DIP Financing in India (2026): Rescue Finance During CIRP, What Lenders, Boards and Rps Must Know

DIP financing India sits at the heart of one of the most consequential decisions a distressed business, its lenders and its resolution professional can make during a corporate insolvency resolution process (CIRP). Rescue finance can keep a viable company operating as a going concern while a resolution plan is formed, but the legal architecture around it under the Insolvency and Bankruptcy Code, 2016 remains nuanced, and ongoing reform discussions are sharpening the questions around priority, protection and tribunal discretion.

For CFOs, credit committees, insolvency professionals (IRPs and RPs), institutional lenders and corporate boards, the practical issues are concrete: can a facility be structured to survive challenge, what protections tribunals will realistically grant, and how to document the arrangement so recovery is possible if a plan fails. This guide walks through the statutory basis, the decision framework, the drafting essentials, the litigation risk map and a comparison of DIP against other rescue routes. It is written as a practitioner reference for the evolving regulatory landscape India finds itself in during 2026.

Executive summary, quick takeaways for lenders, boards and RPs

Before reading the detail, the core messages for anyone weighing a DIP facility during CIRP are these:

• When to seek or offer DIP. Consider rescue finance where the corporate debtor has a credible going-concern case, a short liquidity runway, and sufficient creditor support, but no realistic alternative source of funding on reasonable terms.
• Likely tribunal posture in 2026. The National Company Law Tribunal (NCLT) has authorised interim finance in practice, but it tends to favour arrangements that are transparent, supported by the committee of creditors (CoC), and grounded in commercial rationale rather than aggressive super-priority claims.
• Top drafting protections. Clear purpose clauses, independent valuation, documented CoC approval, express security ranking, inter-creditor arrangements, and fallback enforcement rights are the six protections that most improve a facility’s chance of surviving challenge.
• Documentation discipline. Contemporaneous board minutes, independent legal and financial opinions, and a record of alternatives considered are as important as the term sheet itself.
• Plan-failure planning. Document how security and ranking work if the resolution plan collapses, do not rely on a single remedy or an untested priority claim.

DIP financing India works best when the commercial logic, the documentation and the regulatory posture all align. The sections below show how to build that alignment.

What is DIP / rescue financing under the IBC? (definition and legal basis)

Debtor in possession financing, commonly abbreviated to DIP financing, describes funding advanced to a distressed company to keep it operating during a formal insolvency process. In a classic debtor-in-possession model, existing management retains control of the business and raises fresh money to sustain operations while a restructuring is negotiated. The Indian framework differs in an important structural respect: once CIRP commences under the Insolvency and Bankruptcy Code, 2016, the powers of the board are suspended and the resolution professional takes charge of the corporate debtor.

So while the market freely uses the phrase “DIP financing India,” what is actually being described in most Indian cases is interim finance arranged by the RP, with the approval of the committee of creditors where required, to preserve the enterprise as a going concern.

The policy rationale is straightforward. A company in CIRP frequently cannot meet payroll, pay suppliers or maintain plant without fresh liquidity. If operations stall, enterprise value erodes and the prospects of a successful resolution plan collapse. Rescue financing is therefore designed to bridge the gap between commencement of the process and approval of a plan, protecting value for all stakeholders rather than simply benefitting one creditor.

What the Code and regulations say about interim finance

The Insolvency and Bankruptcy Code, 2016 defines “interim finance” and provides the statutory framework for CIRP and the powers of the resolution professional, and the Insolvency and Bankruptcy Board of India (IBBI) issues the regulations and circulars, principally the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, that govern how RPs manage the corporate debtor, including the raising of interim finance. Under the Code, the RP may raise interim finance, subject to the approval of the committee of creditors where it exceeds the limits approved by the CoC.

Interim finance raised during CIRP is treated as part of the insolvency resolution process cost, which gives it a defined place in the distribution framework and, in liquidation, priority under the statutory waterfall. That treatment is the foundation on which most practical DIP protections in India are built. Lenders and RPs should always begin with the current statutory text and IBBI guidance, because the exact mechanics of priority and process-cost treatment are the anchor for everything that follows in a DIP facility.

When is a DIP appropriate? Decision framework for boards, RPs and lenders

Rescue finance is not the right answer in every distressed situation. Before a board recommends it, an RP arranges it, or a lender commits capital, all three should test the proposal against a structured decision framework.

