The purpose of reorganizing a company is to restore the company’s finances and thereby avoid bankruptcy, allowing the company to continue its current operations. This can be achieved by selling off parts of the business or if the creditors agree to reduce or defer the debt.
Both companies (ApS, A/S etc.) and individuals can go into reconstruction.
Even though it has been possible to use the possibilities for restructuring for a number of years, we have only really seen them utilized during 2022-2023. This may be due to the fact that some companies’ financial challenges are seen as temporary due to economic cycles and market challenges.
There are two main types of reconstruction:
The “ordinary reconstruction”
In this case, you should work out a roadmap with your advisors after a thorough analysis of the company and its viability, before making a decision to file a petition for reconstruction with the bankruptcy court. This is to prevent unpleasant surprises during the reorganization process. You should have an overview of debts, assets in the company, mortgages and creditors and business partners, and it is clearly preferable to have an idea of how the reconstruction will end.
About “preventive reconstruction”
This can be a form of silent suspension of payments, and without the enforcement order, which is discussed below, the distressed party is not protected against recovery via, for example, the enforcement court. When an enforcement order has been issued, the process is similar to the ordinary reorganization. Therefore, we are curious to see how the rules come into play in practice.
The background story
In the spring of 2022, the Bankruptcy Council issued a report containing a number of proposals for amendments to the Bankruptcy Act to implement EU Directive 2019/1023 (the Insolvency and Restructuring Directive) on preventive restructuring.
The rules came into force on July 17, 2022 and appear in sections 9a – 9i of the Bankruptcy Act.
With the adoption of the “preventive reorganization” rules, the possibility to reorganize companies in financial distress has been supplemented.
The procedure for ordinary reconstruction
In ordinary reorganization, both creditors and the distressed party can request the bankruptcy court to place them under reorganization proceedings. The distressed party can only be placed under reconstruction proceedings when the insolvency requirement in section 17(2) of the Bankruptcy Act is met. That is, when they can no longer meet their payment obligations as they fall due, unless the problems are only temporary.
If the bankruptcy court then decides that the person in question should be placed under reconstruction proceedings, the bankruptcy court appoints one or more administrators and sets a date for a planning meeting with the creditors. At the same time, an advertisement is placed in the Danish Official Gazette, inviting all creditors to file their claims and attend the planning meeting, which is held in the bankruptcy court within the first four weeks after the start of the reorganization.
At the plan meeting, the administrator presents an overall plan for the reorganization. A plan that the creditors must subsequently vote at the meeting on whether it can be adopted. If the plan is approved by the creditors, the administrator has up to six months to prepare a reorganization proposal, which must also be approved by the creditors.
A number of different voting rules apply here, where creditors can be divided into voting classes, among other things.
If the reorganization proposal is adopted and confirmed by the bankruptcy court, it will have legal effect. The proposal will then also apply to the creditors who did not vote for the proposal. However, if a majority of creditors do not vote in favor of the proposal or if the proposal cannot be confirmed by the bankruptcy court, the bankruptcy court must initiate bankruptcy proceedings.
Importance of preventive reconstruction
Preventive reconstruction differs from regular reconstruction in a number of ways.
First and foremost, as a trader, you can now request the bankruptcy court to initiate preventive reorganization proceedings if you are insolvent or if there is a likelihood that your business will become insolvent. As a debtor, you now have the opportunity to react to financial difficulties at an earlier stage than before, as there only needs to be a probability of insolvency.
In addition, precautionary reorganization involves less publicity, as it does not have to be published, as is the case with ordinary reorganization. The reorganization plan is not made public, so the outside world only becomes aware of the company’s financial challenges when the reorganization proposal is presented. In addition, there is no mandatory appointment of a reorganization manager, and it is also possible to withdraw from the reorganization after the adoption of the reorganization plan.
A preventive reconstruction comes in two versions. What distinguishes these versions is whether or not a restraining order has been issued.
An enforcement prohibition is a prohibition against creditors being able to enforce their claims through the enforcement court. If the company does not request this protection, a preventive reorganization can be initiated without informing creditors and business partners. They will therefore only be informed when the company submits the reorganization proposal. If, on the other hand, the company requests the adoption of an enforcement injunction, the creditors are informed and a reorganizer must also be appointed, as a request for an enforcement injunction is also considered a request for the appointment of a reorganizer.
Conditions for initiating a precautionary reorganization
The basic conditions for the initiation of preventive reorganization are that:
- The debtor is engaged in a commercial activity
- Application filed by the debtor
- There is a likelihood of the debtor’s insolvency
Thorough thoughts
As stated above, there are many considerations when the topic of restructuring comes into play. Therefore, it is recommended to address the challenges early on and it is clearly preferable for all parties to involve advisors, creditors and mortgagees in the solutions early on.
