 "Illustration by Binay Sinha")
Once a firm has substantial debt, borrowing is an everyday activity; new debt is taken to repay old debt on a regular basis. When lenders become suspicious, this flow of borrowing gets restricted and this creates stress. Stressed firms are then under pressure to obtain cash to pay down debt. All or most lenders tend to step forward and ask for their money back. In the absence of a formal resolution process, the management has the ability to choose who gets repaid. The great advantage of a formal resolution process is that an order of priority is written into law.
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