Why the Allocation of Interim EBITDA in the Corporate Insolvency Resolution Process May Demand Judicial Clarification of Creditor Priority and Resolution Professional Powers

A recent development has drawn attention to a procedural dilemma arising within the Corporate Insolvency Resolution Process, wherein the treatment and distribution of interim profits generated during the resolution phase, specifically measured through earnings before interest, taxes, depreciation and amortisation, has become a contested point among stakeholders seeking clarity on legal entitlement. The core of the quandary concerns whether such interim earnings, commonly referred to by the financial metric EBITDA, should be allocated to the collective pool of creditors in proportion to their statutory priority, or retained under the control of the resolution professional pending final approval of the resolution plan, thereby influencing the overall recoveries available to different creditor classes. Practitioners and regulators alike observe that the statutory framework governing the resolution process provides limited explicit guidance on the characterization of interim profits, prompting divergent interpretations regarding the applicability of existing provisions on the distribution of surplus assets and the rights of operational versus financial creditors to claim such earnings. Consequently, the uncertainty surrounding the allocation methodology threatens to affect the incentives for continued business operations during the moratorium, the adequacy of funds available for satisfying creditor claims, and the broader confidence in the effectiveness of the resolution mechanism as a whole. The matter has therefore assumed national significance, inviting scholarly commentary and prompting calls for judicial clarification to reconcile the competing interests and ensure that the allocation of EBITDA-derived interim profits aligns with the underlying policy objectives of preserving enterprise value while upholding equitable treatment of all creditor stakeholders.

One pivotal question is whether the existing provisions of the insolvency framework, which delineate the distribution of surplus assets, can be logically extended to encompass interim EBITDA, thereby granting creditors a proportionate share of such earnings pending the final resolution plan. The answer may depend on judicial construction of terms such as ‘assets’ and ‘profits’ within the statutory text, and whether the legislature intended to include earnings generated during the moratorium period as part of the estate subject to creditor claims. Should courts adopt a purposive approach, they might emphasise the legislative intent to treat interim earnings as part of the debtor’s asset pool, thereby ensuring that no creditor class is unjustly disadvantaged by the timing of profit generation.

Another pressing issue concerns the relative priority of operational creditors, who typically provide goods and services essential for sustaining the debtor’s business, versus financial creditors, whose loans constitute the principal indebtedness, in the context of allocating interim EBITDA. A competing view may assert that operational creditors should receive a preferential allocation of such earnings to ensure continuity of business operations, whereas an alternative perspective could argue that the statutory hierarchy prioritises financial creditors, thereby mandating that EBITDA be pooled and distributed according to existing debt seniority structures. Moreover, the interplay between the principle of pari passu among similarly ranked creditors and the practical necessity of maintaining working capital may lead to a hybrid allocation scheme that balances immediate operational needs with long-term debt satisfaction.

A further legal query examines the discretionary authority of the resolution professional, who administers the debtor’s affairs during the CIRP, to retain interim profits for purposes such as covering operational expenses or preserving value, and whether such discretion is bounded by statutory fiduciary duties owed to the creditor body as a whole. Perhaps the procedural significance lies in determining whether the resolution professional must obtain explicit approval from the committee of creditors before directing the use of EBITDA, or whether the existing mandate to act in the best interest of the estate implicitly authorises unilateral decisions regarding the allocation of interim earnings. If the resolution professional’s discretion is deemed unbounded, it could raise concerns about potential conflicts of interest, prompting calls for stricter oversight mechanisms to prevent arbitrary diversion of interim profits away from legitimate creditor claims.

Perhaps the most consequential legal implication is the potential need for judicial clarification or legislative amendment to resolve the ambiguity surrounding interim profit allocation, thereby providing a definitive framework that aligns with the policy objectives of maximizing asset value and ensuring equitable treatment of all creditor classes. A fuller legal conclusion would require clarity on whether courts will interpret the insolvency statutes to expressly incorporate EBITDA within the definition of estate assets, or whether they will defer to regulatory guidance and industry practice in prescribing a standardised allocation methodology.

In sum, the EBITDA allocation dilemma underscores the intricate balance between preserving the debtor’s operational viability, safeguarding creditor recoveries, and adhering to the statutory hierarchy, compelling courts, legislators, and practitioners to address the unresolved legal questions to fortify the credibility and efficacy of the corporate insolvency resolution framework. The eventual resolution of these issues will likely influence future creditor behaviour, the willingness of lenders to extend finance during insolvency proceedings, and the overall confidence in the mechanisms designed to revive distressed enterprises while upholding principles of fairness and legal certainty.