Corporate Debt Restructuring (CDR)

Corporate Debt restructuring (CDR)
Debt restructuring
Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. Replacement of old debt by new debt when not under financial distress is referred to as refinancing. A debt restructuring is usually less expensive and a preferable alternative to bankruptcy. The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings typically involve a reduction of debt and an extension of payment terms. In the on-going economic downturn that began in 2008 a sub component of debt restructuring, known as debt mediation emerged for small business entities (usually revenues of <$5m). Like debt restructuring debt mediation is a business to business activity and should not be confused with or considered in the same manner as the more blurry world of individual debt reduction involving credit cards, unpaid taxes and defaulted mortgages. In 2010 Debt Mediation has become a primary means for small businesses to refinance as the market for lines of credit and direct borrowing have shrunk dramatically. The use of debt mediation can be cost effective for the small business, help end or avoid litigation and is highly preferable to filing for bankruptcy as it gives once successful small businesses the chance to recapture that success.
Debt-for-equity swap
In a debt-for-equity swap, a company's creditors generally agree to cancel some or all of the debt in exchange for equity in the company. Debt for equity deals often occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors. This is because both the debt and the remaining assets in these companies are so large that there is no advantage for the creditors to drive the company into bankruptcy. Instead the creditors prefer to take control of the business as a going concern. As a consequence, the original shareholders' stake in the company is generally significantly diluted in these deals and may be entirely eliminated
Corporate restructuring
As the incidence of corporate failures has increased in part due to the current economic climate, so a more 'standard' approach to restructuring has developed. Although every case has unique characteristics, the process of restructuring follows a number of important phases. Initially, a downturn in trading performance is identified typically through management accounts or as a result of revised management projections. This triggers a gathering of lenders (and perhaps other stakeholders), in anticipation of a breach of financial covenants or a crisis of liquidity. The lending group (typically comprising corporate finance divisions of banks) will normally commission a review of the business and its financial position and outlook. This will normally be undertaken by a corporate advisory group such as PriceWaterhouseCoopers or Deloitte. This will form the basis of any restructuring of facilities. The lending group will typically appoint a Corporate Restructuring Officer or CRO, to assist management in the turnaround of the business, and embracing the recommendations presented by the banking group and the corporate advisory report.
Genesis of CDR Mechanism in India

There are occasions when corporates find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavors. Based on the experience in countries like the UK, Thailand, Korea, Malaysia, etc. of putting in place an institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India, a Corporate Debt Restructuring System was evolved and detailed guidelines were issued by Reserve bank of India on August 23, 2001 for implementation by financial institutions and banks. The Corporate Debt Restructuring (CDR) Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the principle of approvals by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision. The CDR Mechanism covers only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs.100 million and above. It covers all categories of assets in the books of member-creditors classified in terms of RBI's prudential asset classification standards. Even cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and other suit-filed cases are eligible for restructuring under CDR. The cases of
restructuring of standard and sub-standard class of assets are covered in Category-I, while cases of doubtful assets are covered under Category-II. Reference to CDR Mechanism may be triggered by: Any or more of the creditors having minimum 20% share in either working capital or term finance, or By the concerned corporate, if supported by a bank/FI having minimum 20% share as above. It may be emphasized here that, in no case, the requests of any corporate indulging in fraud or misfeasance, even in a single bank, can be considered for restructuring under CDR System. However, Core Group, after reviewing the reasons for classification of the borrower as wilful defaulter, may consider admission of exceptional cases for restructuring after satisfying itself that the borrower would be in a position to rectify the wilful default provided he is granted an opportunity under CDR mechanism.
Structure of CDR System: The edifice of the CDR Mechanism in India stands on the
strength of a three-tier structure: CDR Standing Forum CDR Empowered Group CDR Cell
Legal basis for CDR
The legal basis to the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). All banks /financial institutions in the CDR System are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR Mechanism which is the critical element of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors. Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell or at the time of original loan documentation (for future cases). The DCA has a legally binding stand still agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to stand still and commit themselves not to take recourse to any legal action during the period. Stand still
is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. However, the stand still is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action. Besides, the borrower needs to undertake that during the stand still period the documents will stand extended for the purpose of limitation and that he would not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the stand still period.
Role of A Chartered Accountants:

Assist and Prepare Viability Study Conduct business, Asset & share Valuation Carry out due diligence study for business restructuring Verification and vetting of documents Preparation of scheme of arrangement Consultancy on taxation aspect Monitoring of accounts Credit audit of borrowers Stock audits

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Corporate Debt restructuring (CDR)

Genesis of CDR Mechanism in India

Legal basis for CDR

Role of A Chartered Accountants:

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