Why and How Businesses Restructure After Bankruptcy? If a company is about to go out of business, it may choose bankruptcy, which gives a debtor the time and legal protection they need to reorganize their company and repay creditors over time. In a nutshell, it gives you a second opportunity. The success of bankruptcy, on the other hand, is determined by how a company manages its crucial restructuring phase.
To effectively restructure a corporation, a debtor must make significant, fundamental changes to the firm and have the means to do so.
Large companies have historically carried out the most effective restructures, whereas small enterprises have gone from bankruptcy to liquidation. However, the Small Business Reorganization Act (SBRA), which was recently passed, seeks to decrease the expenses of restructuring for people and small businesses.
Learn how business restructuring works and how it may help you get your company back on track.
Why and How Businesses Restructure After Bankruptcy?
Every company has an archetypal structure that was created to define how the organization works in order to achieve its objectives. Accountants in the financial department and marketers in the marketing department, for example, are two examples of how a business may be structured based on specialized functions. A corporation may also be organized into business lines or divisions.
When a business undergoes restructuring, it reorganizes its system in a new manner in order to improve the efficiency of the operation, frequently altering its original structure. A restructuring will almost always involve reconfigurations, or more surface-level adjustments like adding, dividing, moving or dissolving business divisions that have little effect on the underlying structure.
The Process of Restructuring
A debtor must prepare a written disclosure statement and a restructuring plan after filing for bankruptcy. The goal of the reorganization plan is to persuade creditors and the court that the business will become financially solvent after the plan is completed.
Approval of the Plan
Small companies may save a lot of money by filing for bankruptcy under the SBRA. Small companies, for example, no longer have to pay for a creditors’ committee to monitor and vote on restructuring, which was previously prohibitively expensive for them.
Management of Debt
A company’s restructuring strategy will almost certainly involve debt management in addition to functional organizational adjustments. There are many debt management schemes and incentives available:
Debtors may use debtor-in-possession (DIP) financing under specific circumstances, which means they can finance some debts using money they otherwise wouldn’t have been able to. This debt repayment takes precedence over any other debt or equity.
Some or all of the company’s assets may be prepared for sale as part of a reorganization. Buyers won’t have to worry about normal legal risks (such as possible fraud), making these assets very appealing.
If debtors are unable to fulfill the criteria, a restructuring allows them to legally invalidate certain contracts. Unless the contractor renegotiates, he or she will be responsible for the loss.
A reorganization also enables special exit funding, which aids the company’s recovery from bankruptcy. Exit funding may make a business more appealing to investors since it indicates minimal liability and a desire to get out of debt.
Liquidation vs. Business Restructuring
The court will dismiss a case if a company fails to follow its Chapter 11 reorganization plan, such as failing to acquire funding or failing to submit monthly reports. If the debtor fails to effectively reorganize and get approval for a debt payment plan, the trustee may file a Chapter 7 bankruptcy, liquidating the debtor’s assets.
Important Points to Remember
- A company’s corporate structure and debt may be restructured to prevent liquidation.
- During the reorganization, companies are given special treatment, such as the option to terminate unproductive contracts and postpone foreclosures.
- A restructuring plan is often the result of collaboration between debtors, creditors, a U.S. trustee, and the court.
- Small companies historically couldn’t afford bankruptcy, but the SBRA has made it cheaper.