This article is written by Sanjiv Rathi, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from Lawsikho.com. Here he discusses “What are Corporate Debt Restructuring (CDR) Schemes and do these require the approval of NCLT?”.
What is CDR Schemes/Mechanism?
Corporate Debt Restructuring (“CDR”) is typically a voluntary framework, under which financial institutions and banks restructure the debt of companies facing financial difficulties due to various factors, in order to provide support at the right time for such businesses.
CDR is a process employed by companies facing cash crunch or financial distress in order to avoid default risk. It can be done with:
- Reducing interest rates on mortgage loans or extending the length of payment.
- It may also include an equity swap arrangement where creditors of the company may agree to cancel some or all of the debt in return for the company’s equity. It may also require a “haircut” where the corporation may compromise with the Financial Creditor to write off some interest or capital part.
The objects of the CDR mechanism as stated by the Reserve Bank of India, the country’s central bank, are-
“To ensure a timely and transparent mechanism for the restructuring of corporate debts of viable entities facing problems, for the benefit of all concerned.”
“To aim at preserving viable corporates that are affected by certain internal and external factors”.
“To minimize the losses to creditors and other stakeholders through an orderly and co-ordinated restructuring programme”.
The intention behind the mechanism is to revive such firms and also to protect the interests of the lending institutions and other stakeholders. The CDR mechanism is available from more than one lending institution to companies that enjoy the credit facilities. The mechanism allows these institutions to restructure the debt for the benefit of all in a prompt and transparent manner. Debt restructuring can be a mutually beneficial situation for both, as the corporation escapes bankruptcy and the borrowers typically receive more than they would have gained in an IBC bankruptcy proceeding. See link https://economictimes.indiatimes.com/wealth/plan/what-is-debt-restructuring-of-a-company/articleshow/70100980.cms
The CDR system was framed almost 18 years ago, to restructure corporate debt outside the purview of debt recovery tribunals (DRT) and the then Board for Industrial and Financial Reconstruction (BIFR). It is a three-tiered structure, consisting of the CDR Standing Forum followed by the CDR Empowered Group and then the CDR Cell The CDR Standing Committee was responsible for setting all debt restructuring rules and regulations, while the CDR cell was responsible for scrutinizing both borrowers ‘ and lenders ‘ restructuring plans. The CDR Empowered Group took the final decision to approve the restructuring package. Under the rules of the CDR group, the resolution plan should be accepted by at least 75% of creditors by the amount of outstanding financial debt.
Do CDR Schemes need NCLT Approval?
The formal procedure for restructuring as stated above encompasses within its scope scheme of reconstruction, takeover, mergers, demergers, transfer of undertakings and restructuring of debts as provided Sections 230 and 231 of the Companies Act 2013.
The structured restructuring process set out above includes, as provided for in Sections 230 and 231 of the Companies Act 2013, the scope of rehabilitation, acquisition, mergers, demergers, transfers of undertakings and debt restructuring. Section 230 of the Companies Act, 2013 authorizes NCLT to make an order on the application of the corporation or creditor/member, or in the case at issue. Many CDR schemes are carried out by Compromise or Arrangement of Capital Therefore it is important to understand the meaning of Compromise & Arrangement.
Compromise is a term that usually suggests the presence of a rights dispute. A compromise scheme may be drawn up when a corporation has a disagreement with a member or a class of members, a borrower or a class of creditors. Nonetheless, where there is no disagreement but there is a need to adjudicate the member’s or a class of members ‘ rights or liabilities, the organization may resort to the arrangement. A settlement can be made in the preparation or some possibility of a conflict, while compromise is usually found at the close of a dispute. Thus, Arrangement and compromise may take place for, the purpose of amalgamation or reconstruction /merger/demerger of companies, or may involve the reduction of share capital as the need be. Here is the link https://taxguru.in/company-law/analysis-section-230-companies-act-2013.html
CDR Schemes – The Current Scenario:
Recently, the Reserve Bank of India has abolished multiple loan restructuring schemes that are prevalent among banks in order to restructure defaulted loans, and has made the resolution of defaults subject to the Insolvency and Bankruptcy Code (IBC) the key mechanism for dealing with defaulters. See link https://economictimes.indiatimes.com/news/economy/policy/rbi-withdraws-cdr-sdr-s4a-jlf-schemes-to-restructure-defaulted-loans/articleshow/62891543.cms
The Adjudicating Authority, in this case, is also NCLT under the IBC. The resolution process under IBC is well defined with specific timelines. The IBC enables initiation of Corporate Insolvency Resolution Process (CIRP), immediately after the first default has occurred. The Committee of creditors needs to act in the best interest of all the stakeholders of the corporate debtor.
