What are the common methods of debt restructuring?
Debt restructuring refers to a matter in which, when the debtor is in financial difficulty, the creditor makes concessions in accordance with an agreement reached with the debtor or a court ruling. In other words, as long as the originally agreed debt repayment terms are modified, that is, when the debt repayment terms determined at the time of debt restructuring differ from the original agreement, it is all treated as debt restructuring. Now let us take a look together at what methods of debt restructuring there are!
Basic principles of debt restructuring
The procedure generally to be followed in debt restructuring is to write off assets that have already been lost or cannot be recovered and the debit balances in profit and loss accounts, and to revalue assets in order to determine their current value to the enterprise. Determine whether the enterprise can continue to trade without continuing financing, or, if continuing financing is needed, determine the required amount, form, and the persons who can provide financing. The enterprise, according to the scale of debt to be written off and the amount of financing required, determines a reasonable method to spread the impact of the write-off among the parties providing funds to the company.
The legal significance of debt restructuring
In essence, debt restructuring is a legal activity, one aimed at changing the original creditor-debtor contractual relationship between the creditor and the target company (the debtor) through certain methods. For example, restructuring carried out by means of asset settlement is an act in which the creditor and the target company modify the creditor-debtor contract and perform it as agreed; restructuring by means of converting debt into equity is the transformation of the creditor-debtor contractual relationship between the creditor and the target company into an equity investment relationship; and restructuring carried out by means of modifying debt terms is a modification of the rights and obligations under the original contract between the creditor and the target company. On the other hand, the core of this contracting process of debt restructuring between the creditor and the target company is the re-confirmation of the creditor's rights and debts between the two parties, and this confirmation itself embodies the creation of a new legal relationship.
What methods of debt restructuring are there?
1. Settling debt with assets: a debt restructuring method in which the debtor transfers its assets to the creditor to settle the debt. The assets usually used by the debtor to repay debt mainly include cash, inventory, financial assets, fixed assets, intangible assets, etc. Settling debt with cash usually refers to settling debt with cash lower than the book value of the debt; if the debt owed is repaid with an equal amount of cash, it is not considered debt restructuring.
2. Conversion of debt into capital: a debt restructuring method in which the debtor converts debt into capital and at the same time the creditor converts the creditor's rights into equity. However, if the debtor, in accordance with a conversion agreement, converts convertible corporate bonds payable into capital, this belongs to debt capital under normal circumstances and cannot be treated as debt restructuring.
3. Modifying other debt terms: reducing the debt principal, lowering the interest rate, waiving interest payable but unpaid, etc.
4. Combined form of three methods: a form of debt restructuring that uses the above three methods together to settle debt.
① Part of the debt is settled with assets, and the other part is converted into capital.
② Part of the debt is settled with assets, and the other part is subject to modification of other debt terms.
③ Part of the debt is converted into capital, and the other part is subject to modification of other debt terms.
④ Part of the debt is settled with assets, part is converted into capital, and the other part is subject to modification of other debt terms.