A business in financial difficulties, whether it is a company or a sole trader, can receive relief for its distress through restructuring.
Business restructuring is intended to bring about debt restructuring (such as when the debt is reduced) and to make viable business operations financially sounder. Either the creditor or the debtor can apply for business restructuring.
Below we present the main aspects of the business restructuring procedure from both the debtor’s and the creditor’s perspective. It is worth noting that the procedure involves both parties at once; it is difficult to draw a clear boundary between both their perspectives.
You apply for restructuring of your own business
For business restructuring to be successful, you must apply for it early enough. Your business does not need to be insolvent for you to apply for the restructuring procedure.
The stages of the restructuring procedure are roughly:
- restructuring application is sent to a district court
- restructuring is begun or the application is declined
- further on in the process, a restructuring programme proposal is written
- a district court approves the restructuring programme
If your creditors support your restructuring application, or if you are applying for restructuring together with your creditors, you do not need to research whether your business is eligible for restructuring.
If there is any uncertainty about whether your business is eligible for restructuring, you will be asked at the application stage to explain means for making the business profitable.
A district court can approve a restructuring programme in a simplified procedure if that is what the majority of creditors support. In that case, the court can make a quick decision.
When a district court approves a restructuring programme, it pays close attention to whether the business can continue operations and pay its debts in accordance with the programme. You should be ready to demonstrate that the programme is realistic.
When your restructuring programme is approved, you must adhere to it strictly. Note that if someone appeals the district court’s approval of the programme, the programme must still be followed regardless, unless the court of appeals rules otherwise.
If it becomes clear during the restructuring process that your business’s operations cannot be put back on a firm footing, the business may be entered into liquidation.
You apply for restructuring of another business as a creditor
Only debts which were formed before the restructuring application was submitted to a district court are considered “restructuring debts”. In other words: only the debts that existed before a restructuring application was submitted can be considered in debt restructuring. Any new debts that arise after the application is submitted must be paid by the debtor to your company when they fall due.
Also, beginning business restructuring does not generally affect the debtor’s previous contracts and commitments. The start of business restructuring does not prevent you as a creditor from claiming restructuring debts from a guarantor, or the value of the loan security set by a third party.
When business restructuring has begun, the debtor cannot generally repay you restructuring debt or pay you security for it. Nor can you take action against the debtor to recover his or her debt or to secure repayment of it.
Before business restructuring begins, the debtor may apply for a “temporary prohibition” which the district court can impose to prevent debt being recovered from the debtor before the process starts.
If a creditor files for liquidation of a debtor’s business in addition to filing for business restructuring, the decision to start business restructuring is always made before the decision to liquidate. If the business restructuring application is approved and restructuring begins, the debtor can only be entered into liquidation in exceptional circumstances.
If the restructuring application is declined, the business can generally be entered into liquidation, even if the restructuring decision is appealed. However, the court that processed the liquidation application can delay the debtor’s entry into liquidation until the matter of the start of restructuring has been resolved in the court of appeal. If the debtor’s entry to liquidation is not delayed, a court may, on the debtor’s demand, limit realization of property until the decision on restructuring is final.
If the debtor has been entered into liquidation before the matter has been decided in the court of appeal, and the court of appeal then decides that restructuring will begin, the liquidation loses force and restructuring begins.