In practice, compliance encompasses a range of activities undertaken by companies to ensure they operate in compliance with applicable laws and regulations. This encompasses a broad range of corporate governance measures, including those related to their financial health.
Currently, due to the armed conflict in Ukraine and rising inflation, the condition of businesses is deteriorating. Prices for energy, utilities, products, and services are often rising month after month, which not only contributes to rising business costs but also prevents long-term planning, often leading to financial problems for businesses and the threat of insolvency.
Over the coming weeks, we will try to familiarize you with the institution of proceedings for approval of an arrangement as a way to avoid or solve financial problems for companies.
What is the threat of corporate insolvency?
A threat of insolvency is a situation in which a company's economic situation indicates that it may soon become insolvent. The economic situation is simply the financial condition of the company and its liabilities. The financial condition consists of the current profit and loss statement for the given fiscal year, which in turn may be based on revenue and income. It may also be based on incurred operating costs.
What is the procedure for approval of the arrangement?
Arrangement approval proceedings are one of four restructuring procedures provided for in the Restructuring Law. Using this procedure allows a business struggling with financial problems to restructure its debt by entering into an arrangement with creditors. This is the least formal restructuring procedure, allowing the debtor to reach an agreement with creditors without the need for court involvement. However, an important requirement is the involvement of a restructuring advisor, who will act as the arrangement's supervisor.
The restructuring advisor is key. Their role is to prepare a restructuring plan outlining how to implement remedial actions. They also prepare a detailed list of creditors, i.e., debtors. The restructuring advisor's most important task is to prepare a debt repayment proposal for creditors that they will agree to. Debtors can expect deferred repayment, installment plans, debt reduction, or changes to the security for the receivable.
When can proceedings for approval of the arrangement be carried out?
The proceedings for approval of the arrangement may be conducted if the sum of disputed claims (the existence of which is questioned by the debtor) entitling to vote on the arrangement does not exceed 15% of the sum of claims entitling to vote on the arrangement.
It is not possible to conduct arrangement approval proceedings if this threshold is higher. Arrangement approval proceedings also cannot be conducted for entities with developer or bond issuer status, except in situations where the arrangement is partial in nature, i.e., it does not cover the buyers' receivables under development projects and receivables secured by the real estate on which such projects are carried out, or in the case of receivables arising from bond issues.
Declaring bankruptcy isn't the only way out of a company's difficult financial situation. It's also worth considering restructuring proceedings to prevent bankruptcy, including proceedings to approve an arrangement.
In the next posts this month, we will present this topic in detail, guiding you through the entire procedure.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of April 5, 2023
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