Negotiations Between Debtors and Creditors

 

Negotiations Between Debtors and Creditors

Scenario:

• Company Z, a construction firm, is facing financial distress and enters CIRP. The CoC is dominated by financial creditors (mainly banks), but there are also significant operational creditors (e.g., subcontractors).

• The debtor (Company Z) has been trying to negotiate with creditors to avoid liquidation.

Key Steps:

1. Initial Submission of Resolution Plan:

   • The debtor proposes a resolution plan that includes:

     • Restructuring of financial debt, with reduced interest rates and extended timelines.

     • Payment of 50% of operational creditors' dues within the first 2 years.

     • Equity infusion by a new investor, which will help improve the company's cash flow.

2. Creditor Reaction:

   • Financial creditors want a larger repayment and argue for more extended terms. They suggest that the company could be profitable if the restructuring is done correctly.

   • Operational creditors, on the other hand, demand full payment of their dues and argue that their support is vital for the company’s ongoing operations (e.g., future projects).

3. Negotiations:

   • The debtor and resolution applicant enter negotiations with the CoC.

   • Bank A (financial creditor) demands higher recovery, but Supplier Y (operational creditor) pressures the CoC, arguing that the company will not be able to function without their suppliers.

   • After several rounds of negotiation, the debtor and the resolution applicant agree to:

     • Increase payment to operational creditors to 60%.

     • Financial creditors accept slightly reduced terms to allow the plan to proceed, but they maintain longer repayment terms.

4. Final Vote:

   • The CoC votes again. The financial creditors, along with the operational creditors, agree to the revised plan.

   • The resolution plan is approved and submitted to the NCLT for approval.

5. Outcome:

   • The company avoids liquidation.

   • The debtor is relieved that the business will continue, and creditors (both financial and operational) reach a compromise.