We have talked to Lars Eric Gustafsson, Lawyer and Partner within Reconstruction & Insolvency at The Law Firm Schjødt, about what happens when a company enters into a reconstruction.
After studying economics and law, he started working with reconstructions at Ackordscentralen (helping companies with payment or profitability problems to develop, improve or reconstruct their operations). He was then co-founder of the law firm Hamilton, which is now part of The Law Firm Schjødt. As a lawyer, he has worked with countless reconstructions and chords. Today he helps the global company Nynäs with their reconstruction.
The crisis facing the world as a result of Covid-19 means that many industries and companies are being hit very hard. As an experienced reconstructor, what advice would you give to companies approaching an unsustainable situation?
“A reconstruction is carried out to avoid bankruptcy when a company is unable to fulfil its financial obligations, i.e., pay its suppliers, salaries, taxes, etc. A reconstruction requires that you have the conditions to be able to continue the business. In the current situation with Covid-19, it is known, for example, that the market will pick up again later on.
In the first instance, the aid measures that now exist, such as deferment of paying taxes or claiming back tax already paid. If you have large VAT payments, it can mean that you get back a lot of liquidity. It takes the form of a loan but is a good partial solution that has helped many companies. State lay-off aid, where the state takes over up to 80 percent of the wages and reduced employer’s contributions for up to 30 people in the same company, is also something that allows costs to be reduced significantly. The company should also negotiate with its landlord about reduced rent. Here, too, the state is supporting with 25 percent of the rent.”
Can you briefly describe what happens when a company has applied for reconstruction?
“The Company’s Board of Directors applies for reconstruction to the District Court. It is a relatively complex process which must also take place quickly. Companies in this situation need to contact a law firm specialising in reconstruction to get help with this and set up a preliminary plan with a budget. If the company cannot pay its debts and is denied reconstruction, the business will be declared bankrupt.
It is important to keep in mind that if the Company’s Board of Directors continues to operate in insolvency, the board members can become personally liable.”
What is most important to know about reconstructions to purely legal?
“That reconstruction is an alternative to bankruptcy. As a company manager or board member, you have a responsibility to ensure that the accounts are kept according to the rules and that taxes and fees are paid on time. If the company can’t and doesn’t get help in any other way, the board will have to deal with the problem.”
How is it ensured that the core business can be saved in a crisis company and how do the priorities take place?
“The most important thing is to get control of liquidity. A company in reconstruction does not have to pay the old debts, but the company must be able to have liquidity in order to be able to purchase goods and services in order to continue operating. Cash flow is most important. Different ways of resolving this include: to borrow money or negotiate with suppliers and other creditors. However, this, in turn, can lead to suppliers, who do not receive their money, in serious trouble. During the crisis of 2008 – 2009 with great notice and cutbacks, many subcontractors, especially in the engineering industry, went into reconstruction or bankruptcy. We haven’t seen that kind of crisis yet in the context of Covid-19, but an increase in retail reconstructions is clear.”
What skills and experience should management have in order to increase the possibility of a good outcome of the action plan and a successful reconstruction?
“Industry knowledge is the most important – every industry has its specific factors. If management can’t deal and market, many unnecessary and costly mistakes can be made. The CFO has a very important role and it is usually there that it needs to be strengthened with an interim specialist as it can sometimes be difficult to gain momentum. I have often experienced crisis companies bringing in interim specialists to support management.
You have also written a book on reconstruction and chords, tell us about it
“Literature on the subject of reconstruction and bankruptcy is heavy reading written for banking lawyers, lawyers and judges. I wanted to write an easy-to-read book to be able to easily give an overview, accessible to everyone. The book ‘Reconstruction and Chords’ contains an overview of the subject and six real case studies showing different variants of solutions.” Link to the book: https://shop.nj.se/products/foretagsrekonstruktion-och-ackord-2
Facts about reconstruction:
If a company is unable to pay its debts but is in a position to continue its operations, it may apply for resolution instead of filing for bankruptcy. It is the Board of Directors that applies for reconstruction to the District Court. The Board of Directors and auditors have an obligation to report if the company is in danger of failing. Board members may become personally liable in a later bankruptcy if this is not handled correctly.
In order to apply for reconstruction, the company must have the accounting system, a strategy and a budget. In order to obtain liquidity, in order to be able to purchase goods or services, in order to continue operations, the company must negotiate with its creditors on, e.g., compositions (the company and creditors agree that the company pays a certain percentage of the debt) and use the State aid measures that exist through wage guarantee. The company should, if possible, seek to obtain capital injections from owners or other lenders, or alternatively convert loans into shareholdings.
One or more creditors may choose not to negotiate, and then the interaction between the various stakeholders is very important in order not to be forced into bankruptcy. If a majority of creditors wish to agree to a composition, the company may apply for a public composition hearing in court. Then a vote takes place before a judge and the court then determines the will of the majority in a court decision which also applies to the minority who did not wish to agree to a composition. Employees of employers who have been restructured are normally entitled to a state wage guarantee.