Bankrupt Companies: Third-Party Litigation Funds Consider Interim Funding Space

Third-party litigation funding is increasingly becoming a new instrument in the hands of bankruptcy resolution (PR) professionals as they explore ways to fund operations until a new owner takes over the business or the assets are liquidated.

In December, the PR of a Faridabad-based company which owns a shopping mall and has debt of over Rs 300 crore, raised bridge financing to run day-to-day operations even as the company went through the resolution process of the company’s insolvency. (CIRP).

During the CIRP period, to keep the bankrupt company in operation, RP must make payments such as professional fees, payments to workers and for the maintenance of the plant and machinery, among others. In most cases, these expenses are borne by the lenders.

However, when lenders are unwilling to allocate funds to keep the bankrupt business running, the PR relies on third parties for bridge financing. When the resolution plan is approved or a company goes into liquidation, those costs, including the insolvency practitioner’s compensation, have priority of payment over safe financial creditors or any other lender.

“Funding to carry out 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, the Australia and Canada,” said Kundan Sahi, CEO of LegalPay, which provides such funding. We are targeting the middle market segment where the requirements for these funds are between Rs 10 lakh and Rs 5 crore.

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

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