Debt Restructuring Documentation - The Paper That Decides If Restructuring Survives

RBI says restructuring is implemented ONLY when documentation is complete. Not when board approves. Not when money paid. Only when paper is done.

If resolution involves restructuring, then all related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities are completed by lenders

If documentation incomplete, RBI treats it as failed restructuring = NPA continues = provisioning 100%.

1. The Two-Agreement Foundation - CDR Legacy Still Used

Corporate Debt Restructuring system in India is based on two agreements:

A. Inter-Creditor Agreement (ICA):
Agreement among all lenders. Signed before restructuring starts. Now mandatory under RBI Circular June 7, 2019 on Prudential Framework for Resolution of Stressed Assets.

ICA says:

• Lenders will negotiate jointly, not individually
• Lead Bank will coordinate
• 75% by value and 60% by number must agree for resolution plan
• Standstill: No lender will file IBC during 180 days review period

B. Debtor-Creditor Agreement (DCA):
Between borrower and lenders. Borrower agrees to be bound by restructuring scheme approved by Empowered Group. Agrees to pay documentation fees, restructuring fees, meeting expenses as laid out.

Borrower to execute DCA as per format given in Schedule. Restructuring Scheme with assistance of Referring Lender, Lead Institution.

These two are still template for all current restructuring under Prudential Framework 2019.

2. RBI Prudential Framework 2019 - Documentation Checklist

Under RBI Resolution Framework, restructuring is treated as implemented if:

A. Conditions Precedent (CP) Documents:

1. Board Resolution of borrower approving restructuring + authorized signatory
2. ICA executed by all lenders - stamp duty paid
3. DCA executed
4. Updated Credit Facilities Agreement - new repayment schedule, interest rate, moratorium
5. Amendment to Sanction Letters - reflecting new capital structure & changes in terms & conditions reflected in books of all lenders and borrower
6. Security Documents:
   • Amendment to Mortgage Deed - re-stamping if security value increased
   • Hypothecation Agreement - for new assets
   • Pledge Agreement - if promoter pledges more shares
   • Personal Guarantee - fresh or confirmation that existing guarantee continues
   • Corporate Guarantee - if any
7. Charge Creation:
   • Form CHG-1 / CHG-9 filed with ROC within 30 days - perfection of securities
   • CERSAI filing for mortgage / hypothecation
   • NeSL filing for Information Utility
8. Inter-se Agreement - if lenders have different security
9. Trust and Retention Account (TRA) Agreement - if cash flows controlled
10. Independent Credit Evaluation (ICE) - For exposures > Rs 100 Cr, if plan involves restructuring, requires ICE from authorized CRA
11. Valuation Reports - For change in ownership cases

B. Conditions Subsequent (CS):

• Creation of security within 30-90 days
• Equity infusion proof - bank statements
• New capital structure reflected in books

If any CP not completed by deadline (180 days from review period or March 31 as per Covid frameworks), restructuring fails.

3. Types of Restructuring Documentation - Based on Tool

1. Rescheduling: Simplest. Amendment Agreement + Revised Repayment Schedule + Re-affirmation of security + ROC filing.

2. Debt-to-Equity Conversion:

• Board Resolution u/s 62(3) Companies Act
• Shareholders Resolution for increase in authorized capital
• Share Subscription Agreement
• Amendment to Articles - for lender's exit rights
• Valuation Report - Registered Valuer for conversion price
• SEBI compliance if listed - preferential allotment pricing

3. Haircut + Sustainable / Unsustainable Split:

• Master Restructuring Agreement (MRA) - divides debt into Part A (sustainable - to be serviced) and Part B (converted to equity / OCD / written off)
• OCD Agreement - Optionally Convertible Debentures for Part B
• Right of Recompense Agreement - if company revives, lender gets upside - very litigated

4. Change in Ownership (Outside SDR):

• Share Purchase Agreement
• Pledge Invocation Agreement
• New Promoter Guarantee

4. Case Laws - Where Documentation Failed

1. Essar Steel India Ltd. v. RBI - NCLT Ahmedabad - MRA Documentation Dispute
Essar's MRA had clause: If restructuring fails, Right of Recompense applies. Lenders claimed Rs 1,200 Cr recompense after company turned around. NCLT held recompense clause must have clear formula, cap, trigger. Vague clause unenforceable. Many MRAs now have detailed RoR formula due to this.