Key commercial triggers

The clearest signals that DIP financing India may be appropriate include:

• Short liquidity runway. The corporate debtor cannot fund essential operations for the remainder of the CIRP timeline without fresh money.
• Credible going-concern case. There is a realistic prospect of a resolution plan that preserves enterprise value, so the interim funding has a defined exit.
• Creditor support. The committee of creditors is broadly aligned on the need for interim finance and the commercial terms, reducing the risk of later challenge.
• Supportable valuation. Independent valuation evidence shows the enterprise is worth materially more as a going concern than in liquidation.
• Regulatory headroom. Any lender providing the facility can do so within Reserve Bank of India (RBI) prudential norms and exposure limits applicable to its own book.

Where several of these triggers are absent, for example, where creditors are fragmented, valuation is contested, or there is no plausible plan, interim finance may simply defer an inevitable liquidation while adding a priority claimant to the queue. In those cases, the better course is often to proceed directly to the next phase rather than inject rescue money.

Board duties and documentation considerations

For the corporate debtor’s board, the period around CIRP commencement is sensitive. Directors should document the commercial rationale for supporting any interim finance proposal, the alternatives they considered, and why DIP financing was preferred. Clear contemporaneous minutes protect directors from later allegations that they acted improperly or preferred particular creditors. Because CIRP suspends the board’s powers and shifts control to the RP, the board’s role narrows, but the record it leaves behind remains relevant to any subsequent dispute. The Ministry of Corporate Affairs framework on directors’ duties and company filings continues to apply alongside the insolvency process, and boards should treat compliance in both regimes as part of the same decision.

Can the RP or NCLT grant super-priority or other special protections? (statutory and case law overview)

This is the question lenders ask first and the one on which the most money turns. The honest answer is that Indian tribunals can and do recognise practical protections for interim finance, but the concept of an absolute, unassailable “super-priority” remains contested, and reliance on it alone is risky.

The statutory starting point is that interim finance forms part of the insolvency resolution process cost. Process costs occupy a defined and favourable position in the distribution framework, and rank first in the liquidation waterfall under the Code, which in practice gives interim lenders a strong claim relative to ordinary creditors. That treatment, rather than any free-standing super-priority doctrine, is the principal source of protection under the Code. The Supreme Court’s broad approach to interpreting the Insolvency and Bankruptcy Code, emphasising commercial efficacy, the primacy of the committee of creditors’ commercial wisdom, and a coherent reading of the Code as a complete scheme, frames how tribunals exercise their discretion.

The principles articulated in the Supreme Court’s constitutional examination of the Code have become binding reference points for every CIRP financing question.

What tribunals have allowed

In practice, the NCLT has granted approvals for interim finance where the RP has demonstrated genuine need and secured CoC backing. Tribunals have been willing to:

• Approve the raising of interim finance where it is necessary to preserve going-concern value and the CoC supports it.
• Recognise the process-cost status of properly documented interim finance, placing it ahead of many competing claims in distribution.
• Permit security and ranking arrangements that were disclosed, commercially justified and approved by the creditors.

The common thread is transparency and creditor endorsement. Where an RP can show the tribunal that the finance was needed, fairly priced, disclosed and supported, approval has generally followed. The National Company Law Appellate Tribunal (NCLAT) has in turn addressed appeals touching on interim finance and CoC approvals, and its orders reinforce the central role of creditor consent and procedural regularity.

What tribunals have resisted

Tribunals have been more cautious, and sometimes resistant, where:

• A lender seeks absolute priority that would override the statutory scheme or prejudice secured creditors without their consent.
• The commercial rationale is thin, the valuation is contested, or alternatives were not explored.
• There are allegations of conflict of interest, related-party dealing, or lack of CoC approval.

The practical lesson for DIP financing India is to build protection on the firm ground of process-cost treatment, documented CoC approval and disclosed security, rather than on an aggressive priority claim that invites challenge. Lenders should structure for the protection the Code reliably gives and treat any enhanced priority as a bonus to be negotiated, not a certainty to be assumed.

Documentation: DIP term sheet and key clauses to survive challenge

The difference between a DIP facility that survives scrutiny and one that collapses under challenge usually lies in the documentation. A disciplined, transparent DIP term sheet India can prove to a tribunal that the finance was necessary, fairly priced and properly approved. This is the most important practical section of this guide.

