary and reasonable for continuity
• Must be foreseen in plan or approved by court
• Cannot be granted by related party for super-priority unless meets fairness test

C. India - IBC

Definition Sec 5(15): Financial debt incurred by corporate debtor during CIRP + registered valuers / IRP costs = Interim Finance

Regulation 18 & 28: RP can raise interim finance with CoC approval (66% voting). No priming allowed without CoC approval.

Priority: Section 53(1)(a) - Insolvency resolution process costs including interim finance = first priority in liquidation waterfall, before workmen, secured creditors.

II. Compliance Requirements - How to Get DIP Approved

Checklist for Lender / Borrower / RP:

Cannot Obtain Elsewhere Test: Prove company tried to get unsecured / junior financing, failed. Need declarations from 2-3 banks refusing.

Business Justification: 13-week cash flow, use of proceeds - payroll, critical suppliers, not for repaying old debt (unless roll-up approved)

Budget & Reporting: Weekly budget, variance reporting, covenants

Adequate Protection for Existing Secured Creditors:

• If priming, must protect existing lienholder - replacement lien, cash payments, equity cushion

Court Approval Process - Spain:

• File request with Commercial Court - justification, terms, necessity
• Expert report by restructuring expert (Experto en reestructuraciones)
• Hearing of affected creditors
• Auto de autorización

CoC / Court Approval India:

• RP files application to NCLT + CoC resolution 66%
• Terms: interest rate (usually high - 12-18%), fees, security

III. Case Laws - Landmark DIP Disputes

1. US - In re O'Connor, In re Saybrook Manufacturing Co. v. C. Itoh - Priming Lien Doctrine
Saybrook (11th Cir 1990): Court held §364(d) priming lien cannot be used to repay pre-petition debt to same lender - prohibits cross-collateralization where new DIP lender gets security for old debt. Prohibits roll-up unless benefits estate.

Impact: DIP cannot be used to improve position of existing lender at expense of others.

2. In re Crouse Group Inc., In re Bland - Adequate Protection
Courts held if priming reduces value of existing collateral, must give adequate protection - cash payment, additional collateral, or equity cushion 20%+.

3. US - In re SunEdison, In re Peabody Energy - Roll-Up Disputes
In SunEdison, DIP included roll-up of $500M prepetition debt into super-priority. Unsecured creditors objected. Court approved because roll-up provided new money $300M and was only option. Test: Roll-up allowed if new money substantial and necessary.

4. Spain - Celsa Group - Juzgado Mercantil Barcelona 2023 - First Spanish DIP under new law
Celsa obtained €100M interim financing during restructuring negotiations. Court granted predeductible status under Art 242 TRLC. Creditors challenged - argued financing was from related party (funds already shareholders). Court held 50% super-priority rule applies, related party restriction must be interpreted narrowly - funds not "personas especialmente relacionadas" under Art 282.

Landmark for Spain: Confirms Spanish courts will apply US-style business judgment.

5. Spain - X-Elio Energy - Art 630 Clawback Protection
Competitor challenged new financing granted under restructuring plan as preferential. Court held Art 631 provides safe harbor - financing foreseen in homologated plan cannot be rescinded as clawback action.

6. India - Bank of Baroda vs. Sundaresh Bhatt - Supreme Court - Interim Finance Priority
SC held interim finance under Sec 5(15) ranks above all - even workmen dues. RP's costs + interim finance must be paid in full before distribution.

7. India - NCLAT - Committee of Creditors of Essar Steel vs. Satish Kumar Gupta - Interim Finance Approval
NCLAT held RP can raise interim finance only after CoC approval, cannot create security interest over assets already secured without CoC consent.

8. India - CoC of Videocon Industries vs. Venugopal Dhoot - Videocon CIRP
RP raised interim finance Rs 200cr at 18% to keep DTH business alive. CoC approved. Later, objecting financial creditor argued interest too high. NCLT held commercial wisdom of CoC not justiciable if approved by 66% - DIP terms are business decision.

9. UK - Re HMV, Re Debenhams - Rescue Financing
English courts approved super-senior rescue financing under Restructuring Plan, priming existing secured creditors because no alternative.

IV. Compliance Pitfalls = Litigation Risk

1. Roll-Up / Cross-Collateralization:
If DIP lender is existing lender and uses DIP to secure old debt - Saybrook violation - will be challenged. Allowed only if new money > roll-up and only alternative.

2. Related Party DIP:
Spain Art 615 - Financing by shareholder or related party cannot get 50% super-priority unless proves at arm's length + independent expert. India: Related party cannot be interim finance provider if CoC objects due to conflict.

3. Use of Proceeds to Pay Old Debt:
DIP must be for operations, not to repay prepetition debt to same lender, unless court approves as critical vendor.

4. Inadequate Disclosure:
Must disclose all fees - commitment fee, exit fee, OID. US courts struck down hidden fees.

5. No Adequate Protection:
If priming without protecting existing secured creditor - appealable.