Concept of Corporate Debt Restructuring - Interdisciplinary Issues in Indian Commerce | Interdisciplinary Issues in Indian Commerce - B Com PDF Download

Concept Of Restructuring And Relevance To Insolvency​

The concept of restructuring holds relevance in the context of insolvency when the company is in financial distress as restructuring of a company is done when the company essentially has a viable business but owing to external factors, it has a bad balance sheet and therefore incurs losses. These external factors may be factors such as government policy, change of interest rates, pressure on the domestic currency, among other factors. These situations are beyond the company’s control and when a company tends to have a bad balance sheet owing to such unfavourable conditions, it has to be given another opportunity to manage its assets and liabilities and therefore here the role of debt restructuring is important. The basic objective of debt restructuring is to ensure that the company’s business stays viable in the long term and the creditors in turn enter into different arrangements with the company. This is maybe with respect to foregoing a part of the loan, or exchanging a part of the debt for equity shares in the company, which is also referred to as the debt equity swap, or creditors agreeing to a fixed moratorium period where both the company and the creditors agree to refrain from taking any action against each other during the fixed period. The concept of corporate debt restructuring is part of the external restructuring mechanism of the company where it has to ensure that it has the assets to back the restructuring program because once the company enters into the zone of insolvency, it loses its separate legal identity.

Corporate Debt Restructuring (CDR) can take a variety of forms. The plan can provide for conversion of debt into equity, preference shares convertible into ordinary shares, adjustment of secured creditors’ rights, a compromise in which creditors waive a part of their claims or extend term of their debts, modification of Inter Creditor Agreements (ICAs), valuation and settlement of contingent claims or even the distribution of assets and discharge of liabilities of members of a group of companies where these have become inextricably entangled making it difficult to establish the assets and liabilities of any individual company within the group. The restructuring of the company involves different stages such as execution of a standstill agreement, where both the parties mutually agree to refrain from taking any kind of action to enforce their claims for a certain period, after which information about the company’s financials is gathered. The next stage is that of preparation and consideration of proposals .Meanwhile, it is necessary to keep the company trading, for which purpose it might need additional funding and therefore the lenders during negotiations may agree to a higher rate of interest to support the additional funding.

Basic Principles Of Corporate Restructuring

The legal regime for corporate debt restructuring in India is based on the INSOL principles.[ii] The International Association of Restructuring, Insolvency and Bankruptcy Professionals is a federation of national association of lawyers and accountants who specialize in turnaround and insolvency proceedings. These principles are:

• Where a debtor is found to be in financial difficulty, all creditors should cooperate with each other and execute a standstill agreement between themselves and the company in order to allow access to the relevant information provided by the debtor so that they can evaluate proposals for resolving the debtor’s financial difficulties.
• During the standstill period, all creditors should agree to refrain from taking steps to enforce their claims against or to reduce their exposure to the debtor. However, the creditors are entitled to expect that their position with respect to other creditors will not be prejudiced.
• The debtor should not take any action which might adversely affect the prospective returns to relevant creditors (either collectively or individually) as compared with the position at the Standstill Commencement Date.
• Co-ordination between the creditors and the debtor should be facilitated by selection of one or more representative co-ordination committees and by appointment of professional advisers to assist such committees and where appropriate, the creditors taking part in whole process.
• During the standstill period, the debtor should allow the creditors and their representative committees, reasonable access to all relevant information about the company’s assets, liabilities, business and prospects in order to ensure that proper evaluation of the restructuring package is made.
• Proposals for restructuring should reflect the applicable law at the time which governs such arrangements at the Standstill Commencement Date.
• Information obtained by creditors for the purpose of evaluation of the restructuring package should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential.
• If additional funding is provided during the standstill period, the repayment of such funding should be accorded priority status as compared to other claims of relevant creditors.