Negotiation Dynamics: Debtors vs. Creditors

 

Negotiation Dynamics: Debtors vs. Creditors

The negotiation process between the debtor and creditors is often complex and intense, especially when dealing with large companies in distress. Both sides aim to achieve favorable terms, but they approach negotiations with different priorities.

A. Debtor’s Strategy in Negotiations

1. Preserving Business Continuity:

   • The primary objective of the debtor is to avoid liquidation and keep the business running. This can involve negotiating:

     • Extended repayment terms with financial creditors to ease the burden.

     • Debt restructuring through equity infusion by a new investor to revitalize the company.

2. Restructuring Debt to Improve Cash Flow:

   • The debtor may negotiate to reduce the debt burden in exchange for equity or a longer repayment schedule.

   • Reducing operational costs (e.g., renegotiating contracts or wages) could be a key part of the negotiation to improve profitability.

3. Addressing Operational Creditors’ Concerns:

   • Operational creditors may often be concerned with the future viability of the business, and the debtor might promise to:

     • Ensure continued operations (with payment to operational creditors in full or at a higher percentage).

     • Provide incentives such as guaranteeing future business if the company is revived.

   • Debtors may offer operational creditors a stake in the company (via equity allocation) to win their support.

4. Equity Offers and Control:

   • The debtor may offer creditors equity in the company in exchange for debt forgiveness, providing them with ownership and a future share in profits if the company performs well post-restructuring.

B. Creditors’ Strategy in Negotiations

1. Maximizing Recovery:

   • Creditors, especially financial creditors, aim to recover as much of their dues as possible, and may seek:

     • Larger repayments upfront.

     • Interest on the debt or penalties for missed payments.

   • Creditors may also negotiate to preserve their rights in case the resolution plan fails, ensuring they are compensated fairly in case of liquidation.

2. Coercing the Debtor to Accept Terms:

   • Creditors may use their leverage (e.g., holding large claims) to force the debtor into accepting a resolution that is in their favor. For instance:

     • Diluting the debtor’s control over the company (if equity restructuring is involved).

     • Ensuring better treatment for senior creditors (like financial institutions) in the resolution plan.

3. Incentivizing Debtors to Accept the Plan:

   • Creditors may provide incentives to the debtor, such as offering more favorable repayment terms or deferring interest payments, in exchange for the company agreeing to the resolution plan.

4. Impact of Operational Creditors:

   • While operational creditors have lower voting power, they can still influence negotiations if they hold significant claims. Creditors in this category may push for better terms for:

     • Full payment of dues (if possible).

     • Faster repayment timelines to ensure they can continue their business relations with the company.

C. External Negotiations with Resolution Applicants

1. Bidding for Control:

   • In cases where multiple resolution applicants are involved, the debtor and creditors may negotiate with the bidders to determine the best proposal, considering:

     • Financial backing: Does the resolution applicant have the ability to fund the plan?

     • Strategic fit: Is the bidder capable of ensuring business continuity and growth post-resolution?

2. Bidding and Competition:

   • Creditors may be involved in choosing between multiple bidders based on which offer guarantees the best outcome for them.

     • Debt restructuring terms, equity offers, and the long-term viability of the plan will be weighed against each other.