RECALIBRATE: DEBT REORGANISATION AS A CONSENSUAL SOLUTION
The Central Bank, in its latest Financial Stability Review, 2020 has warned that the scale of economic shock due to COVID-19 is unprecedented and we are perhaps only at the end of the beginning as the challenges emerge. The review further goes on to state “Uncertainty remains about the likely mortgage default rate resulting from Covid-19. In some cases, the income shock for mortgage borrowers will persist beyond the length of the payment break and will require additional forbearance, restructuring or resolution” While the Irish Government has announced various measures like SBCI COVID 19 working capital scheme, Temporary Wage Subsidy Scheme, Microfinance Ireland Business Loan, etc to combat working capital challenges for businesses, many businesses might not meet the criteria. This certainly will put more stress on the liquidity of such companies. It is likely that due to this, a number of companies, will not be in a position to meet their financial obligations and might eventually fail to sustain in certain cases. But such a scenario should not always lead to insolvency or winding up of business operation. In such cases, Debt reorganisation acts as a consensual solution for all the stakeholders involved. This article sets out the debt reorganisation solutions available to a company, in case such a scenario transpires. FORMS OF DEBT REORGANISATION 1. Debt Restructuring This approach involves reducing financial distress by renegotiating the debts of any company with its creditors to allow the business to restore liquidity and embrace business continuity. Ways in which a company can leverage debt restructuring techniques are as follows:
- Renegotiate the terms of the credit or debt facility by extending the period, reducing interest or requesting grace period for repayment of the debt.
- Debt- Equity Swap: This process involves conversion of debt to equity. Under this arrangement the creditors/ lenders agree to forego a certain amount of outstanding debt in return for equity or stake in the business. The lender converts the amount of loan into an equivalent ownership/stake in the company. This option helps the company maintain its cashflows by ceasing the obligation to pay back the capital and interest amount. Thus, it is a method by which a corporation improves its financial position by eliminating liabilities and protecting its assets.
- Informal Debt Agreement: This process is dependent on the bargaining power of the Debtor and their repayment history. Under this debtor company may reach out to its creditor and lenders to negotiate for lenient terms or a partial write off of debts.