A retailer's operating company is liquidated for Rs 900 crore against a secured bank, unsecured bonds, trade creditors and a finance subsidiary that both lent to it and holds its guarantee. Compute recoveries with and without the double dip.

Without the double dip every unsecured creditor recovers 36.4%; with it the finance subsidiary's lenders recover 57.1% and everyone else 28.6%. The secured bank takes Rs 500 crore in full, leaving Rs 400 crore. The finance subsidiary's lenders hold two claims on that pool, the intercompany loan and the guarantee, so claims grow from Rs 1,100 crore to Rs 1,400 crore and the bondholders' recovery falls from Rs 218 crore to Rs 171 crore. The double dip creates no value; it moves Rs 62 crore to one lender.

Think of a dinner bill split among friends after one of them, who paid the deposit, takes it back first. Secured creditors are paid from their collateral before anyone else; whatever is left is shared among unsecured creditors in proportion to what they are owed. Bazaarika's bank has a charge over everything, so it takes Rs 500 crore of the Rs 900 crore and is whole. The Rs 400 crore remainder is the unsecured pool. The pro rataIn proportion to the size of each claim: a creditor owed twice as much receives twice as much from the same pool. rule means recovery is the pool divided by total claims, and the whole question turns on what counts as a claim.

Follow the Rs 300 crore. Outside lenders gave it to the finance subsidiary; the finance subsidiary lent it to the operating company; the operating company guaranteed the outside lenders. When the operating company fails, those lenders have two routes to its assets: the guarantee, which is a direct claim of Rs 300 crore, and the intercompany loan, a second claim of Rs 300 crore that the finance subsidiary collects and passes up to them as its only creditors. One rupee lent, two rupees of claim. The pool of claims becomes 600 plus 200 plus 300 plus 300, Rs 1,400 crore, and each claim recovers 28.6%. The double dipA structure in which one lender ends up with two claims against the same debtor for one loan, typically a guarantee plus an intercompany receivable, so it takes a double share of a recovery pool. lenders collect 28.6% twice, 57.1% on their Rs 300 crore, while the bondholders who lent directly collect 28.6% once.

The bondholders pay most of it: Rs 47 crore of the Rs 62 crore that moves, because they are the largest unsecured claim. The adviser's first argument is that the two claims are one debt in substance, so the guarantee claim should be reduced by whatever the intercompany loan recovers, and the second is that the bond documents may have prohibited guarantees of this kind in the first place. Whether either works depends on the exact wording of the guarantee, the bonds' covenants and the insolvency law of the jurisdiction, which is why this is a restructuring question and not an accounting one. Say the limits plainly: in some systems courts collapse double claims, in others they are honoured, and the finance subsidiary's lenders priced their loan on the assumption that they would be. The practical lesson for anyone buying the bonds was to read what the group was allowed to guarantee before it did.