Brief on Corporate Debt Restructuring

CA Shushant Singhal

Corporate Debt Restructuring (CDR) is basically a mechanism by way of which company endeavors to reorganize its outstanding obligations.

When a corporate is having severe financial crisis in terms of:

Trouble in repaying it’s debt obligation
Inability in timely servicing of its interest

It generally resorts to Corporate Debt Restructuring Mechanism.

The reorganization of the outstanding obligations can be made by any one or more of the following ways:

Increasing the tenure of the loan
Reducing the rate of interest
One time settlement
Conversion of debt into equity
Converting unserviced portion of interest into term loan

CDR gives the lenders a unique opportunity to avoid being encumbered with NPA’s.

CDR becomes an instrument for the lenders, i.e. the banks, to aid the transformation of otherwise Non-Performing Assets into productive assets.

The CDR structure in India is based upon the three tier structure as follows:

CDR CELL

It is third tier of CDR mechanism
This cell makes the initial scrutiny of the proposals & if restructuring gets approved this cell makes a detailed plan for restructuring in conjunction with the lenders

Empowered Group

This group is comprised of the ED level representatives of leading banks along with ED level representatives of concerned lenders
This group based upon preliminary report prepared by CDR cell decides whether they should take up the restructuring or not, if yes then they provide initial guidelines
When final restructuring plan is prepared by CDR cell the same is again approved by EG

Standing Forum

This is the top tier in CDR mechanism comprised of representatives of all the financial institutions & banks.
This body lays down the policies & guidelines to be followed by the EG & CDR cell for debt restructuring.

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.

CDR Cover following cases

Multiple Banking accounts/Consortium Banking of Corporate Borrower engaged in type of activity with o/s fund based & non fund based limit of Rs 10 crores & above by banks and institutions.
Imitative to resolve the case under CDR by at least 75% of creditors in value & 60% of creditors in quantity.
Applicable to “Standard” & “Sub Standard” accounts only.
BIFR Cases not eligible for CDR cases.
Corporate indulge in Frauds & malfeasance not eligible for CDR.