If a company lacks liquidity, it can apply for reorganisation. Company reorganisation is decided by the district court at the company’s own request or at the request of a creditor.
What does company reorganisation mean?
Company reorganisation usually involves obtaining a settlement (write-down of liabilities). The settlement is achieved by a voting procedure in which the size of the majority determines how hard a settlement can be implemented. The most common percentages are 25% (i.e. 75% of all debts are written off) and 50%. With company reorganisation, a majority of creditors can force a settlement against the will of a minority. Even unknown creditors are bound by an agreed settlement.
What is a reorganisation schedule?
In addition to the settlement, an action plan (reorganisation schedule) must be drawn up for the company. In the reorganisation plan, the company, together with the administrator, shall describe to the court and to the creditors how the underlying problems can be resolved. Over-indebtedness is never the problem per se; over-indebtedness, however, is a symptom of an underlying problem in the company.
Company reorganisation is a powerful instrument for over-indebtedness as the company is in principle protected against foreclosure and hostile bankruptcy petitions throughout the process. The disadvantage is that the procedure is legally binding and that the district court normally only approves specialists as administrators. This means that the costs of the proceedings are at least as high as those of a corresponding bankruptcy and the costs of the reorganisation must be borne by the petitioning company itself. In general, the more work the company can do itself, the lower the costs can be.
Salary guarantee in case of company reorganisation
As in the case of bankruptcy, wage guarantee from the State is also payable in case of company organisation. Part of the paid salary guarantee goes into the settlement and is paid at the percentage decided by the court; another part is closest to a state credit which is to be repaid to the State after the completion of the reorganisation. The regulatory framework for a salary guarantee in reorganisations is complex and there is, among other things, a possibility of remedying redundant personnel with the salary guarantee rules in such a way that, under certain conditions, the entire dismissal pay can be covered by a settlement.
Personal liability and company reorganisation
Company reorganisation, like bankruptcy, can break personal liability for taxes, but it cannot, like bankruptcy, be used to address an unresolved critical capital shortage. On the other hand, the gains on debt restructuring can restore used capital. However, this presupposes that the liquidation obligation has not been imposed on the company yet.
How much does company reorganisation cost?
As indicated above, the drawbacks of company organisation often involve the price. For creditors, failed reorganisation would entail double cost, as there would then also be a receiver in bankruptcy in addition to the administrator. For this reason, the non-lower-ranking creditors are often critical of reorganisation, and in practice it is not possible to implement a reorganisation without the consent of the non-lower-ranking creditors.
How long does a company reorganisation take?
A company reorganisation takes more time than a bankruptcy. If the operation of a bankruptcy company is normally transferred within one month from the date on which a petition for bankruptcy is filed, it normally takes at least 6-9 months to reach a settlement decision. The maximum limit for company reorganisation is 12 months. There must be a sustainable liquidity budget for the entire period.
Company reorganisation has often been criticised for being expensive and for the fact that the companies that have implemented it often go bankrupt within three years or even less. The problem with reorganisation is not implementing and obtaining a majority in favour of the settlement itself, but that the company, having paid the administrator and its composition distribution to the creditors, should be healthy enough to be able to survive. The company has to be strong after the reorganisation. At the same time, however, taking the creditors’ interest into account, the concessions made must not leave a company that is too strong because such reorganisation would benefit shareholders rather than creditors. Successful reorganisation therefore places great demands on the administrator and their negotiating skills.
When is a company reorgansation fitting?
The matter of whether reorganisation is fitting in a case is linked not only to what the profit and loss account and the balance sheet of each company look like, but also to the sector in which the company operates. For example, reorganisation of construction companies is typically difficult because in these cases it is a question of entering into ongoing contracts with long guarantee obligations. The customers of the construction companies are very rarely interested in waiving guarantee obligations even in exchange for price reductions. Customers often perceive the guarantees as a major achievement on the part of the company. If, on the other hand, it is a matter of property companies, road haulage companies or commercial companies, reorganisation may often be fitting.
In order to get an assessment and audit of your particular company, you should contact a specialist. Most specialists offer a free audit of your company. During the meeting with the specialist, you should pay particular attention to whether the focus is only on the implementation of the settlement. Addressing the underlying problems that have led to the over-indebtedness is as important as the settlement itself if your company is to survive in the long term. It is often appropriate to bring your auditor to the meeting with the administrator.
Unlike the receiver, the administrator is an adviser to the company and the board of directors continues to be responsible for the company even during a reorganisation.
How do i find a fitting administrator?
In order to find a specialised lawyer, it might be a good idea to speak to your main creditor. The principal is usually a bank or Almi that is secured by corporate mortgages in the business. They therefore usually have a good idea of which lawyers are skilled and which are not. Reorganisation against the wishes of the principal is itself formally possible, but in practice it becomes difficult or impossible. So, it is a good idea to listen to whoever has corporate mortgages in the business and ask for their views on initiating company reorganisation and if they have any idea whether there is a lawyer who can help you.
As in other contexts, it may be advisable to compare several different options and talk to more than one lawyer. You could have more confidence in one of them or perhaps one of them could have better ideas about how to resolve your particular situation and how to implement reorganisation.
You can read more about company reorganisations we have handled under ”experience”.