How do you define restructuring?
Restructuring, or restructuring proceedings, is another way of agreeing with creditors to avoid bankruptcy. Restructuring benefits entrepreneurs at risk of insolvency or who are insolvent. So let’s start at the beginning:
Important!
Insolvent is defined as a company or debtor that does not pay its monetary obligations for more than three months and still does not have the ability to pay its debts. There is also another situation in which a debtor is termed insolvent: when the amount of debt exceeds the value of the assets for more than 24 months.
A company at risk of insolvency is in a difficult financial situation that leads one to believe that the company will soon (the time need not be precisely defined) become insolvent.
When threatened with insolvency (or already insolvent), a debtor may file an application that results in the initiation of restructuring proceedings. The purpose of restructuring is to avoid bankruptcy and insolvency by working out an agreement with a company’s creditors and/or putting the company into debt. In other words: restructuring allows a company to obtain protection from foreclosure while it makes significant changes to enable it to continue operating and pay off any future liabilities.
What is the difference between restructuring and bankruptcy?
The restructuring process is aimed at getting the company to settle its debts to creditors and continue its operations. Bankruptcy proceedings, in turn, lead to the closure of the company – along the way trying to bring about the settlement of arrears.
Restructuring – as the name suggests – can lead to profound changes in a company. These changes may include the scope of services provided, the nature of the business, staff reductions and even a change in management. A company declaring bankruptcy does not need to make far-reaching changes, since the result of the proceedings will be the closure of the business anyway.
The course of the restructuring process
In order to successfully restructure, it is necessary to:
- Analyze the financial condition of the company,
- Plan steps to restore liquidity to the company,
- Implementation of necessary measures.
Before all this can happen, however, it is necessary to spread an appropriate “protective umbrella” over the entrepreneur for the duration of the proceedings. This protection includes:
- Withholding the need to regulate the obligations covered by the agreement,
- Suspension of pending enforcement proceedings,
- blocking the possibility of terminating the lease or rental agreement for the property in which the debtor operates an enterprise,
- blocking the possibility of terminating a loan or credit agreement, insofar as they relate to funds at the entrepreneur’s disposal before the date of initiation of the proceedings,
- Blocking the possibility of terminating the lease for arrears covered by the agreement,
- Blocking the termination of contracts critical to the company’s operations,
- The possibility of cancelling unprofitable contracts without paying contractual penalties and downsizing by an appointed court administrator.
Important!
Restructuring includes those liabilities, enforcement proceedings and contracts that already existed at the time the restructuring proceedings were initiated. This means that if the entrepreneur acquires further liabilities already in the course of the proceedings, he will have to pay them on time.
The same is true of a real estate lease or rental agreement. During the restructuring, the debtor does not have to repay debts that arose earlier, provided that he pays rent or lease payments that arose after the opening of the proceedings on an ongoing basis.
Restructuring plan
With the opening of the proceedings, the company is appointed a supervisor or court administrator – a person whose job is to help the company smoothly go through the restructuring process. One of the duties of the court supervisor is to draw up a restructuring plan. This is a key element, as it is meant to convince creditors to agree to the proposed agreement.
In order to be able to prepare a reliable and feasible restructuring plan, the court administrator must receive as complete a set of data as possible from the debtor. The manager then analyzes and compiles the information received.
The restructuring plan may include, among other things:
- Deferral of liabilities,
- Implementation of updated rules for regulating obligations between the debtor and creditors,
- debt reduction – for example, by forgiving interest and sometimes even a portion of obligations,
- Conversion of debt into company shares or participation in company profits.
Types of restructuring proceedings
Restructuring a company can be done in many ways. These are the types of proceedings:
Proceedings for approval of the arrangement
The least invasive type of restructuring proceedings. In this option, the entrepreneur manages the company and its assets himself, makes decisions on his own and works out an agreement with his creditors on his own. The role of the court in the proceedings for approval of the arrangement is only… to approve the arrangement.
Important!
