Bankruptcy and Debt Restructuring: Understanding the Options

Bankruptcy is a formal, legal process where a business, unable to meet its financial obligations, seeks relief through a court system. In India, this is governed by the Insolvency and Bankruptcy Code (IBC) of 2016. The IBC’s primary goal is to prioritise reorganisation over liquidation to maximise value. A resolution professional takes charge, managing assets and working with creditors to find a viable solution. While it offers legal protection, it’s a complex and public process that can be both costly and time-consuming.

Debt Restructuring, on the other hand, is a more flexible and proactive strategy. It involves directly renegotiating the terms of your existing debt with your creditors. Think of it as a collaborative conversation, not a courtroom battle. You might secure a lower interest rate, extend your repayment period, or even convert debt into equity. This is often an out-of-court settlement, which allows your business to restore its liquidity and financial health without the formal, public process of bankruptcy. As McKinsey emphasises, a successful restructuring requires a deep financial assessment and a clear strategy to align the interests of all stakeholders.

For example, while bankruptcy involves a court-appointed professional managing your assets, a company like Azul recently completed a debt-for-equity swap, which is a perfect example of effective corporate debt restructuring that helped it reduce its obligations without ever needing to file for bankruptcy.

Bankruptcy and Debt Restructuring Matters So Much to Your Business

In a global economy marked by high inflation and geopolitical uncertainty, businesses are under immense financial pressure. The Reserve Bank of India (RBI) has noted the significant level of stressed assets in the banking system, underscoring the urgent need for robust insolvency solutions.

Opting for the right path is a strategic decision that directly impacts your company’s future. Debt restructuring and bankruptcy can be critical tools for preserving enterprise value and saving jobs. The World Bank has even shown that countries with effective reorganisation frameworks, like the IBC, can recover up to 71 cents on the dollar for distressed assets, a significantly higher yield than what is typically recovered through liquidation. For SMEs, which are the backbone of our economy and account for a huge portion of global employment, strategic restructuring is often the most effective way to avoid a complete shutdown.

Key Challenges You’ll Face

Choosing between these two paths isn’t easy. You’ll encounter several hurdles:

• Creditor Resistance: You might face pushback from creditors who prefer the certainty of a formal bankruptcy process over a negotiated restructuring. In fact, a significant number of out-of-court workout attempts fail for this very reason.
• High Costs: Bankruptcy, particularly a reorganisation process, can be very expensive. Deloitte’s research on crisis management notes that legal and advisory fees can hit SMEs particularly hard, eating into the very value you’re trying to preserve.
• Reputational Risk: Filing for bankruptcy can severely damage your brand’s reputation. While restructuring might signal financial weakness, it’s generally a more positive message than a formal insolvency filing.
• Regulatory Complexity: India’s IBC, while effective, has strict timelines and compliance requirements that can be challenging to navigate without expert guidance.
• Liquidity Constraints: A lack of immediate cash flow can hamper your ability to even begin a restructuring negotiation, as PwC’s crisis frameworks often highlight.

LawCrust Proactive Approach to Business Recovery

At LawCrust, we don’t just offer advice; we provide a clear, structured roadmap to guide your business back to health. Our approach is based on a blend of top-tier consulting frameworks from firms like Deloitte and PwC, ensuring you get a customised, actionable plan.

• Assessment: The Diagnostic Deep Dive

We begin with a deep, unbiased financial analysis, poring over your balance sheets, cash flow statements, and debt terms to pinpoint the root causes of distress. Using frameworks similar to those developed by McKinsey, our team evaluates whether financial restructuring is feasible or if bankruptcy is the more necessary step. This thorough approach ensures a clear path forward for your business recovery.

• Strategy: The Customised Roadmap

Based on our assessment, we will craft a bespoke strategy for you. We prioritise out-of-court solutions like debt modification and equity swaps to help you avoid the costs and stigma of bankruptcy. If a formal process is unavoidable, we will ensure you are fully prepared to navigate the IBC with confidence.

• Implementation: The Execution Engine

Our team will be by your side every step of the way. We will lead negotiations with your creditors, secure standstill agreements, and ensure the plan is executed flawlessly. We draw on PwC’s crisis management strategies to help you maintain operational continuity and protect your business’s value.

