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Outline solutions to the shareholders and creditors conflicts.

Outline solutions to the shareholders and creditors conflicts.

Answers

1. Restrictive debt covenants – creditors can impose strict terms and conditions on the borrowers (shareholders). Such restrictions may involve restricting payment of dividends, not borrowing additional debt using the same asset etc.
2. Callability provisions – such provisions provide that the borrower will have to pay the debt before maturity if there is a breach of the terms and the conditions set in the debt covenant.
3. Creditors’ representation in the management – the creditors may demand representation in the board of directors to oversee the utilization of debt capital borrowed and safeguard the interests of the creditors.
4. Refusal to lend – creditors may refuse to lend to the business entity or charge high interest on the borrower as a deterrent mechanism.
5. Convertibility of debt into ordinary shares – the debt covenant to the effect that on the breach of the terms and conditions, the creditors will convert the debt into ordinary shares.

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Lellah answered the question on November 8, 2021 at 06:35

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