Complex Negotiations Between Debtor and Creditors

 

Complex Negotiations Between Debtor and Creditors

When a company enters CIRP, both the debtor and creditors engage in intense negotiations to shape the resolution plan. Here’s how those negotiations play out in more detail:

A. Debtor’s Negotiation Strategy

1. Avoiding Liquidation:

   • The debtor’s main objective is to avoid liquidation, as this results in the company’s assets being sold off and the business ceasing to exist. To avoid this:

     • The debtor will negotiate for extended repayment terms, debt restructuring, or even the introduction of new investors (equity infusion).

     • The debtor may offer equity in exchange for debt forgiveness, reducing immediate cash outflows and making the company more viable in the long term.

2. Equity Infusion:

   • New investors may come into play, with the debtor offering them a stake in the company. This can be a crucial part of negotiations as it shows creditors that there is a plan to revive the business, making them more likely to accept the resolution plan.

   • The debtor may also offer equity to creditors, especially operational creditors, in exchange for more favorable payment terms or debt reduction.

3. Restructuring and Moratorium Periods:

   • The debtor may negotiate for moratorium periods on principal repayments and interest, giving the company time to stabilize its operations before starting to pay creditors.

   • Debt restructuring might involve reducing interest rates, extending the repayment period, or capitalizing interest (i.e., converting unpaid interest into principal).

B. Creditors’ Negotiation Strategy

1. Maximizing Recovery:

   • Creditors, particularly financial creditors, seek to maximize their recovery under the resolution plan.

     • They may demand larger repayments (or higher interest) and ensure that their seniority in debt repayment is maintained.

   • Financial creditors might accept restructuring terms (e.g., extended repayment or reduced interest) if they believe that doing so offers the best chance of recovering their debts in the future.

2. Ensuring Payment of Operational Creditors:

   • Creditors may pressure the debtor to ensure that operational creditors (suppliers, service providers, etc.) receive at least a fair share of the payment, ensuring that business operations can continue smoothly post-reorganization.

   • If operational creditors are not paid sufficiently, they might stop providing goods or services, thus affecting the company’s future profitability and viability.

3. Securing Control in the Resolution Process:

   • Large creditors might demand more control over the resolution process, especially in selecting a resolution applicant or approving the resolution plan. They may influence the direction of the business restructuring to ensure their claims are prioritized.