Restructuring or bankruptcy of the company - this is the question more and more entrepreneurs are asking themselves when a company loses liquidity. In a limited liability company, specific deadlines and risks are at stake: from protection from enforcement in restructuring proceedings to the obligation to file a bankruptcy petition and the personal liability of management board members.
Below, we show how to choose between restructuring and bankruptcy in practice. We also explain what provisions in the articles of association can facilitate quick decisions and safeguard shareholders.
When does a financial problem become a legal problem?
Insolvency law attaches key consequences to the moment of insolvency. A debtor becomes insolvent when he loses the ability to fulfil his due monetary obligations. The law presumes the loss of this capacity when the delay in the payment of obligations exceeds three months.
From the occurrence of this ground, a 30-day period for filing a bankruptcy petition arises in principle.
For legal entities, so-called over-indebtedness is also relevant. This refers to a situation in which the monetary liabilities exceed the value of the assets and this condition persists for more than 24 months.
Why is this important? Because from this point onwards the board should:
- update the list of creditors
- build a realistic cashflow forecast
- avoid actions favouring selected counterparties
- prepare a plan aimed at an arrangement with creditors or a bankruptcy proposal
Passive waiting usually leads to creditors taking the initiative. As a result, the company loses control of the subsequent scenario.
Restructuring proceedings - protection from enforcement and recovery plan
In many industries, a company can have a high turnover and yet lose liquidity. This is because the costs of doing business often increase faster than the margin. This is typically the point at which restructuring proceedings should be considered.
The aim of restructuring is to conclude an arrangement with creditors, i.e. an agreement to repay the debt in a modified form - e.g. in instalments, with a deferral or partial write-off.
The greatest value of restructuring is the time to get the company „back on its feet” and protection from enforcement. In addition, it allows you to structure your payments in a way that increases your chances of continuing as a going concern.
In practice, however, „protection” alone is not enough. This is because credible arrangement proposals and a plan showing where the company will get the money to repay the debt after restructuring are key.
If you want to better understand how „restorative” restructuring works, see: judicial reorganisation of a company.
Arrangement with creditors - what, in practice, convinces you to vote for
Creditors vote with numbers, not emotions: „how much will I get in an arrangement” versus „how much will I get in bankruptcy”. When a company does not have significant tangible assets to sell, bankruptcy often means years of proceedings and a low level of satisfaction.
Therefore, even a partial repayment spread over instalments may be more attractive than a percentage satisfaction of an insignificant part of the debt.
In practice, there are three elements at work here:
- realistic revenue forecast (preferably based on contracts already concluded)
- sorting out costs and showing creditors what income the company will achieve after restructuring
- a signal from the shareholders that they are taking responsibility for the plan - e.g. through subsidies, bridging loans or subordinating their claims
Such an arrangement of interests is sometimes crucial to build a majority among creditors. They need to be reassured that the shareholders are serious about restructuring and that the planned proceeds offer a better guarantee of recovery.
Bankruptcy of a limited liability company. - when it becomes a necessity and how to limit losses
Bankruptcy is a formal mechanism for sorting out insolvency. In the liquidation option, the trustee monetises the assets and distributes the funds to the creditors. If the company has no significant assets, satisfaction of creditors is sometimes low. For the company, bankruptcy usually means the interruption of contracts and the end of operations.
From a management perspective, however, timing is key. Filing for bankruptcy too late will not „fix” the situation, and may increase the scope for charges in disputes with creditors.
For this reason, it is worth working in parallel - preparing a restructuring and having a bankruptcy option ready in case the talks fail (so-called option B). It is also good practice to limit the creation of new liabilities if there is uncertainty about the sources of coverage.
Liability of the management board of a limited liability company. - Art. 299 KSH and Art. 21 of the Insolvency Law
A limited liability company limits the risk of the partners as to covering liabilities from personal assets. However, in a crisis, creditors often turn to the liability of directors and officers.
The most common occurrence is Article 299 CCC. It provides that if enforcement against the company proves ineffective, the members of the management board may be jointly and severally liable for the company's obligations (including interest and costs).
The second regime is Article 21 of the Insolvency Act - liability for damages caused by the untimely filing of a bankruptcy petition.
What realistically reduces the board's risk?
Above all, a quick decision on which formal path to take - restructuring or bankruptcy of the company. The sooner the management makes a decision, thinks through a restructuring plan or files for bankruptcy, the greater the chance of minimising the accusation of worsening the situation of creditors. Timely payment of public-law liabilities is also important here.
It is also advisable to ensure that a well-structured D&O policy is in place and to remember to report events to the insurer in a timely manner. Nowadays, many insurance companies offer such protection solutions for board members and owners.
It can be tempting to resign as chairman or board member, but this does not solve the problem of liability for an earlier period. It is therefore better to focus on „hard” actions and evidence of due diligence.
Memorandum of association as an „action manual” for the crisis
Company crisis exposes shortcomings in the articles of association. Who recapitalises the company and when? How quickly can a resolution be passed? Who represents the company in discussions with creditors? Can the partners grant a loan? What happens if one of the shareholders blocks rescue efforts?
These issues - typical, inter alia, in a restructuring or bankruptcy process - are an extremely important part of a company agreement. While a well-written agreement is not a substitute for restructuring proceedings, it can shorten the response time and structure the entire negotiation process.
A broader catalogue of provisions is discussed here: limited liability company contract. - what to include.
Examples of clauses worth implementing:
- rapid recapitalisation mechanism (surcharge or capital increase)
- shareholder loans and subordination of repayments to external creditors
- resolution and quorum rules in „rescue” cases - remote voting on restructuring, sale of key assets, etc.
- representation and control of the contracting of obligations - amount thresholds, requirement of cooperation or resolution for acts exceeding ordinary management
- exit and conflict resolution mechanisms
- disclosure obligations and liquidity reporting
Taxes, Social Security and current accounts in restructuring and bankruptcy
In the restructuring and bankruptcy scenario, public-law liabilities are of particular importance. Arrears to ZUS or the tax office create separate management liability risks.
This is why it is worth keeping accounts current and monitoring payment dates. This is also an element of credibility when talking to creditors.
We also write about changes that may affect cashflow here: New VAT rules for small businesses - SME VAT Scheme.
Restructuring or bankruptcy of a company - what to do today
In a situation of mounting arrears, it is the first weeks that count. It is crucial to organise the data (list of creditors, receivables and realistic forecasts), choose a course of action and communicate with counterparties.
A well-prepared restructuring can stop the domino effect and protect the value of the company. At the same time, it makes it possible to limit the exposure of board members.
Need help with company restructuring or bankruptcy?
If your company is facing loss of liquidity, calls for payment or pressure from creditors - contact us. We will propose a safe path (restructuring or bankruptcy), help you prepare composition proposals and analyse your company's articles of association.
We will examine whether it provides the tools for rapid recapitalisation and decision-making. The sooner we get things in order, the better the chance of protecting shareholders' and management's assets.
Write to us or call us: sekretariat@bktkancelaria.pl, +48 606 608 089
