Bankrupt firms: Third-party litigation funds eyeing interim finance space

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’, 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 very popular in the hands of resolution professionals in developed markets such as the US and UK, Australia and Canada,” said Kundan Sahi, CEO, LegalPay, which provides such funding. We are targeting the mid-market segment where the requirements for…

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