Entrepreneur's plan B: re-establishing business through reorganization

Author: Heli Lehtsaar-Karma, freelance journalist

In the current complicated situation, the revenue of a lot of companies has decreased sharply or even fallen to zero, and liquidity problems become apparent. As there is a great deal of uncertainty and nobody knows whether the businesses that came to a halt will recover in three, six or nine months, it is worthwhile for entrepreneurs to think about plan B, perhaps rescuing their company through reorganization.

What is reorganization?

Reorganization is being used to help a company that has temporarily become insolvent, for example due to the current pandemic and crisis. It is important to emphasize that a company can be reorganized if the business model is sustainable, and the difficulties are temporary. Reorganization helps to overcome temporary insolvency problems and thus prevents bankruptcy.

What exactly is being done during reorganization, so that the company could get back on its feet and the creditors can get their money back?

Reorganizing and restructuring a business is a very complex task: reorganization could mean changing the existing business model, closing some business units and focusing on what creates value. For instance, it may be the case that there is one business unit in the company that is viable and profitable, but another business unit that is not. The goal is to get liabilities under control and eliminate the risk of bankruptcy, so that the company could focus on the reorganization process.

There are various ways to satisfy the claims of creditors: deferral or reduction of payments, conversion of debt into shareholding, provision of additional guarantees, offering shareholdings in the future. The measures are proposed by the company and must be approved by the creditors. To be more specific, a reorganization plan submitted to court is approved by the creditors if at least half of all creditors, holding at least 2/3 of all votes, approve it.

If a company could be declared bankrupt by a creditor or an employee, then who initiates the proceedings of a reorganization?

Reorganization is a voluntary procedure and it can be done if the company requests it. The management board of the company applies to the court to initiate reorganization proceedings and together with the reorganization advisor they draw up a reorganization plan. This must be confirmed by the creditors and / or the court.

How long is the reorganization process and when will the company be back on its feet?

This, of course, depends on the company and its condition, but the reorganization plan cannot be longer than five years.

What are the criteria for a successful reorganization?

• The first is that the management, the reorganization adviser and the creditors must believe that the reorganization will result in a functioning and solvent business again. A reorganization can only be successful if creditors support the reorganization plan, trust the company's management and believe that the company's future will improve.
  
  
• Hence the second criterion: transparent and trusting communication, not just formally informing the creditors. It is worth noting that trust is not earned overnight, it is a long-term process. Consequently, companies that have been correct and transparent in the past have a better chance: annual reports are submitted on time, those who are not required by law to an audit but have voluntarily commissioned to an audit, as this creates additional transparency and trust.
  
  
• The third important factor is the involvement of a reorganization adviser. Reorganization is a very complex task; the planning must be carried out in a relatively limited time and it requires resources and competence from the management. It is true that the legislation only speaks of a reorganization adviser, but the proceedings also require the competence of a lawyer, because it is necessary to negotiate with creditors and suppliers and communicate with the court. The skills of a business advisor are also needed, as business recovery and making the company successful is key. Financial competences are required, as the activities planned for reorganization need to be integrated into the financial plans and the implementation of the plan needs to be monitored at later stages. Reorganization is a team effort where the company's management needs more help than just the mentioning of the reorganization advisor in the Reorganization Act.

You mentioned that companies often tend to start the reorganization process too late. Why is that?

Indeed, the greatest art is the timely commencement of the reorganization. Unfortunately, reorganization is often started too late, which is why liabilities have accumulated and temporary insolvency has arisen. The circuit court has stated in one of its decisions that there must be no interruption of payments by the time the reorganization proceedings are initiated. However, we have seen in practice that the need for reorganization becomes apparent when payments have already been stopped. But then it's too late.

There can be several reasons for the delay. First, people may not be aware of what the reorganization process means and what is the purpose. Secondly, reorganization has unfortunately a negative image in society, to which the media has also contributed - it is believed that reorganization implies an end of a company. Therefore, it is not surprising that as soon as the company's intention to begin reorganization becomes public, the flow of incoming calls from suppliers with the message that the next purchases can only be done by prepayments will rise drastically. Consequently, it is necessary to thoroughly explain to cooperation partners and creditors what reorganization is and what is the goal and purpose of it.

So, communication is key?

Definitely. You must be transparent with creditors and cooperation partners, and it is worth communicating as early as possible in order to discuss the situation and inform about the start of the reorganization, so that they are not frightened. It is necessary to clarify that the focus is on restructuring the business so that creditors do not lose their money. It should also be clarified that reorganization achieves a better result than bankruptcy proceedings: in case of bankruptcy, the company's assets are usually sold at a bankruptcy auction price, but reorganization creates a precondition for increasing the company's assets and value and selling them at a fair price if necessary.

The aim of a reorganization is to keep the company in business and preserve its value, so everyone should come out as winners: the owners, employees and the creditors.

How identify the right moment to not surpass the right time to initiating reorganization proceedings?

Identifying the right moment is possible if the company has a good budgeting and forecasting system that works consistently. This means that the financial results, orders, revenue etc. are constantly monitored, and the forecasts are not done looking in the rearview mirror, for instance based on last year's results. This way you can react in a timely manner if problems start to arise.

Secondly, I recommend involving external experts in the supervisory boards of companies in addition to your family members and acquaintances. Though the company is like one’s child, whom you know best, an external expert can sometimes look at the company with an impartial view and notice when problems start to arise.

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