Brief Overview:
CoC’s ‘in‑principle’ nod to raise interim finance, without approving the exact terms and conditions, does not amount to the ‘specific approval’ mandated under Section 28 of the Insolvency and Bankruptcy Code (“IBC”).
Technical Details:
National Company Law Appellate Tribunal, (“NCLAT”) has clarified that:
1) A broad or generic approval from the Committee of Creditors (“CoC”) that allows the Resolution Professional (“RP”) to raise interim finance is not enough.
2) The CoC must give specific, formal approval for the exact amount, interest rate, lender details, and terms of the interim finance as required under Section 28 of the IBC.
The things that went wrong:
1) The RP treated the CoC’s preliminary ‘in‑principle’ approval as if it were final.
2) Relying on this, the RP unilaterally signed a detailed interim finance agreement and then presented it to the CoC as a done deal.
3) The RP also failed to justify:
(a) Why a related party was chosen as the lender, and
(b) Whether the loan amount and terms were necessary or reasonable.
4) This conduct violated the RP’s duty under Sections 25 and 28 of the IBC, which require complete transparency and mandatory CoC approval for such decisions.
JC takeaway:
1) “In‑principle” ≠ approval: CoC must expressly approve the exact quantum, pricing, lender, and terms of interim finance.
2) No unilateralism by the RP: Executing loan documents without CoC’s prior sign‑off breaches statutory duties of transparency and disclosure.
3) Related‑party funding demands scrutiny: Any such proposal must be backed by clear justification and placed before the CoC upfront.
4) Process integrity is paramount: Interim finance must be raised through a transparent, CoC‑approved process, no fait accompli.
5) Non‑compliance has consequences: Deviation from Sections 25 and 28 of the IBC can trigger findings of professional misconduct and financial penalties against the RP.
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