Arrangement approval proceedings can be implemented only if the sum of disputed claims does not exceed 15% of the claims eligible to vote on the arrangement.
Arrangement proceedings
This type of proceeding takes the longest, but allows to block enforcement proceedings even before the application for restructuring proceedings is processed. What’s more, the arrangement procedure allows disputes to be conducted while the list of creditors is being prepared – hence the longer duration.
Accelerated arrangement proceedings
By opting for accelerated arrangement proceedings, the restructured company is protected from execution from the moment the restructuring proceedings are opened. This type of procedure also gives the aforementioned protection against termination of contracts important to the debtor. The entire accelerated arrangement procedure should close in about 12 months.
Sanitation proceedings
This type of procedure is characterized by the widest range of measures available to restructure the company. Sanitation proceedings can lead to the abandonment of unprofitable contracts, allows the dismissal of employees in the same way as layoffs in the bankruptcy of an employer. As part of the sanitation procedure, the entrepreneur also has the opportunity to sell assets while still being able to make an arrangement with creditors.
How to properly choose the type of restructuring proceedings?
The key element that influences the choice of the type of proceedings is the time it takes for the debtor to try to lift the company out of collapse. In a situation of moderate risk of insolvency, when restructuring becomes a precautionary measure, an entrepreneur may opt for arrangement approval proceedings. On the other hand, an entrepreneur whose company is already insolvent at the time of filing should even consider using sanitation proceedings.
However, when making this difficult decision, an entrepreneur should consider many more factors. A detailed analysis, taking into account the company’s assets, image, the cost of restructuring proceedings or the number of creditors and the value of liabilities to be paid, will certainly help in making the right choice.
Restructuring vs. factoring
Restructuring proceedings affect many aspects of a company’s operations – including financing. In this chapter, we will explain how factoring financing options are changing for a company undergoing restructuring.
As the authors of the article point out Factoring and restructuring proceedings – a study of the problem , Robert Fluder and Malgorzata Anisimowicz, it is problematic that factoring still belongs to unnamed contracts. Defining it so as to cover by the term all available types of factoring (and there are many) is actually an impossible task.
A key issue in the context of restructuring is the inclusion of factoring receivables in the inventory of receivables. However, a lot depends on the type of factoring chosen. While court supervisors may portray restructuring as a process that does not affect factoring, this is only part of the truth.
When a company uses full factoring financing (a variant in which the factor assumes the risk of non-receipt of payment), the factoring agreement tends to be indifferent in the context of the inventory of receivables drawn up for the purpose of restructuring proceedings.
The situation is different for incomplete or reverse factoring. In such situations, collateral on the factor’s assets and sureties should be considered. Both must be included in the list of claims – the guarantors in such an arrangement will be designated as contingent creditors.
There are also doubts about the amount of the claim to be included in the inventory. The lack of precise factoring regulations makes it impossible to say with certainty whether the full factoring limit granted to the factor or only the utilized part of it should be included in the inventory of receivables. However, the authors of the aforementioned article point out that Article 256(2) of the Restructuring Law provides some guidance. According to it, only the portion of the limit that – as of the day before the initiation of restructuring proceedings – was used by the factoring company should be included in the inventory.
This is not the end of the contentious issues, but the most significant conclusion should be that, although complicated, financing with factoring during restructuring proceedings is possible.
Restructuring proceedings in your company versus factoring at PragmaGO
We want to make it clear that we do not disqualify companies in the restructuring process. We are fully committed to our mission of making financing available to entrepreneurs even in borderline situations, but in the context of restructuring, certain limitations must be kept in mind.
Remember that when your company is in the process of restructuring:
- it will be necessary to draw up an addendum to the factoring agreement in the presence of and with the written consent of the factor’s assigned court supervisor,
- we need to inform the recipients of the pending proceedings in case the other creditors want to redirect debt payments to the recipients.
Much depends on whether the assignments established up to the opening of the proceedings are effective. If yes – we will do our best to maintain the financing of your company also during the restructuring.
