The IBC is not the only route for a corporate debt restructuring. A company that is not in insolvency, or that wishes to restructure its debt consensually, can use a scheme of arrangement under Section 230. The scheme route is class-based and consensual, and it binds the dissentients within the approving class.
The Advantages
The scheme route is flexible. It can provide for a haircut, a rescheduling, a conversion of debt into equity, or a combination. It can be structured to meet the commercial needs of the company and the creditors, and it does not have the rigid timelines of the IBC. The scheme route also avoids the stigma of insolvency, which can affect the company’s relationships with its customers and suppliers.
The Limitations
The scheme route is not available during the CIRP in the absence of a liquidation order. It requires the active support of the creditors, and the company must obtain the approval of the requisite majority in each class. The scheme route does not have the statutory moratorium that the IBC provides, and the company may face creditor pressure during the process.
The Process
The scheme is filed with the NCLT under Section 230, and the Tribunal convenes the class meetings. The scheme is approved by the requisite majority, and the Tribunal sanctions it after considering the objections. The sanction order binds the company, the creditors, and the members.
A debt restructuring scheme outside the IBC is a viable option for a company that has a viable business but a temporary liquidity problem. The scheme must be structured carefully, and the creditors must be engaged early in the process.
Call to Action
Anuj Desai & Associates advises companies and creditors on corporate debt restructuring outside the IBC—from the Section 230 scheme and the creditor classification to the class meetings and the NCLT sanction. If you are considering a consensual restructuring, we can help you structure the scheme.
📧 office@anujdesaiassociates.com
📞 9619456656
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