In the evolving world of corporate insolvency, one quiet revolution is unfolding in courtrooms and boardrooms: the rise of third-party funding. For distressed companies, funding is often the difference between resolution and ruin. And for India, still navigating the growing pains of its insolvency regime, Third-Party Funding (“TPF”) and Interim Finance (“IF”) are beginning to step out of the margins and into the mainstream.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) promised speed, efficiency, and revival. But it left a lingering question: how does a financially crippled company pursue costly legal claims or stay operational while doing so? TPF and IF now seem to be part of the answer.

Significance of TPF in ecosystem of IBC

Litigation is expensive. For companies already struggling to survive, the idea of pursuing avoidance transactions, fraudulent transfers, or even defending critical claims may seem like an unaffordable luxury. That’s where TPF steps in.

Globally common, but still novel in India, TPF allows external funders to bankroll litigation in exchange for a share in the outcome. And it comes without recourse, if the case fails, the funder bears the loss. The Supreme Court’s green light in Bar Council of India v. A.K. Balaji (2018) opened the doors for this model in Indian courts. But, in insolvency, it’s still early days for Third-party funding.

Third-party funding is not just about money; it’s about access to justice. It gives RPs the firepower to pursue claims that would otherwise be shelved. And, crucially, it aligns with the IBC’s mandate: maximizing value for all stakeholders.

TPF contributes to the cause of keeping the Corporate Debtor as a going concern

While TPF keeps beneficial litigations alive, Interim Finance keeps the company alive.

Interim Finance is defined in Section 5(15) of the IBC, which refers to short-term borrowing during the Corporate Insolvency Resolution Process (“CIRP”), approved by the Committee of Creditors (“CoC”). It covers essential costs, from salaries and payments to utilities and asset protection. Section 25 of the IBC empowers the IRP to raise interim finance, subject to the approval of the CoC.

The law treats ‘interim finance’ with priority. Section 53(1)(a) puts interim finance at the front of the repayment line, even ahead of secured creditors in liquidation. The RBI has attempted to encourage lenders by classifying such loans as ‘standard assets’.

Still, banks remain reluctant to provide interim finance, out of the fear of no guaranteed returns, and priority displacement issues. Creditors hesitate to allow new money to outrank old debts. Regulatory uncertainty only makes it harder to attract grant of interim finance.

In such backdrop, the courts have stepped in, like in the case of Edelweiss ARC v. Sai Regency Power, wherein the NCLAT reminded everyone that without interim finance, even a viable company might collapse. It was stressed that value isn’t just in the assets, it’s in continuity.

Contributions of TPF as IF

So, what happens when third-party funders go beyond funding of mere litigations? In such backdrop, a new model emerges, where TPF begins to plug in the gaps left by traditional IF.

Interestingly, the external funders are now showing interest in financing not just legal claims but also operational continuity. Non-recourse funding becomes a tool for resolution professionals to run the business and chase legal rights without draining estate resources.

The benefits are immediate:

Pertinently, it’s not just financial support, it’s strategic alignment, contributing to the objectives and scheme under the IBC ecosystem.

Challenges in the implementation of arrangements for TPF & IF

Significantly, the promotion of both, TPF and IF, have to face hurdles. In the case of TPF, the lack of regulatory framework creates discouragement in the reaping of benefits of such beneficial arrangement.

India does not have law and regulatory regime, governing third-party funding. Some states, like Maharashtra and Gujarat, have allowed it through amendments to the Code of Civil Procedure. But there’s no uniformity.

In such backdrop, there are obvious concerns around TPF, like, (a) whether funders can influence litigation strategy? (b) concerns with respect to confidentiality and privilege, (c) how do courts ensure fairness, keeping in view the interest of funder as against the interest existing under the scheme of IBC? In jurisdictions like the UK and Singapore, these concerns do have answers in the form of their own established regulatory regime, however, in India, such regulatory regime has not yet seen the light of day yet.

Similarly, the arrangement of interim finance has its own bottlenecks. Banks worry about promoter-related parties benefiting indirectly. They are unsure how to provision for such loans. And in the backdrop, where NPAs are still a sensitive topic, very few would want to take a risk on a company facing CIRP.

Global perspective with respect to TPF

It would be useful to refer to the regime being followed in other jurisdictions with respect TPF. In that regard, in United Kingdom, the litigation funders follow a self-regulatory code under the Association of Litigation Funders. Further, Singapore and Hong Kong have legalised and structured TPF in international arbitration.

Even in the context of India, the judicial precedents has been encouraging with respect to resort to TPF. From the Privy Council’s 1867 ruling in Ram Coomar Coondoo vs. Chunder Canto Mookerjee to the Supreme Court’s A.K. Balaji judgment, Indian courts have made space for funding, provided it’s fair, transparent, and arms-length.

Apart from Judicial moves, the recent policy moves are also significant. In February 2025, the IBBI proposed allowing interim financers to observe CoC meetings, enabling protection of their interest. It’s a small step, but signals that regulators are listening.

The Road Ahead

Since implementation of IBC in the year 2016, the regime has seen overwhelming “debt resolution”. Now the thrust is upon achieving progress in “Insolvency Resolution”. In that course, India’s insolvency regime is still maturing. In this backdrop, if TPF and IF are nurtured, through clear rules, transparent disclosures, and supportive jurisprudence, they could prove to be game changes in this exercise.

Because at its heart, insolvency isn’t just about winding up. It’s about revival, resolution, and restoration of value. And that requires money, sometimes from unexpected places.