Corporate restructuring

Lindahl's experts provide legal advice and assist your company throughout the entire process of a company reconstruction.

Contact one of our experts

The process of a company reconstruction

For a company in financial difficulties, restructuring the company and its operations can be an alternative to bankruptcy.

A requirement for being granted a company reconstruction is that the company and its operations are deemed to have viability beyond the financial difficulties that the reconstruction aims to address.

In a company reconstruction, it is examined whether the company's organization and operations can be changed to become profitable in the long term (so-called "substantive reconstruction"). Furthermore, the possibilities of reducing the existing debts in the company through a debt reduction or "composition" (so-called "financial reconstruction") are explored. The purpose of a company reconstruction is, in other words, for the company to overcome its financial difficulties with a healthy and profitable operation and without a burdensome debt load.

Decision on Reconstruction

An application for company reconstruction is jointly prepared by the distressed company and the proposed company reconstructor. The application, which includes a proposal for who should be appointed as the reconstructor, is submitted to the district court in the location where the company is registered.

The application can only be granted if the district court assesses that there is a well-founded reason to believe that the viability of the business can be secured through the reconstruction. This "viability test" has been tightened with the new legislation, which imposes higher requirements than before on the content of the application. Therefore, the application must not only explain the background to the financial difficulties but also present a clear and convincing path forward to overcome these difficulties.

A decision on company reconstruction has the following effects:

Protection against a creditor's application for bankruptcy (so-called "bankruptcy protection"). The company can still apply for bankruptcy itself, thereby interrupting the reconstruction.
Protection against enforcement and other execution measures against the company. (The protection has certain exceptions not discussed in detail here.)
The company is generally not allowed to pay old debts or fulfill other types of obligations (including so-called natural obligations) that arose before the decision on company reconstruction.
The company's contracting parties cannot terminate agreements due to non-payment or delay in other performance, even if the grounds for this existed before the decision on company reconstruction. This provides the company with the right and opportunity to fulfill agreements despite not having paid for previous performances.
The state wage guarantee can be used during a transitional period to cover the costs of employees' wages.

The Role of the company reconstructor

Unlike bankruptcy, where the bankruptcy trustee assumes full responsibility for the business and assets, in a reconstruction, the company's board and CEO continue to lead the business. The company reconstructor oversees compliance with the reconstruction regulations by providing advice and guidance to the company management. However, certain actions during the reconstruction require the reconstructor's consent. The reconstructor also has some ability to intervene against unlawful actions taken by the company management by requesting their reversal. Generally, it is the reconstructor's duty to guide the company in the reconstruction process and the tools and opportunities it provides, such as the ability to terminate burdensome contracts and request partial fulfillment of agreements.

The reconstructor is responsible for preparing certain documents during the process, such as notifying creditors that a company reconstruction has begun and the so-called reconstructor's report, where the reconstructor comments on various aspects of the company's situation. The reconstructor also assists the company in preparing the reconstruction plan, which the company presents to creditors and other stakeholders for consideration. If the company's reconstruction plan is not accepted, the reconstructor also has the option to present an alternative reconstruction plan.

Negotiation of the reconstruction plan

The main goal of a company reconstruction is to get the creditors to approve the reconstruction plan presented by the company. The plan should include the necessary measures to address the company's financial difficulties and ensure the future of its operations.

The reconstruction plan almost invariably includes a proposal to reduce the company's debts (composition), but it can also contain proposals for changes in operations, such as the sale of certain business segments or assets, or changes in the company's operational management. The plan may also involve diluting the shareholders' equity by allowing new owners, who inject fresh capital into the company, to subscribe for shares. The plan might also include creditors receiving payment for their claims in the form of shares in the company (so-called "debt-to-equity swap"). The reconstruction plan, with its many possibilities, is one of the main innovations in the new Company Reconstruction Act that came into force on August 1, 2022.

Those affected by the proposals in the reconstruction plan—creditors whose claims arose before the reconstruction decision and the shareholders—are allowed to vote on whether the plan should be adopted. The affected parties are divided into different groups, usually based on their position in the order of priority, i.e., the payment order that would have applied in a bankruptcy.

For the plan to be adopted, it requires the support of a two-thirds majority of the voting parties and the total amount of claims in each group. If the majority requirement is not met in every group, other groups can still force the adoption of the reconstruction plan under certain complex and strict conditions specified in the law (so-called "cram down" according to the terminology of the EU directive on which the rules are based).

If the plan is adopted by the affected parties (groups), the district court must finally decide on the confirmation of the plan. A reconstruction plan confirmed by the district court is binding for the company, which must then implement the measures outlined in the plan. If the company subsequently violates the content of the reconstruction plan, the district court can decide to annul the plan.

Once the district court has confirmed the reconstruction plan, the reconstruction process ends. However, the reconstruction can end earlier for various reasons, such as if the company itself requests it or if the district court determines that the purpose of the company reconstruction is unlikely to be achieved.

Challenges during a company reconstruction

A company entering a reconstruction needs to ensure sufficient liquidity to continue its operations during the reconstruction. The fact that the company's wage costs are initially covered by the state wage guarantee benefits liquidity, while the fact that the company's contracting parties typically require advance payment for new deliveries of goods and services burdens liquidity. The ongoing costs of the reconstruction process itself also need to be considered, especially in smaller companies. Therefore, it is very important to prepare a liquidity budget before a company reconstruction.

A successful company reconstruction often requires temporary financing during the reconstruction process and new financing when the company exits the reconstruction, for example, to ensure that the company can fulfill its payment obligations under the confirmed reconstruction plan.

Both temporary and new financing can be associated with granting the financier the highest general priority for their claims against the company, thus giving them a favored position relative to other creditors. Balancing the interests of different creditors can be a significant challenge during a reconstruction, especially when developing a reconstruction plan.

Contact one of our experts

Bankruptcy

What does bankruptcy entail? Which are the possible paths forward when your company cannot pay its debts? Lindahl's lawyers have handled some of the largest bankruptcies in Swedish history.

Learn more

Practice areas

Lindahl is a full-service firm with a comprehensive offering in all areas of business law.

With vast experience, high competence, and strong commitment, our aim is to create business value and make a difference for our clients, regardless of the industry or legal area involved. Explore all of Lindahl's practice areas.

AI Anti-Corruption Banking & Finance Capital Markets | Public M&A Commercial Dispute Resolution Compliance & Risk Construction

Corporate Law Corporate Commercial Employment Energy EU & Competition Law Environmental Law Financial Services Industry

Infrastructure Intellectual Property Internal Investigations Insolvency Insurance IT/Tech Life Sciences M&A

Public Procurement GDPR & Data privacy Private Equity Real Estate Sustainable Business Strategic Contracts Tax Law Transportation