Bankruptcy and relaunch: opportunity or risk?
Date: November 10, 2022
Modified November 14, 2023
Written by: Reinier Pijls
Reading time: +/- 2 minutes
Date: November 10, 2022
Modified November 14, 2023
Written by: Reinier Pijls
Reading time: +/- 2 minutes
All business owners with a tax debt due to the corona deferral have received a letter in recent weeks: the existing tax debt must be paid off in 60 installments. The first installment was due Oct. 31. The insolvency law service team provides various solutions to liquidity problems in 5 blogs and a webinar.
The Internal Revenue Service gives options for relaxing the repayment of tax debts (by corona), such as: paying quarterly, staggering the repayments from 5 years to 7 years and a temporary pause button, but the tax debt must be repaid in full.
Already a good number of clients have come forward because of tax debts ranging from several tons to several tens of millions of euros that need to be repaid. It is a huge drain on liquidity and liquidity forecasts show that it will not be feasible to meet these repayment obligations. With exponential increases in energy prices, inflation on the rise, interest rates steadily increasing, and the NOW scheme potentially having to be partially repaid, it may be necessary to restructure a company to overcome financial challenges. But what if it is too late and bankruptcy is inevitable?
When bankruptcy is declared, the court appoints a receiver in its judgment. The job of a receiver is to sell the assets of a bankrupt company and distribute the proceeds to that company's joint creditors.
The trustee can do this in two ways:
In this article, I will discuss both methods of sale, focusing in particular on the restart. In doing so, it is explained that, under circumstances, the relaunch may be the best restructuring tool for both the:
In this article, I will further discuss some important points of interest in a relaunch so that the relauncher does not face unexpected and unpleasant surprises. At the end I will discuss the pre-pack. A pre-pack means a restart from bankruptcy, which is prepared prior to the bankruptcy.
In a liquidation sale, the trustee sells the assets - such as stock, inventory and accounts receivable - privately to a buyer or has the goods auctioned off. The business conducted in the bankrupt company is then discontinued and is not continued.
In a relaunch, the trustee sells the company going concern to a third party making the highest offer. This party then buys all the assets of the bankrupt company, pays a purchase price to the trustee, and continues the business previously conducted in the bankrupt company in another company.
As a rule, relaunches yield higher proceeds than liquidation sales. This is because in this type of sale the restarting party also pays a goodwill fee. In addition, the restart is often willing to pay more for the remaining assets.
Thus, for creditors, a relaunch is the best solution because it generates the highest proceeds. This is then distributed back to the creditors. Yet this does not always feel that way for creditors. This is particularly the case if the directors/shareholders of the bankrupt company are involved in the restart. These directors/shareholders then form a new company and that company then buys the assets from the bankruptcy trustee.
Legally, however, there is nothing against this. In fact, the old management will often be willing to pay the most, so a sale to them can be in the interest of the creditors. Also, a relaunch is often the best option for employees because it preserves most jobs. Finally, a relaunch can be a good and legitimate restructuring tool. I explain this in more detail below.
An over-indebted company can restructure in several ways. The first is to see if restructuring can be done by rehabilitating a company's existing indebtedness. This can be done, for example, by a:
If it is not possible to rehabilitate the debts in the company in which the business is conducted AND it ceases to pay, there is little choice but to file for bankruptcy on your own .
The directors/shareholders can then form a new company. This new company purchases the assets from the liquidator and the business conducted in the bankrupt company is continued in this new company.
The great advantage of this is that the debts remain in the bankrupt company and the resuming party can choose which assets and which employees to take over. The relauncher can thus engage in cherry picking. In short, a bankruptcy with a successful relaunch can also be an opportunity.
Major disadvantages are that the shares in the bankrupt company generally become worthless and the relauncher has to pay a purchase price for assets that, in his view, were actually already instinctively his. On the other hand, it allows the relauncher to start with a clean slate, leaving behind debts and key assets and employees. So that can be - if restructuring cannot be done within the company - an attractive last option.
There are, however, a few concerns that are important to keep in mind during a relaunch.
In bankruptcy, it is the trustee who sells. Thus, the administrator loses control. As a rule, the trustee will sell to the party with the highest bid. It is therefore important to make the highest bid.
Trouble with this can be that the bids are not public. There is therefore a chance that the former owners could miss the boat. With the advice of an insolvency law attorney from our firm, you can mitigate this risk.
In a bankruptcy, a trustee will terminate employment contracts with employees of the bankrupt company. He may do this with the authorization of the bankruptcy judge. In principle, the relauncher is free to determine which employees he offers a new contract to. As mentioned, this is one of the major advantages of the relaunch.
It is important to note that if the resuming party offers a contract to an employee of the bankrupt company, the employee's employment history will also be transferred to the resuming party. So this is good to keep in mind in order not to be confronted with negative surprises.
In principle, bankruptcy does not affect ongoing contracts. However, almost all agreements do contain a provision that:
If the agreement is not terminated, contract assumption can take place. However, this requires the consent of the resuming party, contracting party and receiver. Incidentally, a contracting party is not obliged to do so.
In a relaunch, the trustee will always - as in the case of transfer of business outside bankruptcy - demand a goodwill payment. Thus, this amount will have to be paid on top of the other assets.
Under circumstances, taking advantage of a bankruptcy followed by a relaunch may qualify as an impermissible death structure. This may constitute an abuse of rights.
This is not likely to happen, but if it does, you run a high risk of being held liable as a director. To identify and mitigate these risks for you, the attorneys of our team will be happy to advise you.
If it is clear that a company is going bankrupt, then consideration may be given to requesting a court to appoint a silent administrator. The appointment of this silent administrator is not made public.
The silent administrator works together with the management of the company in relative peace and quiet to restart the company under the best conditions, to the best buyer. Once the deal is (more or less) in place, the court is asked to declare bankruptcy, and the silent administrator - now the trustee - sells to the party with whom the restart was negotiated before the bankruptcy date. In this way the damage is minimized and the highest proceeds are realized.
The procedure described above is called a pre-pack. Thus, with a pre-pack, a restart from bankruptcy is prepared prior to that bankruptcy.
In recent years, a pre-pack seemed impossible/unworkable because the European Court of Justice had ruled in the Smallsteps ruling that the re-starter would have to take over (briefly) all the staff of the bankrupt company.
In the fairly recent Heiploeg judgment, the European Court of Justice returns to this (in part). At least under conditions, the Court seems to offer room for a pre-pack without automatically transferring all employees to the re-starter. This means that the pre-pack (subject to conditions) can again be an interesting restructuring tool.
It is important that the pre-pack is laid down in a law, which has not been the case to date. A bill to this effect has been on the shelf for some time: the Continuity of Enterprises Act I. When this bill comes into effect, there will also be room again for the pre-pack as a means of restructuring.
A bankruptcy followed by a relaunch can be a good restructuring tool under circumstances. This will be particularly the case when a company has excessive debt that cannot be restructured. In that situation, bankruptcy followed by a relaunch is best for all concerned. The creditors get paid the most, most employees keep their jobs, and the relauncher can continue the business with a clean slate.
When the Continuity of Enterprises Act I comes into effect, the pre-pack will also be a (real) option again. With a pre-pack, a restart from bankruptcy is prepared in relative peace prior to the bankruptcy. In this way, damage can be minimized and the highest yield can be realized.
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