Preventive restructuring

What it means

Preventive restructuring is a procedure for a company merely facing the threat of insolvency. The aim is to settle with creditors before it arrives and keep the business running.

Unlike restructuring in insolvency it need not involve all creditors: the debtor selects the group it negotiates the plan with and pays the rest normally.

A threat of insolvency is not the same as a company crisis. Under the Commercial Code a crisis covers both insolvency and its threat, and it triggers restrictions such as those on repaying shareholder loans. Preventive restructuring, by contrast, is a tool that gives a company facing insolvency an orderly procedure with creditors instead of waiting for things to get worse.

How it works in practice

It starts with a public or private proposal carrying a plan and current financial statements. The court can grant temporary protection, suspending enforcement and bankruptcy petitions.

It demands orderly books and a credible cash flow forecast. A creditor decides on whether the numbers make sense, not on promises.

In preparation we first go through the liabilities by creditor and due date in the sub-ledger with the client. It shows which creditors make sense to include in the plan and which can simply be paid as usual, such as suppliers the business cannot run without, or employees.

What to watch out for

The tool works only when used in time. A company arriving deep in insolvency is left with bankruptcy, and the director faces the late-filing question.

Temporary protection is not a pause on everything. New liabilities and taxes still have to be paid properly and on time. If a company under protection piles up new debts, creditors will use it against it, the court can lift the protection, and the road leads to the bankruptcy that restructuring was meant to avoid.