Explanation

During financial distress, a company can modify its debt in the capital structure, which is called restructuring because it is not able to manage such fixed expenditure with its current operations. It is done to make a company look financially sound. This process includes extension and composition of debt. In case of extension, the company asks its creditors to postpone the dates of repayment to later dates when the company has some positive cash flow to pay the debt. In case of composition, the creditors reduce their claims either by accepting lower principal amount or by accepting lower interest payment.

Verified Answer

Restructuring is a process of modifying debt in the company's capital structure in times of financial distress. This process includes extension and composition of debt. In an extension procedure, the company asks its creditors to postpone their payment dates during financial distress. In the composition of debt as a part of the informal restructuring, the creditors voluntarily reduce their claims on the financially distressed company. Restructuring is a way of the informal settlement of claims without going through a formal bankruptcy procedure.