Sample term sheet, annotated core clauses

A robust interim finance term sheet should address, at minimum, the following elements. Each is set out with the drafting objective and the risk it mitigates:

• Facility amount and availability. State the committed amount, drawdown mechanics and any conditions precedent. Tie availability to demonstrated operational need, which supports the commercial-necessity argument before the tribunal.
• Purpose and use of funds. A tightly drawn purpose clause, limiting deployment to specified operational, payroll and preservation uses, is one of the strongest defences against an allegation that the facility diverted value or preferred particular parties.
• Security and ranking. Specify precisely what security is granted, over which assets, and where it ranks. Where existing secured creditors are affected, their consent should be documented. Clear ranking reduces the scope for later priority disputes.
• Process-cost and priority wording. Record that the finance is intended to be treated as insolvency resolution process cost, with realistic fallback wording where enhanced priority is negotiated but not guaranteed. Avoid absolute super-priority language that overreaches the statutory scheme.
• Interim repayment and triggers. Set out repayment timing, interest and any triggers tied to milestones in the resolution process. Clear triggers make enforcement cleaner if things go wrong.
• Covenants and reporting. Information covenants, monitoring rights and operational covenants let the lender track the debtor and demonstrate active oversight, useful evidence of good faith.
• Events of default. Define default events precisely, including failure of the resolution process, to give the lender defined exit rights.
• Inter-creditor arrangements. Where multiple creditors are involved, an inter-creditor agreement that records the agreed waterfall and priorities reduces the risk of contested enforcement later.
• Challenge and approval mechanics. Record the CoC approval and, where relevant, the NCLT application, so the approval trail is embedded in the documentation itself.
• Indemnities and step-in rights. Appropriate indemnities and, where commercially agreed, step-in rights give the lender additional protection, subject to the constraints of the CIRP framework.

The following table illustrates how clause variants carry different tribunal risk, helping drafters choose wording that is defensible rather than merely aggressive:

The lower-risk column is almost always the better commercial choice for DIP financing India, because a facility that is enforceable and approval-backed is worth more than one with aggressive terms that may be struck down.

Evidence and board minutes RPs should produce to justify DIP

Documentation extends beyond the term sheet. To justify an interim finance decision, the RP and board should assemble and retain:

• Contemporaneous CoC minutes recording the discussion, the alternatives considered and the vote.
• An independent valuation showing going-concern value materially exceeds liquidation value.
• Independent legal and financial opinions on the structure and pricing.
• Board minutes of the corporate debtor documenting the commercial rationale and the absence of better alternatives.
• Conflict-of-interest and independence records for the RP and any advisers involved.

This evidential bundle is what converts a defensible term sheet into an approval that will withstand later attack. The strongest DIP financing India arrangements are those where the paper trail tells the same coherent story as the deal.

Lender protections and recovery strategies if a resolution plan fails

Even well-structured rescue finance can be exposed if the resolution plan collapses. Lenders should plan for that outcome at the outset rather than react to it. DIP lender protections are only as good as the documentation and orders that support them when the process ends without a plan.

The principal recovery levers available include acceleration of the facility on a defined event of default, enforcement of security according to the ranking documented in the facility agreement, reliance on any guarantees obtained, and the statutory priority of interim finance as a process cost. Where CIRP ends without an approved plan and the corporate debtor moves to liquidation, interim finance repayment ranks at the top of the liquidation waterfall under the Code. Each of these levers depends heavily on how carefully the facility was documented and approved. Where security ranking was clearly recorded, consented to by affected creditors, and endorsed by the CoC, enforcement is far more straightforward.

Where it was ambiguous or unconsented, the lender should expect factual disputes and the risk of avoidance-type challenges.

Inter-creditor arrangements and the waterfall

An inter-creditor agreement that records an agreed distribution waterfall is one of the most effective protections for an interim lender. It aligns expectations across creditors, reduces litigation over priority, and gives the tribunal a clear, consented framework to apply. Where multiple financiers participate, the waterfall should set out the order of recovery unambiguously and address what happens to the interim lender’s position if the process moves from resolution to liquidation. Clarity here is worth more than any additional basis point of interest.

Practical litigation playbook, tribunal pathways

If recovery is contested, the dispute will typically move through the NCLT, with appeals to the NCLAT and, on questions of law, ultimately to the Supreme Court of India. A practical litigation playbook for interim lenders includes:

• Leading with the documented commercial rationale and the independent valuation that justified the finance.
• Relying on the CoC approval record to demonstrate creditor consent and procedural regularity.
• Deploying contemporaneous minutes and advisers’ opinions to rebut allegations of conflict, undervaluation or preference.
• Anchoring the priority argument in process-cost treatment rather than contested super-priority wording.

