A corporate reconstruction may be initiated for a company that, despite facing a financial crisis, is deemed to be viable in the long term. The purpose of a corporate reconstruction is to preserve the existing value within the company and to revitalize it for continued survival and future profitability.
Corporate reconstruction is a legal procedure used as an alternative to bankruptcy for companies experiencing financial difficulties. The process generally involves reducing the debts owed to creditors, allowing the company to continue operating as a legal entity. Only businesses deemed viable, meaning they have a reasonable chance of recovery, can be granted 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.
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.
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. Other measures may also be included, such as the transfer of certain company assets or changes in management. The reconstruction plan has the same effect as 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.
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A corporate reconstruction typically lasts for three months from the date the district court approves the reconstruction application. After three months, the court may decide to extend the reconstruction process in increments of three months. The maximum duration for a corporate reconstruction is one year.
The reconstruction must be concluded when its objectives have been achieved or if it becomes apparent that the objectives will never be met. 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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