What happens in a company reorganisation? Guide and example

Here you will learn everything you need to know about company reorganisations, such as what they are and how a reorganisation works.

What is a company reorganisation?

A company reorganisation (rekonstruktion, the Swedish court-supervised restructuring procedure) is a legal process intended to help companies in financial difficulty avoid bankruptcy and return to profitability. During the reorganisation process the company is protected from bankruptcy and certain creditor claims, which gives it time to carry out the necessary measures. The process is led by an administrator (rekonstruktör) appointed by the district court (tingsrätt), who is responsible for drawing up a plan to improve the company's finances. This plan may involve restructuring or reducing debts in consultation with the creditors, who often need to approve the plan for the reorganisation to succeed.

What happens during a company reorganisation?

A reorganisation normally follows the steps we describe below.

The company applies for reorganisation

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

An administrator is appointed

The district court appoints an administrator, often an experienced lawyer or economist, who is given access to the company's financial information in order to lead the reorganisation process.

Bankruptcy protection and a freeze on debts

During the reorganisation the company is protected from bankruptcy petitions from creditors, and its debts are temporarily frozen to give the company time to stabilise its finances.

Restructuring of debts

The administrator negotiates with the creditors to reduce the debt burden, often by extending the repayment period or lowering the amount owed. A public composition (offentligt ackord) may be proposed, under which part of the debt is written off if the creditors approve the plan.

A reorganisation plan is drawn up

Next, a reorganisation plan is drawn up by the administrator and representatives of the company. This plan describes how the company will become profitable again. Some examples of common proposals in a reorganisation plan are that:

• A certain part of the workforce is laid off.
• Some of the company's assets are sold, such as patents or shops.
• The business is made more efficient, for example by making more products with fewer resources.
• Agreements are renegotiated, for example with suppliers and intermediaries.

The reorganisation plan must be approved by the creditors. A common way to get the plan approved is to hold a creditors' meeting where the creditors are first told all the details and then say whether or not they approve the plan.

Reporting during the reorganisation period

The company must keep the district court and the administrator informed of how the work is progressing. If the reorganisation does not follow the plan, the district court can end the process.

The reorganisation period continues

While the reorganisation period continues, the company must keep both the district court and the administrator informed of how it is doing. If the reorganisation goes according to plan, it may continue, but if it is mismanaged or fails, the district court can decide to end the process.

The reorganisation ends

If the reorganisation plan has been carried out successfully, the company can end the reorganisation and continue operating with improved finances. If its finances have not improved enough, the company may be forced to file for bankruptcy.

A simplified example of a company reorganisation

Below we describe a fictional reorganisation of the company Pelles Pellets.

Background

Pelles Pellets has been in business for 10 years, but over the past two years the business has been doing worse. Expensive machines have been bought and staff have been hired who in turn underperform. Instead of filing for bankruptcy, the owner, Pelle, decides to apply to the district court for a reorganisation.

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

• The administrator freezes and renegotiates all debts to the creditors. The company's suppliers write the debts down by 50%, and in return the creditors are promised that they can continue supplying pellets to the company for at least the next 5 years.
• A reorganisation plan is drawn up by the administrator and the company, in which it is decided to close two unprofitable shops and lay off 25% of the workforce.
• The reorganisation continues for two years. Pelles Pellets is once again making a profit and the future looks considerably brighter.
• The reorganisation ends and the company can continue its business as before, but with considerably tidier finances than previously.

Advantages and disadvantages of a company reorganisation

Below we describe the advantages of a reorganisation.

• The company gets time to try to fix the business's problems calmly and with expert support behind it.
• The company will probably get its debts written down and/or more favourable repayment plans than before.
• A successful reorganisation means the company avoids bankruptcy and can keep running its business, which benefits everyone. Examples of positive effects of a successful reorganisation are that the state and the municipality receive more tax, employees keep their jobs and the company can continue creating value for society.

Below we describe the disadvantages of a reorganisation.

• There is a risk that the company's reorganisation fails, which will probably lead to bankruptcy.
• A reorganisation can damage the company's reputation, which can make it hard for the company to take out new loans and find new suppliers.
• A reorganisation normally takes a long time and requires work such as reporting and negotiations. The extra work required can therefore put further strain on the company.

It is worth bearing in mind that a reorganisation is in principle always a positive measure, provided the company has a good, or at least a reasonably good, chance of succeeding. The advantages should therefore be seen as much stronger than the disadvantages.

What happens to shares in a company reorganisation?

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

• The value of the shares will probably fall, since a reorganisation is seen as, and more or less is, an emergency measure.
• The value of the shares is diluted if the company decides to pay off debts with shares through a share issue. More shares mean a lower ownership stake per share, hence the dilution.
• The company can be delisted from the stock exchange if it no longer meets the requirements the exchange places on its listed companies.
• The share price will probably move quickly both up and down, since a reorganisation is a process that makes investors uncertain about the company's survival.
• If the company goes bankrupt even though a reorganisation has been carried out, the shares will be worth nothing or close to nothing. In a bankruptcy, creditors are paid from the bankruptcy estate first, and it is very unusual for there to be any money left for the shareholders after all the company's debts have been paid.

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