SECTION H - WORK OUTS

The concept of the informal ‘work out’ might be said to be based on a combination of the following elements:

  • the fact that there is a significant size of debt owed to a number of different creditors (mostly these would be bank or other financial institution creditors) and the present inability of the corporate debtor to service that debt;
  • the attitude that it may be preferable to negotiate an arrangement for the financial difficulties of the debtor both between the debtor itself and the financiers (and perhaps other lesser creditors) and also between the financiers themselves;
  • the availability of relatively sophisticated refinancing, security and other commercial techniques that might be employed to alter, re-arrange or re-structure the debts of the corporate debtor or the corporate debtor itself;
  • the sanction that if the negotiation process cannot be started or breaks down there can be relatively swift and effective resort to the application of an insolvency law; and
  • the prospect that there may be a greater benefit for all through the negotiation process than by direct and immediate resort to the insolvency law.

In relation to these elements:

(a) identify which of these elements are appropriate and relevant to this economy;
 

(b) which of these elements might be considered absent, ineffectual or of little consequence in this economy?

(c) which of these elements would be viewed as the least persuasive if a work out was contemplated?
 

(d) are there any other elements that are relevant to this issue in this economy?
 

Of the five factors identified in the context of an informal work out a significant size of the debt owed to the lenders and the inability of the corporate debtor to service with debt is a significant factor. The Reserve Bank of India which is the central bank, and which lays down the policy for banks in India for rehabilitation financing has issued guidelines for banks on the basis of which they can deal to revive industrial concerns.

Industrial auditors and borrower are aware that by negotiating they can obtain waivers of penal and compound interest and rescheduling of their debts. These measures however, do not apply to private financiers.

There are no sophisticated devices for refinancing available presently in India but there are adequate legislative procedures applicable for proposing a scheme of arrangement or composition with creditors. The insolvency procedures in India are slow. Most borrowers by resorting to seeking the protection from insolvency by seeking a declaration of industrial sickness do get a respite against legal proceedings. The law requires to be strengthened in relation to swift and effective resort to the application of an insolvency law and the sanction of the break down of a negotiation process for ensuring financial viability. A debt market for heavily discounted debt of a semi insolvent company has also to be created and junk bonds may have to be legitimized in India. The process for presenting a negotiation scheme has to be made the burden of a company or a creditor debtor rather than that of an operating agency and if within the particular time frame the scheme of arrangement cannot be proposed by the company or its workmen, which is found viable within a specified time based upon the financial parameters which are publicly disclosed then industrial sickness must convert to action for winding up and insolvency.