With growing litigation over insolvency cases, banks are increasingly opting for loan settlement deals under IBC Section 12A from defaulting companies. Under IBC section 12 A, borrowers are given the option of accepting these offers from defaulting promoters.
CDR Scheme in Practice:
Recently, lenders of Jaiprakash Power Ventures led by ICICI Bank restructured their debt by converting much of it into equity and convertible instruments and subsequently approached the National Company Law Tribunal (NCLT) to withdraw their application for bankruptcy proceedings.
Therefore, the Jaiprakash Associates group’s outstanding debt has fallen from more than Rs 12,000 crore, after the restructuring, to less than Rs 6,000 crore. The consortium of banks and financial institutions has agreed to convert Rs 3,800 crore of debt into convertible preferential stock, with a maturity period of 29 years and a coupon rate of 0.01 per cent, the remaining Rs 5,800 crore debt on the financial statement of the company will have an interest rate of 9.50 per cent. Therefore, after the restructuring, the annual interest cost burden of the company would decrease significantly from nearly Rs 1,500 crore to less than Rs 600 crore, i.e. more than 50%, resulting in an annual interest cost-benefit of almost Rs 1,000 crore in interest cost alone enabling the Company to improve its Cash flows and subsequently the bottom line. Here is the link https://economictimes.indiatimes.com/industry/energy/power/jaiprakash-power-ventures-to-exit-insolvency-process/articleshow/73237112.cms
Due to long delays in the NCLT process, now many Lenders are more interested to settle dues outside the NCLT framework. Very Recently on 30th December 2019 Power Generation Company, Rattan India Power Ltd. has announced a one-time settlement (OTS) arrangement to clear its debts with its lenders. This is the first effective scheme to be closed under the newly promulgated RBI’s Prudential Framework for Resolving Stressed Assets and the largest compromise settlement outside the NCLT framework in terms of size. Here is the link https://newsd.in/rattanindia-power-resolves-debt-via-one-time-settlement
CDR- Current MSME Focus
RBI has permitted a one-time restructuring of current MSME loans, which have defaulted but are not non-performing as of January 1, 2019, in a huge step. Such debt restructuring would still not result in a downgrade in the asset category. To qualify for the debt restructuring scheme, the exposure mix together with the bank’s total facilities must no longer exceed Rs. 25 crore to a borrower. The restructuring of the loan must also be carried out by way of 31 March 2020. After the budget announcement by Finance Minister Nirmala Sitharaman, the government has asked the Reserve Bank of India (RBI) to extend the debt restructuring scheme beyond the deadline of March 31, 2020, the RBI extended the scheme to December 31, 2020. This would help MSMEs tide over problems following demonetisation and implementation of GST due to a lack of work capital. Ms. Sitharaman had said in her budget speech that more than five lakh MSMEs have benefited from the debt restructuring that RBI has allowed in the past year.
Revival Focus of CDR Schemes
Debt-ridden firms would find it hard to get back on the road to recovery, even if they are trying to fix finances. That’s because companies that go through the corporate debt restructuring or CDR process, have been prohibited from applying for contracts proposed by some government agencies in few states. It is important to realise that Companies going for CDR are not bankrupt, and need handholding from all the stakeholders to succeed.
Future of CDR Schemes
There is a lot of talk about “Pre-Packs” on CDR. A pre-packaged restructuring plan is a pre-planned insolvency process in which a corporation arranges to sell its assets to a bidder before filing for insolvency, promotes the sale and NCLT are approached by creditors and shareholders with a pre-negotiated, pre-approved corporate reorganization plan called the “pre-packaged.” This kind of corporate rescue and reorganization plan reduces significantly the time taken in lengthy court proceedings apart from the substantial costs for companies that are already in financial distress. One of Pre-pack’s most significant benefit is that it is debtor-focused and not creditor-focused, as is typically the case under the IBC. The purpose of the pre-pack procedure is to save the company, its financial and intellectual property assets, and to ensure operational continuity while at the same time moving towards getting the business out of the financial slump and reclassifying it as a performing asset. Here is the link http://www.alpha-partners.org/2019/12/18/pre-packs-save-financially-distressed_17/
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