• Monitoring: The Watchful Eye

Once the plan is in motion, we don’t disappear. We will help you monitor key milestones from capital raises to break-even targets to ensure your recovery is sustainable. This ongoing support is a core part of our commitment to your long-term success.

A Case in Point: Jet Airways vs. PizzaExpress

The Jet Airways saga is a powerful case study in the complexities of insolvency. After an initial attempt at debt restructuring failed, the airline entered India’s formal IBC bankruptcy process. While the process was long and challenging, a resolution plan was eventually approved, leading to the potential revival of the airline. This shows the power of the IBC in a complex situation.

Compare this to the 2020 restructuring of PizzaExpress in the UK. The company secured a massive debt-for-equity swap, avoiding bankruptcy entirely and saving thousands of jobs. This case beautifully illustrates how early intervention and expert negotiation can steer a business away from formal insolvency and toward a successful out-of-court settlement. With LawCrust, you could have that strategic guidance to pursue a successful restructuring, minimising costs and delays.

The Tangible Benefits You’ll Achieve

Choosing the right path and executing it effectively will deliver real results:

• Improved Cash Flow: Financial restructuring eases your repayment burdens, giving your business the breathing room it needs to breathe and grow.
• Avoided Insolvency: By pursuing an out-of-court settlement, you preserve your reputation and operational continuity, maintaining the trust of your customers and suppliers.
• Job Preservation: Reorganisation and restructuring save jobs and careers, as seen in the PizzaExpress case, contributing positively to the local economy.
• Higher Recovery Rates: As the World Bank has demonstrated, strategic reorganisation yields higher returns on assets compared to liquidation, protecting value for all stakeholders.

Our Best Practices & Actionable Tips

• Act Early: This is the most important tip. Don’t wait until you’re in a full-blown crisis. Engaging an advisor at the first sign of distress, as PwC advises, gives you more options and a higher chance of success.
• Be Transparent: Open and honest communication with your creditors builds trust and makes negotiations smoother.
• Seek Expert Guidance: Bankruptcy and debt restructuring are complex fields. You need legal and financial experts who can help you navigate the system.
• Focus on the Long-Term: Your recovery plan shouldn’t just be a temporary fix. It must align with your long-term business goals to ensure sustainable growth.

FAQs

Q1: What’s the main difference between bankruptcy and debt restructuring?

A1: Bankruptcy is a formal, court-ordered process that provides legal protection and can lead to liquidation or reorganisation. Debt restructuring is a negotiated, often out-of-court settlement with creditors to modify debt terms, focusing on flexibility and preserving business operations.

Q2: How does India’s IBC framework affect my options?

A2: The IBC provides a structured framework for business insolvency solutions, prioritising reorganisation to maximise asset value. It can be a powerful tool for revival but requires strict compliance and can be a lengthy process.

Q3: When is an out-of-court settlement a better option than bankruptcy?

A3: An out-of-court settlement is often a better option when your core business is viable and your creditors are willing to cooperate. It’s generally faster, less costly, and helps you avoid the public and reputational risks associated with formal bankruptcy.

Conclusion & Your Call to Action

Whether it’s bankruptcy or debt restructuring, the path you choose will define your business’s future. While bankruptcy offers legal protection, debt restructuring provides the flexibility and cost savings that so many businesses need. With India’s IBC and global best practices at your disposal, you can not only survive but thrive.

At LawCrust, our expert team is ready to guide you through this journey with a clear, customised plan. We will help you assess your situation, develop a strategic approach, and execute it flawlessly.

About LawCrust

LawCrust Global Consulting Ltd. delivers cutting-edge Hybrid Consulting Solutions in Management, Finance, Technology, and Legal Consulting to ambitious businesses worldwide. Recognised for our cross-functional expertise and hybrid consulting approach, we empower startups, SMEs, and enterprises to scale efficiently, innovate boldly, and navigate complexity with confidence. Our services span key areas such as Investment Banking, Fundraising, Mergers & Acquisitions, Private Placement, and Debt Restructuring & Transformation, positioning us as a strategic partner for growth and resilience. With an integrated consulting model, fixed-cost engagements, and a virtual delivery framework, we make business transformation accessible, agile, and impactful.

For expert legal help, please contact us:

• Email: inquiry@lawcrustbusiness.com