Article “Reorganisation – plan A, compromise in bankruptcy proceedings – plan B” by Urmas Tross and Aldo Vassar
Reorganization and compromise in bankruptcy proceedings can take place both out of court and in court proceedings. Once the parties have reached a common understanding on the issues, an out-of-court settlement can always be reached but the agreement usually requires a small number of contractual parties. In court proceedings, a compromise is offered under the conditions provided for in the Estonian Bankruptcy Act, and reorganisation takes place on the basis of the Reorganisation Act. The precondition for both procedures is the company’s inability to fulfil its obligations to the full extent through common economic activities.
Reorganisation and compromise in bankruptcy proceedings have common as well as different features. Common is the necessity of the service or product offered by the company to many consumers or its importance in the market segment. Payment difficulties have arisen which can be resolved by agreement between the company and creditors, there is reliable financial support, the management board is ready and able to implement changes, resign if necessary and the owners are ready to reduce or even release their share, if necessary. It is important to objectively assess whether the activities of the owners, investors and the management upon using the resources and their previous business activities are any longer sustainable or what would be a reliable action plan for achieving a better result. In both proceedings, the business plan must be drawn up again and the support of both secured and unsecured creditors must be won. The military-recognized term ‘deterrence’, as mentioned in the press regarding the reorganisation of a shopping centre in Tallinn, is not helpful upon evaluating investors who did not consider the reorganisation to be sufficiently reliable or who were in fact excluded from the process. At the same time, the reorganisation of one dairy industry in Estonia is positive since the involvement of a certain investor and the implementation of an objective business plan proved to be decisive.
There is a procedural difference in the handling of claims. If enforcement proceedings are terminated in bankruptcy proceedings as a result of the bankruptcy decision, the court proceedings and the calculation of interest and delay fees are also terminated. In reorganisation proceedings, enforcement proceedings against an entrepreneur are suspended (except for a claim based on employment or alimony) as well as the calculation of an interest or a contractual penalty increasing over time and any court proceedings are suspended until the reorganisation plan is approved or terminated. This is an important difference and also an additional burden on the company, as in practice the reorganisation plan concerns all creditors and must also be negotiated separately with those who have initiated enforcement or court proceedings. Otherwise, there will be a difference with the reorganisation plan subject to be approved, as the litigation or the growth of claims may continue.
Bankruptcy proceedings certainly make it possible to better map the current situation. Time is also an important factor in approving a plan. If in bankruptcy proceedings it is possible to approve the compromise after defending the claims and before submitting the distribution proposal, the preparation time may be up to half a year. The reorganisation procedure has two months from the commencement of the reorganisation. At the same time, finding an investor can be time consuming in the absence of prior agreements. In bankruptcy proceedings, readjustment of a company requires more effort and responsibility from the debtor than reorganisation. However, if reorganisation fails then credibility is lost faster than in bankruptcy proceedings.
In order for the procedures to be successful, extensive preparation between the manager and the owners is essential. In addition to an objective assessment of the current situation, it is necessary to define the expected end result. Achieving the desired outcome can be an unpleasant process and also require a change of management or a reduction of the shareholding in favour of a new investor. During the preparation, the possibility of resolving the issue out of court or waiving the remediation altogether can be clarified. The situation is resolved by liquidation or insolvency, and a restart on the new grounds. In conclusion, a new comprehensive business plan is needed, and secondly, the availability of additional financial resources. The reorganisation of one well-known window manufacturer in Estonia failed due to the loss of financial support. As finding and involving an investor is more time-consuming than the assumptions arising from the deadlines contained in the Reorganisation Act, it is necessary to initiate the according activities at an early stage and already have additional capital by the time of submitting an application. Third, the company’s operations must be maintained in the new circumstances during the renewal process; an objective review of the business with a critical assessment of the management system and costs can already take place until the actual plan has not been adopted. Fourth, the largest creditors (mainly credit institutions, tax authorities, secured large investors) must be contacted before the procedure is initiated in order to have a common understanding of the situation between all the parties. Thus, upon submitting an application to the court for reorganisation, the substantive reorganisation has already started. Obviously, good preparation at the training (before starting the procedure) guarantees a positive result in the battle field (approving and implementing the plan).
In conclusion, it is always necessary to think of two alternatives, i.e. reorganisation is plan A and compromise in bankruptcy proceedings is plan B. If reorganisation is not successful even though the product or service, employees, technology and other necessities are strong, reorganisation can transfer into bankruptcy proceeding and offer again the solution of compromise. For example, in the case of technology companies, it is decisive whether the application, platform, solution or model created is relevant and modern or it has lost its importance and users lack the interest. In a rapidly changing economic environment, there should be a readiness to choose plan A or plan B since both plans help to overcome difficulties in a positive manner.
Bankruptcy registrar and adviser of Law Firm LINDEBERG
Attorney-at-law of Law Firm LINDEBERG