I. What is DIP?

In normal loan, Bank takes security. In DIP, company is already bankrupt, no security left. So law gives DIP lender Super-Priority to encourage rescue financing.

Example: Jet Airways in CIRP needed Rs 100 Cr to pay airport charges to keep planes parked, otherwise planes repossessed. New lender gives Rs 100 Cr as DIP - This Rs 100 Cr gets first priority over all other debts.

II. Legal Framework

A. USA - Origin of DIP - Chapter 11 - Section 364 of US Bankruptcy Code

Four levels of DIP priority, in increasing order:

364(a) - Unsecured DIP: Same priority as admin expenses - No security.

364(b) - Administrative Super-Priority: Paid before all other admin expenses.

364(c)(1) - Super-priority over other admin claims + (c)(2) Lien on unencumbered property + (c)(3) Junior lien on encumbered property.

364(d) - Priming Lien - Super-Senior: DIP gets lien senior to existing secured lender - Most controversial. Court must prove:

1. Debtor cannot get credit elsewhere
2. Existing lender adequately protected

This is true DIP financing - Can prime SBI's mortgage if needed.

B. INDIA - IBC 2016 - No word "DIP", but called "Interim Finance"

1. IBC Section 5(15) - Definition:

Interim Finance means any financial debt raised by Resolution Professional during CIRP period and such other debt as may be notified - Excludes any debt raised during pre-pack.

2. IBC Section 20(2)(c) - Resolution Professional Duty:

RP can raise interim finance - Provided no security interest shall be created over any encumbered property without prior approval of CoC.

3. IBC Section 28(1)(a) - CoC Approval:

RP needs 66% CoC vote to raise interim finance.

4. CIRP Regulation 21 & 27 - IBBI
Interim finance must be disclosed to CoC, cost to be part of CIRP cost.

5. Priority under IBC:

• Section 30(2)(a) + Reg 38 - Interim Finance = Part of CIRP Cost
• Section 53(1)(a) - Distribution Waterfall: CIRP Cost including interim finance paid first, even before workmen dues and secured creditors.

6. RBI Prudential Framework 2019 - Resolution Plan - Interim Finance allowed during Review Period + 180 days - Gets priority.

Key Difference India vs US:

• US allows Priming Lien - DIP can jump ahead of existing secured creditor.
• India DOES NOT allow priming lien. Sec 20(2) proviso says RP cannot create security over encumbered asset without CoC approval. In practice, CoC never allows priming of its own security. So Indian DIP is effectively unsecured but super-priority as CIRP Cost, not super-senior secured.

III. Legal Obligations & Conditions for DIP / Interim Finance

For RP:

1. Must prove no other option - Why company will die without it
2. Must get 66% CoC approval [Reg 27] - With Information Memorandum of use of funds
3. Cannot create security on already mortgaged property without CoC consent - Sec 20(2)
4. Must be disclosed as CIRP Cost - Not as financial debt with voting rights
5. Must be repaid within CIRP period or as part of Resolution Plan - Max 330 days

For DIP Lender:

1. No voting rights in CoC - Anuj Jain Interim Resolution Professional vs Axis Bank - SC 2020 - SC held interim finance provider is NOT Financial Creditor, no vote.
2. Gets super-priority but only if approved as per Sec 28 - If RP takes without approval, lender loses priority - Treated as unauthorized.
3. Cannot be promoter or related party - To avoid evergreening - IBBI Circular 2021.

IV. Landmark Case Laws

INDIA - IBC

1. Swiss Ribbons Pvt. Ltd. vs Union of India - SC 2019 - 4 SCC 17 - Constitutionality of Interim Finance Priority
SC upheld IBC Sec 53 priority where interim finance as CIRP Cost ranks first. Court held:

Without interim finance, corporate debtor will be pushed to liquidation, destroying value. Giving super-priority is reasonable classification under Article 14 to encourage rescue financing.

This is foundational case upholding DIP concept in India.

2. SBI vs V. Ramakrishnan - SC 2018 & Committee of Creditors of Essar Steel vs Satish Kumar Gupta - SC 2019 - 2 SCC 1
In Essar Steel, SC held:

• Interim finance must be paid in full under Resolution Plan as part of CIRP Cost under Sec 30(2)(a)
• It cannot be reduced or haircut like other financial creditors
• Even if Resolution Plan gives 10% to secured banks, interim finance gets 100%

Principle: DIP is untouchable.

