Corporate debt restructuring
A financial crisis and economic conditions that are not favorable for a business often give rise to a situation when the company seeks to restructure the business and the debts. This is generally known as corporate debt restructuring.
How is it done?
Often a Corporate Debt restructuring Committee is formed by the Central Bank of a country to provide a platform to the borrowers and the creditors to work out schemes for debt restructuring that are feasible to both of them so that none of them have to resort to legal processes. Many companies opt for this friendlier approach rather than moving up to the court. The arrangement that is worked out by both the sides is usually informal and does not involve any legal codes. Moreover, it can be called off by either of the parties at any point of time.
The objective of a Corporate Debt restructuring Committee (CDRC) is to provide an impulsion for formal workouts between borrowers and Financial Institutions by way of adjustment and consensus. It also works as a mediator and advisor for the exercise of debt restructuring between the creditors and debtors. A debtor or a creditor needs to file an application with the CDRC. Then an independent consultant is appointed who chalks out a restructuring program that is suitable for the debtor. CDRC evaluates the application and the restructuring program, considers its feasibility for the bankers and shareholders of the company and finds out if it is acceptable by all the parties involved. Only after the acceptance of the proposal by all the parties it is brought into implementation.
The framework of a CDRC is dependent upon the co-operation of the borrower and the Financial Institution and their collective efforts. A CDRC works upon certain principles. Firstly, for the CDRC to work effectively, the Financial Institution has to be supportive and should not precipitate insolvency. Secondly, decisions can be taken only when all the parties involved are ready to share reliable information. There should be co-operation between Financial Institutions so as to reach a collective decision regarding the finances that are to be provided to the borrower on some specific terms. Lastly, the losses that have incurred should be fairly borne by all in specified categories.
Any Corporate Debt Restructuring Committee has certain objectives for which it works. Usually a CRDC has the main objective of minimizing the losses suffered by the creditor, shareholders and others who hold a stake in the company by the process of coordinated workouts. It also works towards not letting the viable companies be placed into receivership or liquidation. This is done with the idea of preservation of jobs and eventually increasing the capacity of production. It also helps the banks by providing them a way to a greater role in the financial re-establishment of the corporate sector. The CDRC works towards introducing the best way of practicing Corporate Debt Restructuring and also to implement a framework that is comprehensive for the same.
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