The strength of this playbook is determined long before the dispute arises, at the moment the facility is documented and approved. That is why documentation and recovery planning are two sides of the same coin for DIP financing India.

DIP vs pre-pack vs traditional restructuring, decision table

Rescue finance is one option among several. Boards and RPs should weigh interim finance within CIRP against the pre-packaged insolvency resolution process (available for eligible corporate debtors, including MSMEs under the framework introduced in 2021) and a traditional negotiated restructuring. The table below compares the routes across the axes that matter most to decision-makers.

In broad terms, interim finance within CIRP suits a viable company that has already entered the formal process and needs liquidity to survive it; a pre-pack suits an eligible business able to assemble stakeholder support ahead of a tribunal filing; and a traditional restructuring suits earlier-stage distress where creditors remain cooperative and a formal process can be avoided.

Practical steps for RPs and boards when evaluating DIP offers (checklist and timeline)

When an interim finance proposal lands on an RP’s desk, a disciplined evaluation process both improves the commercial outcome and builds the evidential record. The following step-by-step sequence, mapped to an indicative timeline, helps RPs and boards move from offer to funded facility with the documentation in place. The indicative days below are illustrative only; they must be managed within the overall CIRP timeline prescribed by the Code.

1. Days 0–15: Needs assessment and valuation. Establish the liquidity gap, obtain or update an independent valuation, and confirm the going-concern case.
2. Days 10–25: Market the requirement. Seek terms from potential financiers, record the alternatives considered, and document pricing comparisons.
3. Days 20–35: Structure and term sheet. Negotiate facility amount, purpose, security, ranking and process-cost treatment; take independent legal and financial opinions.
4. Days 30–45: CoC engagement. Present the proposal to the committee of creditors with full disclosure, secure approval where required, and record the minutes carefully.
5. Days 40–55: NCLT approval where required. Make any necessary application and obtain the order, embedding the approval in the documentation trail.
6. Days 50–90: Funding and monitoring. Draw down against the agreed conditions and maintain active monitoring, reporting covenants and conflict checks throughout.

Timelines overlap in practice and compress under genuine liquidity pressure, but the sequence and the evidential discipline should remain constant regardless of speed.

Common tribunal challenges and how to mitigate them (litigation risk map)

Interim finance decisions attract challenge from creditors who feel disadvantaged, from parties alleging undervaluation, and occasionally from those raising conflict-of-interest concerns. Mapping these risks in advance allows the RP and lender to pre-empt them.

• Priority disputes. Mitigate with disclosed security, documented CoC approval, and reliance on process-cost treatment rather than untested priority claims.
• Undervaluation allegations. Mitigate with a contemporaneous independent valuation and a clear record of the going-concern analysis.
• Conflict of interest. Mitigate with independence records for the RP and advisers, and with arm’s-length pricing evidence.
• Preference or diversion claims. Mitigate with a narrow purpose clause, use-of-funds controls and monitoring.

Sample arguments to support approval

Where a facility is challenged, the arguments most likely to persuade a tribunal are those grounded in the record: that the finance was commercially necessary to preserve value, that independent valuation supported the decision, that the CoC approved it with full disclosure, and that the terms were fairly priced and defined. The common denominator is that the strongest arguments are evidenced, not asserted. This is why the documentation discipline described earlier is itself the best litigation strategy for DIP financing India.

Conclusion, practical takeaways and next steps

DIP financing India can be the difference between a company that resolves and one that liquidates, but its value depends entirely on how it is structured, approved and documented. The reliable foundation is the Code’s treatment of interim finance as a process cost, ranking first in the liquidation waterfall, reinforced by disclosed security, documented CoC approval and a coherent evidential record, not an aggressive super-priority claim that invites challenge. Boards should document their rationale, RPs should build the approval trail into the facility itself, and lenders should plan recovery routes before they advance a rupee.

In an evolving regulatory landscape shaped by ongoing reform discussions, the parties who succeed will be those whose documentation tells a single, transparent and defensible story. For bespoke term-sheet drafting, inter-creditor structuring or tribunal representation, specialist legal advice should be taken early in the process.

Sources

1. Insolvency and Bankruptcy Board of India (IBBI)
2. Ministry of Corporate Affairs (MCA)
3. National Company Law Tribunal (NCLT)
4. National Company Law Appellate Tribunal (NCLAT)
5. Supreme Court of India
6. Reserve Bank of India (RBI)