3. Anuj Jain IRP for Jaypee Infratech vs Axis Bank - SC 2020
Axis Bank gave interim finance to Jaypee and claimed voting rights in CoC as Financial Creditor. SC held:

Interim Finance provider under Sec 5(15) is not Financial Creditor under Sec 5(7). It has no right to vote, attend CoC. Its protection is only priority under Sec 53.

This settled that DIP lender is protected by priority, not by control.

4. K. Sashidhar vs Indian Overseas Bank - SC 2019 - CoC Discretion on Interim Finance
SC held CoC's commercial wisdom on whether to approve interim finance and its amount is non-justiciable. NCLT cannot direct CoC to approve interim finance. CoC can reject even if company dies.

5. Jet Airways (India) Ltd. - NCLT Mumbai 2019-2021 - Practical DIP Case
Jet needed Rs 175 Cr interim finance to maintain aircraft, retain slots. CoC led by SBI approved Rs 50 Cr interim finance from SBI itself as CIRP Cost. Later, NCLT allowed use of cash generated from operations as deemed interim finance. Case shows practical use - Without interim finance, Jet's slots worth Rs 1000 Cr would lapse.

6. Videocon Industries Ltd. - NCLT 2019
Consolidated CIRP of 13 Videocon companies. RP raised interim finance of Rs 100 Cr for maintaining DTH operations. NCLAT held interim finance raised before CoC constitution, but later ratified by CoC with 66%, is valid and gets priority.

7. MBL Infrastructure Ltd. vs Ranjit Lala - NCLAT 2020
RP raised interim finance without 66% CoC approval, created charge on unencumbered assets. NCLAT held such finance is unauthorized, cannot claim CIRP Cost priority, will be treated as unsecured debt of RP personally.

USA - Leading Cases for Priming Lien Concept - Cited in Indian NCLT

8. In re: Saybrook Manufacturing Co. Inc. - US 11th Circuit 1992 - Cross-Collateralization Banned
Court held DIP cannot be given security over pre-petition debt as well as post-petition - Called cross-collateralization illegal. Indian CoCs cite this to avoid giving existing bank extra security under guise of DIP.

9. In re: Snowshoe Co. Inc. - US Bankruptcy Court 2006 - Adequate Protection for Priming
For 364(d) priming lien to be allowed, existing secured lender must get adequate protection - e.g. cash payments, replacement lien. Indian law does not allow priming at all, so this protection concept is used by CoC to reject DIP that dilutes their security.

10. In re: B&F Global - US - Roll-Up DIP Disallowed
Roll-up is where DIP lender was already existing lender and uses DIP to convert its old loan into super-priority new loan - Unfair to other lenders. US courts disallow. IBBI also circular - Existing CoC member cannot give interim finance to get priming over others unless approved by 100% CoC.

V. Practical Drafting - DIP Term Sheet in India

If you are lending DIP / Interim Finance to a company in CIRP, term sheet must have:

1. Approval Reference: "Approved by CoC Resolution dated ___ with 66% under Sec 28(1)(a)"
2. Priority Clause: "Shall be treated as CIRP Cost under Sec 30(2)(a) and Sec 53(1)(a) and paid in full before any distribution to any creditor"
3. No Voting Rights Acknowledgment: Lender acknowledges no CoC voting rights as per Anuj Jain case.
4. Use of Funds: Specific - e.g. "Only for payment of airport charges, employee wages" - RP cannot divert.
5. Tenure: Repayable on approval of Resolution Plan or completion of 330 days, whichever earlier.
6. Security: Only over unencumbered assets, or with explicit CoC NOC if encumbered - To comply with Sec 20(2).

VI. Current Issues

• Banks reluctant to give interim finance because even with super-priority, if company goes to liquidation, there may be no assets to pay CIRP Cost.
• RBI is considering allowing Priming Lien like US 364(d) to encourage DIP - Discussion paper by IBBI 2023.
• Promoter funding of CIRP as interim finance not allowed as per Sec 29A - Would be backdoor entry.