2. ICICI Bank Ltd. v. Shree Rajasthan Syntex - DCA Enforceability
Borrower signed DCA but argued ICA not signed by 2 lenders, so DCA void. Court held DCA independent - borrower bound once signs, even if some lenders don't sign ICA. Borrower cannot escape.

3. SBI v. Monnet Ispat - ICA 75% Rule
3 lenders out of 10 with 68% value approved restructuring. SBI argued 75% needed. NCLAT held 75% by value AND 60% by number mandatory under RBI circular. 68% fails. Restructuring invalid, IBC filing valid.

4. Settlement Fixing Payment Terms Doesn't Novate Debt - NCLT Mumbai Dec 2025
NCLT held settlement agreement that merely prescribes mode and schedule of payment does not extinguish or alter nature of operational debt and does not create pre-existing dispute. Means restructuring agreement is not novation unless expressly says old debt extinguished. If you draft restructuring as mere payment schedule, original security continues - important for SARFAESI.

5. Guarantee Requires Direct Undertaking - Supreme Court 2023
Court emphasised guarantee requires direct undertaking to creditor, and contemporaneous documents - sanction letter, information memorandum, assignment deed, financial statements - clearly showed no corporate guarantee contemplated. Concept of "see to it" guarantee inapplicable under Indian law.

Impact on restructuring: When you restructure, you must get fresh guarantee deed or at least confirmation letter that existing guarantee continues for restructured facilities. Many banks forget - guarantee extinguished by material variation without guarantor consent u/s 133 Contract Act.

6. NML Capital v. Argentina - Pari Passu Litigation - US SDNY
Hedge funds who held out from 2005 and 2010 debt restructuring obtained equitable remedy preventing Argentina from paying restructured creditors unless holdouts paid. Court enforced pari passu clause. Lesson for ICA: If ICA has pari passu clause and one lender gets preferential payment under restructuring, other lenders can get injunction.

5. Common Documentation Mistakes That Kill Restructuring

Mistake 1 - Not Filing CHG-1: MRA executed, but ROC filing missed 30-day window. Charge not perfected. Later another lender claims priority. Under Sec 77 Companies Act, unregistered charge void against liquidator.

Mistake 2 - Guarantor Not Party: MRA changes interest rate from 12% to 8%, extends tenure 5 to 10 years - material alteration. Guarantor not signed. Guarantee void u/s 133. Bank loses guarantee.

Mistake 3 - No Right of Recompense Cap: Bank writes "Borrower shall pay recompense as determined by lender". Courts strike as unilateral, penalty under Sec 74.

Mistake 4 - ICA Without Standstill: Lender signs ICA but files DRT case during standstill. Other lenders sue for breach of ICA. ICA enforceable as contract.

Mistake 5 - CERSAI Not Updated: Restructuring creates new mortgage over additional property. Not filed in CERSAI. SARFAESI action fails - security not registered.

6. Drafting Checklist - What Good Documentation Looks Like

Master Restructuring Agreement Must Have:

1. Definitions - Restructured Facilities, Cut-off Date, Sustainable Debt, Residual Debt
2. Conditions Precedent - ICA, DCA, Board Resolutions, Valuation, ICE, Legal Opinion
3. Restructuring Terms - New repayment schedule annexed, interest rate, moratorium, conversion price formula
4. Security - Confirmation that existing security continues + new security + negative lien
5. Representations - Borrower represents no other debt, no litigation
6. Covenants - Financial covenants - D/E ratio, DSCR, reporting monthly
7. Events of Default - Failure to create security in 90 days = default
8. Right of Recompense - Formula: NPV difference between original and restructured at 10% discount, capped at 50% of sacrifice
9. Governing Law + Jurisdiction

Documentation Execution Flow:
Day 0: ICA signed -> Review Period starts
Day 30: DCA + MRA draft circulated
Day 60: Board approvals + Shareholder approvals
Day 90: MRA executed + Stamp duty + ROC filing + CERSAI + NeSL
Day 180: All CP completed = Restructuring Implemented -> Account upgraded from NPA to Standard if 10% provision made