Corporate Restructuring
Turning a temporary crisis into long-term profitability
Corporate restructuring provides viable companies with the breathing room needed to resolve temporary financial crises. Through a court-approved restructuring plan, long-term profitability is established, jobs are saved, and asset values are secured for the future.
Which companies are suitable for restructuring?
Corporate restructuring is suitable for companies with a fundamentally profitable core business that have been affected by temporary financial difficulties—for example, as a result of a major customer loss or costly restructuring efforts. Through court-sanctioned protection, the company gains breathing room from its creditors to develop a sustainable plan for the future.
Both the income statement and balance sheet must be addressed
The purpose is for the business to continue in a healthier and more profitable form. This usually requires more than just a debt reduction (composition); operational changes must also be implemented, such as optimizing revenue streams, terminating unprofitable contracts, or changes in management and ownership structure.
The restructuring plan and alternatives for smaller companies
All measures are compiled in a restructuring plan that the creditors vote on. If a sufficient majority adopts the plan and the outcome is better than in bankruptcy, it is approved by the District Court (tingsrätten). For smaller companies with limited cash flows, a formal procedure may be difficult to finance—in such cases, an informal restructuring with an informal settlement agreement can be an effective alternative.
The strategy that distinguishes a temporary downturn from an unsustainable business model
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:
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.
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.
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.
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.
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.
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.
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).in exchange for a write-down of claims.
During a corporate restructuring, the board of directors (and, where applicable, the managing director) remains the formal decision-making body within the company. However, more significant decisions require consultation with, and in certain cases the consent of, the restructuring administrator.
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 during the restructuring.
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 on payment of debts, protection against enforcement and termination of contracts.
- Binding debt reduction through public composition.
- Staff reductions and access to state wage guarantee during the notice period.
- Ability to terminate unprofitable contracts early.
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