Business restructuring

Which companies are suitable for restructuring?

Corporate restructuring provides viable companies with the breathing room needed to resolve temporary crises. Through a court-approved plan, long-term profitability is established, jobs are saved, and asset values are secured for the future.

Corporate restructuring is suited for fundamentally viable companies with a profitable core business that have encountered temporary financial difficulties—for example, due to costly operational reorganizations or extraordinary events such as a major credit loss. In these situations, a restructuring procedure serves as a highly effective instrument. It grants the company a court-sanctioned reprieve against its creditors, providing the opportunity to methodically develop and present a long-term solution to its financial challenges.

The purpose of a corporate restructuring is for the reorganized business to continue operating post-restructuring in a different, more profitable form. While a restructuring often involves a debt reduction, it can also encompass operational changes such as optimizing cost and revenue streams, winding down unprofitable business units, or restructuring corporate management and ownership. It is rarely sufficient to execute a debt write-down without simultaneously taking measures to benefit the company’s long-term profitability; otherwise, the company risks slipping back into financial distress once the restructuring procedure is concluded. Consequently, a corporate restructuring entails working actively with both the balance sheet and the income statement.

All restructuring measures must be recorded in a restructuring plan, which creditors and other stakeholders subsequently negotiate and vote upon. If there is a sufficient majority to adopt the restructuring plan, and the outcome for creditors is more favorable than in a bankruptcy, the plan can be sanctioned by the District Court, making it legally binding on all affected parties.
Corporate restructuring is not suited for companies with more profound financial distress that stems primarily from their underlying business model; such entities should instead be wound down through bankruptcy. Furthermore, smaller businesses generally face greater challenges undergoing formal court-restructuring proceedings due to a lack of sufficient cash flow to finance the process. In these cases, an alternative may be an informal restructuring through out-of-court compositions and similar voluntary debt settlements.

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What can be achieved
with a business restructuring?

Application for restructuring

The application is submitted to the District Court (tingsrätten) and must include, among other things, a proposal for a corporate restructuring administrator (företagsrekonstruktör). This is usually an attorney who meets the strict qualification requirements for the assignment (such as a bankruptcy receiver with extensive experience in ongoing business operations) and who commands the trust of the creditors.
Furthermore, there are fundamental criteria to initiate the proceedings; already at the application stage, the company must clearly demonstrate that there are realistic prospects of the restructuring achieving its purpose: to secure the company’s long-term viability. This viability test (livskraftstest) is intended to function as a filter against abuse of the restructuring process, ensuring that “hopeless cases” are weeded out before proceedings ever begin.
Once the District Court grants the application for corporate restructuring, a number of legal effects enter into force:

När tingsrätten fattat beslut om företagsrekonstruktion inträder ett antal rättsliga följder:

Suspension of payments

As a general rule, debts incurred prior to the restructuring decision may not be paid, which immediately strengthens the company’s liquidity. Such debts may only be settled in exceptional circumstances.

Protection against bankruptcy and enforcement

While the corporate restructuring is ongoing, the company cannot be declared bankrupt or be subject to asset seizure (utmätning) or other enforcement measures regarding the debts and obligations covered by the payment moratorium. With a few exceptions, the same applies to the realization of pledged assets. This protection is a necessary prerequisite for the payment moratorium to have any practical significance.

Protection against termination of the company’s contracts

The company’s contractual counterparties cannot validly terminate existing agreements based on delays in the payment of debts covered by the moratorium. Instead, the counterparty may demand acceptable security for future performance carried out during the restructuring—typically in the form of a deposit or an advance payment.

Option to terminate long-term contracts

During the restructuring process, the company can prematurely terminate long-term contracts. Getting out of unprofitable and redundant agreements is often a vital component of a successful corporate restructuring.

State wage guarantee for employees

The company can apply for the state wage guarantee (statlig lönegaranti) to cover unpaid wages for its employees. Subject to certain statutory financial caps, the wage guarantee covers wages earned up to three months prior to, and one month following, the restructuring decision. It can also be granted for redundancy pay for employees who are exempted from work (arbetsbefriade) during their notice period. The State becomes a creditor in the restructuring for the paid-out wage guarantee amounts, and this debt is subject to any potential debt reduction.

Debt write-down

Within the framework of a corporate restructuring, it is possible to negotiate a debt reduction with creditors, which is then sanctioned by the court and becomes binding on both the company and the affected creditors. Previously, a public composition (offentligt ackord) generally required a minimum payment of 25 percent of the nominal debt amount to unsecured creditors within one year of the decision becoming legally binding. Under current legislation, however, it is possible to negotiate lower composition levels, longer repayment schedules, and to include secured and other prioritized creditors. It is even possible to offer equity in the company in exchange for a write-down of claims.

Financing with super-priority

A successful corporate restructuring often depends on injecting new capital into the business. If the company needs to borrow new funds during the restructuring, the restructuring plan can include conditions for the new borrowing—including the duration for which the lender will have priority over other creditors in the event of a bankruptcy, known as super-priority (superförmånsrätt).

Who decides?

Under en företagsrekonstruktion kvarstår styrelsen (och i förekommande fall verkställande direktör) som formell beslutsfattare i företaget. Viktigare beslut kräver emellertid samråd med, och i vissa förekommande fall även samtycke från, rekonstruktören.

Three Important Things to Keep in Mind

1. Apply for Corporate Restructuring in Time

The most common reason corporate restructurings fail is that the company’s financial distress has become too deep-seated by the time the process is initiated. Experience shows that district courts are strict in their assessment of the viability test. If insolvency is too advanced, it can be difficult to prove that the company possesses a viable core and is suitable for restructuring.

2. Maintain Proper Accounting Records

A successful corporate restructuring requires that the company’s financial position can be presented to creditors in a credible manner. It is rarely possible to convince creditors to accept a debt reduction unless a reliable basis for decision-making is provided. Up-to-date, orderly bookkeeping is now a strict statutory prerequisite for initiating a corporate restructuring.

3. Have a Clear Cash Flow Plan

The company’s liquidity during the restructuring should ideally be generated by its own cash flow. Otherwise, capital injections or (often expensive) new borrowing must finance the process. Keep in mind that customers may hesitate to enter into new business with a company undergoing restructuring, particularly regarding large-scale transactions with long lead times.
While the payment moratorium and the wage guarantee have a positive impact on liquidity, this boost is partially offset by the fact that suppliers and counterparties will frequently demand cash in advance or cash on delivery to continue supplying goods and services. Before applying, the company should have a well-substantiated plan projecting estimated liquidity for at least the duration of the restructuring period, and preferably until any debt settlement has been fully executed.

Before the company applies for corporate restructuring, a well-substantiated plan detailing the projected liquidity should be in place, covering at least the duration of the restructuring period, and preferably extending until any potential debt settlement has been fully finalized.

Summary: Effects of Corporate Restructuring

Temporary Moratorium: A temporary reprieve from debt payments, protection against enforcement, and a ban on contract terminations, enabling structured negotiations with creditors.
Binding Debt Reduction:
Workforce Downsizing: The ability to lay off personnel and utilize the state wage guarantee to cover notice-period salaries.
Contract Optimization: The ability to exit costly or redundant agreements, entirely or partially, and compromise on any potential damages arising from breach of contract.