What happens in a restructuring? Guide and examples

Here you will learn everything you need to know about reconstruction, such as how it works and what it is. 

What is a reconstruction? 

A reorganization is a legal process aimed at helping companies with financial problems avoid bankruptcy and regain profitability. During the restructuring process, the company is protected from bankruptcy and certain creditor claims, allowing time to implement the necessary measures. The process is led by a restructuring administrator appointed by the district court, who is responsible for drawing up a plan to improve the company's finances. This plan may include restructuring or reducing debts in consultation with creditors, who often need to approve the plan for the reorganization to succeed.

What happens during a reconstruction?

A reconstruction normally follows the steps we describe below. 

Company files for reorganization

The process starts with the company applying to the district court for restructuring. The court assesses whether the restructuring has a chance of saving the company from bankruptcy and decides whether to grant or reject it.

A reorganizer is appointed

The district court appoints a restructuring manager, often an experienced lawyer or economist, who is given access to the company's financial information to manage the restructuring process. 

Bankruptcy protection and debt freezing

During the restructuring, the company is protected from bankruptcy filings by creditors, and debts are temporarily frozen to give the company time to stabilize its finances.

Restructuring of debt

The administrator negotiates with creditors to reduce the debt burden, often by extending the repayment period or reducing the amount of debt. A public arrangement may be proposed, whereby part of the debt is forgiven if creditors agree to the plan.

A reconstruction plan is drawn up

A recovery plan is now being prepared by the administrator and representatives from the company. This plan describes how the company will become profitable again. Some examples of common proposals included in a reorganization plan are 

• A certain part of the workforce is fired. 
• A sale of the company's assets is carried out, such as the sale of patents or shops. 
• Operational efficiencies are being implemented, such as producing more products using fewer resources. 
• Contracts are renegotiated with suppliers and intermediaries, for example. 

The reorganization plan drawn up must be approved by the creditors. A common way to get your restructuring plan approved is to hold a creditors' meeting where the creditors first find out all the details, and then say whether they approve the plan or not. 

Reporting during the reconstruction period

The company must keep the district court and the administrator informed about the progress of the restructuring. If the reorganization does not go according to plan, the district court can terminate the process.

The reconstruction period continues

During the reorganization period, the company must constantly report on how the company is doing to both the district court and the administrator. If the restructuring goes according to plan, it may continue, but if the restructuring is mismanaged or fails, the district court may decide to terminate the process. 

Reconstruction ends

If the reorganization plan has been successfully implemented, the company can exit the reorganization and continue operating with improved finances. If the economy has not improved sufficiently, the company may be forced to file for bankruptcy. 

A simplified example of a reconstruction

Below is a fictional reconstruction of the company Pelles Pellets. 

Background information

Pelles Pellets has been operating for 10 years, but in the last two years the business has been underperforming. Expensive machinery has been purchased and employees have been added who in turn underperform. Instead of filing for bankruptcy, the owner Pelle decides to apply for a reconstruction through the district court. 

The district court grants a reconstruction and the process that follows is as below: 

• The administrator freezes and renegotiates all debts to the creditors. The company's suppliers write down the debts by 50 %, and in return the creditors receive a promise to continue supplying pellets to the company for at least 5 years to come. 
• A restructuring plan is drawn up by the administrator and the company, which decides to close two unprofitable stores and lay off 25 % of staff. 
• Reconstruction continues for two years. Pelles Pellets is once again making a profit and the future looks much brighter. 
• The reconstruction is completed and the company is allowed to continue operating in the same way as before, but with a much cleaner economy than before. 

Advantages and disadvantages of a reconstruction

Below we explain the benefits of reconstruction. 

• It gives the company time to address the issues facing the business in a calm and expert manner. 
• The company is likely to receive debt write-downs and/or more favorable installment plans than before. 
• A successful restructuring means that the company avoids bankruptcy and can continue to operate, which benefits everyone. Examples of positive effects of a successful restructuring are that the state and municipality receive more tax revenue, employees can keep their jobs and the company can continue to create value for society. 

Below we explain the disadvantages of reconstruction. 

• There is a risk that the company will fail in its reconstruction, which is likely to lead to bankruptcy. 
• A restructuring can have a negative impact on a company's reputation, making it difficult for the company to take out new loans and find new suppliers. 
• A reorganization normally takes a long time and requires work such as reporting and negotiations. The extra work required can therefore place an additional burden on the company.

It is worth bearing in mind that a restructuring is in principle always a positive measure provided that the company has a good, or at least relatively good, chance of success. The advantages should therefore be considered much stronger than the disadvantages. 

What happens to shares in a restructuring?

In a restructuring, the following things can happen to the company's shares.

• The share value will probably decrease as a reorganization is considered, and more or less is an emergency measure.  
• The value of the shares is diluted if the company decides to pay off debt with shares via a issue. Thus, more shares lead to a lower ownership ratio per share, hence the dilution. 
• The company can be delisted from the stock exchange if it no longer meets the requirements set by the exchange for its listed companies. 
• The share price is likely to move up and down quickly, as a reorganization is a process that makes investors uncertain about the company's survival. 
• If the company goes bankrupt despite a reorganization, the value of the shares will be zero or close to zero. In bankruptcy, creditors are the first to benefit from the bankruptcy estate and it is very rare that there is any money left for shareholders after all the company's debts have been paid. 

Frequently asked questions

Where to request reconstruction?

An application for company reorganization must be submitted to the district court where the company has its registered office. The district court then considers issues such as whether the restructuring is necessary and whether a restructuring has the potential to save the company. The reorganization application is then granted or rejected. 

What counts as a good reconstruction?

A good restructuring is a process that succeeds in returning the company to profitability. When the restructuring is completed, the company should ideally have such good prospects that a further restructuring will probably never be necessary. 

What is a reconstruction?

A restructuring allows a company in financial difficulties to implement measures to avoid bankruptcy and achieve long-term viability. The aim of the restructuring is to restore the company's financial stability through debt restructuring, streamlining and other improvement measures. During the reorganization, the company is protected from bankruptcy petitions from creditors, giving time to implement necessary changes. 

What is the difference between restructuring and bankruptcy? 

A restructuring is designed to rescue a company that is going badly, while bankruptcy means that the company is closed down and its debts are paid according to its ability. Reconstruction is always preferable to bankruptcy, as avoiding bankruptcy is the main objective of reconstruction.