When a company experiences financial difficulties for one reason or another, one, and usually last, resort is corporate restructuring. In our opinion, the restructuring procedure is a good way to restore the company's viability and protect the interests of the company and its owners. Corporate restructuring works better the earlier it is sought.
Corporate restructuring and its prerequisites
Restructuring is a procedure created for viable businesses to overcome a critical phase and continue operations. Under company restructuring, it is possible to terminate long-term lease and other agreements and gain protection against bankruptcy for the period while the restructuring application is pending and, if the company enters restructuring, also for the period during which the restructuring programme is being followed.
A prerequisite for commencing company restructuring is insolvency or the threat thereof. Restructuring cannot be initiated if it is assessed that the company will be unable to pay its new debts or that its business cannot be restructured profitably. In restructuring, the company must be viable, meaning that restructuring will lead to profitable business operations.
In corporate restructuring, a company's operations are reorganised. Unprofitable activities are ceased or sold off, and the focus shifts to profitable operations. A key aspect of corporate restructuring is the review of debts.
The District Court assesses whether the debtor's assets are sufficient for the restructuring costs before deciding to initiate the restructuring proceedings. The debtor must also be able to pay the costs incurred after the proceedings have been launched, meaning no new debts should arise. Generally, the company's debts are reduced, and a new payment plan is made for the remaining debts. The company is forgiven its reduced debts if it can complete the restructuring programme according to the agreed terms.
Company restructuring application
You need to allocate at least a week to prepare the corporate restructuring application, so that we have time to gather all the necessary information from the company and draft a proper application. Another week should be allocated for the auditor's statement on the restructuring application.
We usually apply for protection against creditors immediately in the corporate restructuring application, i.e., temporary injunctions such as a payment and security enforcement prohibition, debt collection prohibition, attachment prohibition, and prohibitions on other enforcement measures. The court does not always automatically grant these based on the application alone, but a well-drafted and justified application also increases the likelihood of temporary injunctions.
The court requests a statement on the company restructuring application from the main creditors, usually banks, the tax authority, and pension insurance companies. If the creditors oppose the restructuring, the court will arrange a hearing on the matter, where issues related to the application and the creditors' grounds for opposition will be discussed.
The Restructuring of Enterprises Act separately defines grounds for refusal, which prevent an enterprise from undergoing restructuring. These grounds for refusal are:
- It is probable that insolvency cannot be eliminated by means of a reconstruction programme.
- It is likely that the debtor's assets will not be sufficient to cover the costs arising from the restructuring proceedings;
- It is likely that the debtor will be unable to pay debts incurred after the commencement of the proceedings;
- there is a justified reason to assume that the conditions for the establishment or confirmation of a recovery programme are not met; or
- The statutory accounting records are essentially deficient or erroneous
Crucial for the success of an application is that the company's bookkeeping is up-to-date and reliable. Creditors can be asked for pre-approval for corporate restructuring, and in some cases, a creditor may also be a co-applicant in the restructuring.
A pending bankruptcy application does not in itself prevent corporate restructuring, but for the restructuring application to be successful, it is better to submit the corporate restructuring application before one of the creditors files for bankruptcy.
Reorganisation procedure, or liquidation phase
Once the court decides to initiate a reorganisation procedure, it also appoints an administrator, who is usually a lawyer specialising in corporate reorganisation. The administrator's task is to draw up a reorganisation plan in conjunction with the company. Despite this, the company's management retains decision-making power over the company's affairs, but the administrator must be consulted for consent regarding significant decisions. The administrator also acts as a supervisor of the creditors' interests.
The rehabilitation programme proposal defines the means to make the company's business profitable. Almost all programme proposals also include debt restructuring carried out in different ways. The purpose of debt restructuring is to change the repayment terms of the company's loans with regard to, for example, the payment period, interest, repayment schedule, and ultimately also the principal. The key and most significant part of the debt restructuring in a rehabilitation programme is the renegotiation of debts, i.e. the ”cutting” of debts.”
Rehabilitation programme approval
The administrator negotiates with creditors and draws up a restructuring programme proposal with the company. The aim is usually to obtain approval from as many creditors as possible. The administrator then submits the plan to the district court for consideration and confirmation.
Creditors or groups of creditors decide on the approval of a restructuring programme. Following the creditors' decision-making, the confirmation stage of the restructuring procedure follows. In this stage, the court decides on the confirmation of the restructuring programme proposal, provided that sufficient creditor support is obtained. After the confirmation of the restructuring programme, it becomes binding on all parties, and all of the debtor's obligations and their terms contained in the restructuring programme are altered.
The duration of a recovery programme is determined at the time of approval. Generally, programmes last for approximately 4–6 years, sometimes longer. The company will have its debt written off if it can complete the recovery programme according to the agreed terms.
Actual renovation
While the district court confirms the rescue plan, it also appoints a supervisor for the rescue plan, and the rescue procedure begins. In practice, rescue measures have usually been started already during the application phase for the rescue or even before that.
The court does not supervise the implementation of the programme; rather, that is the responsibility of the supervisor and the creditors. The supervisor periodically provides the creditors and any creditors' committee with reports on the implementation of the programme. If the company is unable to comply with the restructuring programme, the restructuring can be ordered to be suspended.
The author of the article, Jari Sotka, works as a consultant for companies in business recovery and has participated in about a hundred business recovery cases in various roles.
Jari Sotka
Lawyer, MBA
Tel. 040 544 0610
[email protected]
Amos Attorneys at Law Oy
www.amoslaki.fi
The author acts as a company advisor in business restructurings and has been involved in around one hundred business restructurings in various roles. He has worked as a lawyer and attorney for over 25 years, focusing his entire career on preventing and resolving the legal problems of small and medium-sized enterprises.