Corporate Reconstruction

Exploring the different aspects of corporate reconstruction

Corporate reconstruction refers to legal process and mechanism which helps companies going through financial struggles to prevent and handle their bankruptcy. Typically, it facilitates in decreasing the debts the respective company owes to its creditors. As a result, it can carry on with its operations and continue to be a legal entity. Only businesses deemed viable, meaning they have a reasonable chance of recovery, can be granted corporate reconstruction.

Conditions for corporate reconstruction

To initiate a corporate reconstruction, a company that is insolvent or at risk of insolvency must submit an application to the district court. The court then evaluates whether the company’s debts can be restructured without resorting to bankruptcy. 

If the court does not believe that the purpose of the reconstruction can be achieved, the application will be denied. A creditor can also file an application for corporate reconstruction, provided the company consents. If the court grants the application, a reconstructor will be appointed to oversee the process.

The viability test

Before a corporate reconstruction is approved, a viability test is conducted. The purpose of this test is to determine whether there is a realistic chance for the company’s survival and whether the reconstruction process is likely to prevent bankruptcy. 

The test involves a thorough assessment of the company’s financial condition, future profitability prospects, and its ability to implement the proposed measures. There must be concrete evidence suggesting that the reconstruction has a reasonable chance of success. A general guideline is that the business should be able to repay at least 25% of its debts.

The reconstruction process

Once the district court has approved the corporate reconstruction and a reconstructor has been appointed, the reconstructor examines whether the company’s operations can continue, either fully or partially. If continuation is feasible, the reconstructor will also investigate how it can be achieved and whether the business owner can reach a financial settlement with creditors. Such a settlement is referred to as a composition agreement. 

The reconstructor must also prepare a reconstruction plan, outlining the measures needed to resolve the company’s financial difficulties so that operations can continue. The reconstruction plan should include a debt settlement agreement between the company and its creditors, who must be given an opportunity to comment on it. 

Some other measures also need to be taken care of. These include any changes in the company’s hierarchy and management structure as well as the process of transferring its assets. The effect of the reconstruction is quite similar to a resolution by the general meeting under 4 kap 31 § aktiebolagslag (2005:551) regarding changes to share capital, dilution of shares, or similar matters. Once the reconstruction plan is finalized, the district court will decide whether to approve it. If approved, the plan becomes binding on all parties.

Conclusion of the corporate reconstruction

A corporate reconstruction typically lasts for three months from the date the district court approves the reconstruction application. The court usually takes three months to make the decision of extending the company’s reconstruction process, but it happens in three-month installments. The most time a company can get for its reconstruction is a full year.

As soon as the company’s goals are accomplished, it must conclude its reconstruction. In case, it is observed that the desirable outcome may never be fully achieved, it must end the reconstruction in that scenario too. The process will also end if an extension is not requested and approved, if the debtor requests termination before a plan negotiation has begun, if the reconstructor requests it, if serious deficiencies in the debtor’s accounting are discovered, or if the debtor is declared bankrupt.

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