Interim finance in insolvency: conflict of interest and RP fiduciary breach found; fees trimmed and appeals allowed.

Interim finance raised by the resolution professional (RP) from a related party without disclosing the relationship to the committee of creditors (CoC) breached the RP's fiduciary duty and transparency obligations, constituting a conflict of interest; consequence: the arrangement and appropriations were impugned. The RP misused interim finance to pay his own and a related legal professional's fees despite lack of CoC approval of loan terms and CIRP costs; consequence: appellate modification reduced the amount allowed to the RP and sustained directions limiting refund of interest and processing fees. Appeals were allowed to that extent.

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Issues: (i) Whether the Resolution Professional (RP) raised interim finance with prior and specific approval of the Committee of Creditors (CoC) and in accordance with the IBC and CIRP Regulations; (ii) Whether the RP's conduct in raising and appropriating interim finance from a related party, and appointing related legal professional, amounted to professional misconduct/conflict of interest; (iii) Whether and to what extent the interim finance advanced should be refunded to the interim finance provider and what directions should be issued.

Issue (i): Whether the RP raised interim finance with prior and specific approval of the CoC and in accordance with statutory requirements.

Analysis: The first CoC meeting gave only a general, preliminary authorization to raise interim funding; it did not approve final terms (amount, interest, default interest, lender). The RP executed the Loan Agreement on 15.02.2021 before convening the second CoC meeting on 22.02.2021 and failed to place the specific CIRP cost sheet and the detailed terms before the CoC for formal approval. CIRP Regulations 34-A/34-B and Sections 25 and 28 require disclosure of insolvency resolution process costs and CoC consideration of such costs. The RP did not satisfactorily produce evidence that the CoC gave final approval to the specific terms prior to execution.

Conclusion: The RP did not obtain specific, final approval of the CoC for the terms of the interim finance; the general authorization in the first CoC meeting was insufficient.

Issue (ii): Whether the RP's conduct in raising and appropriating interim finance from a related party and appointing a related legal professional constituted professional misconduct or conflict of interest.

Analysis: The record shows substantial appropriation of the corpus towards RP's fees and fees of a legal professional who was a director of the interim finance provider; the Loan Agreement was executed without transparent disclosure to the CoC of the relationships involved and without placing the CIRP cost for CoC scrutiny. The RP failed to demonstrate meaningful work during the prolonged period when a Section 12A application was pending and significant portions of fees were drawn from the interim finance. These facts indicate lack of transparency, non-disclosure of related party arrangements, and appropriation primarily for the benefit of RP and related parties.

Conclusion: The Adjudicating Authority's adverse characterization of the RP's conduct as deplorable is sustained; the conduct amounted to conflict of interest and professional misconduct.

Issue (iii): Whether and to what extent the interim finance advanced should be refunded, and whether interest and processing fees are payable.

Analysis: The Adjudicating Authority treated the principal interim finance as CIRP cost but disallowed refund of interest and processing fees because the funds were raised from a related party and there was lack of formal CoC approval for terms. The appellate Tribunal agreed that the interim finance was raised from a related party and misused largely to pay RP and related legal fees, but found the Adjudicating Authority erred in directing full repayment of principal. Considering misuse and lack of substantiation for full fees, a rationalisation of the principal payable to the interim finance provider is warranted.

Conclusion: The impugned direction for full refund of principal is modified: Liquidator to pay Rs. 50,00,000 out of principal Rs. 64,74,109 to the interim finance provider; balance Rs. 14,74,109 to be refunded by the RP to the Liquidator and then paid to the interim finance provider. No refund for interest or processing fees shall be ordered.

Final Conclusion: The Adjudicating Authority's allowance of repayment to the interim finance provider is partly sustained but modified to reduce the principal payable to Rs. 50,00,000 and to deny repayment of interest and processing fees; adverse findings of professional misconduct against the RP are upheld and the matter is referred to the IBBI for appropriate action.

Ratio Decidendi: A general or preliminary CoC authorization to raise interim finance does not substitute for CoC's specific approval of the detailed terms; RPs must make full disclosure of related party arrangements and cannot appropriate interim finance for fees without CoC scrutiny and transparent justification.

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