Vestius offers rescue plan to companies in dire straits

The Corona crisis is giving rise to financial problems for many companies. Restructuring is sometimes required to safeguard the company’s continuity. Henk Brat has set up the Corporate Recovery Practice at Vestius Advocaten in order to optimally assist the law firm’s clients in that regard. 

What developments at companies do you identify on the market?

The Corona crisis has given rise to serious problems for companies in a number of sectors, such as the recreation and hospitality industries. They are having difficulty keeping their heads above water. They are just about managing to do so thanks to their financial buffers and the government’s cash infusion. But their overheads are high and they will in any event incur debts that will be difficult to pay off. Restructuring will therefore be necessary, either now or in the future. It is in any event advisable not to wait too long before investigating whether a company must take action.

What are the possible consequences of failing to do so?

Failure to look into these issues in a timely manner gives rise to the risk of managing directors being held personally liable by debtors. In that case it is possible that both the company and the managing director in person will be faced with bankruptcy. Whether that will happen largely depends on what action is taken to ward off bankruptcy and whether certain rules are met. If you are unable to pay your taxes, for instance, it is important to sound the alarm on time. It is also important that the accounting records are in order. All kinds of agreements can often be made regarding the payment of debts, and the impact of the Corona crisis will also certainly be taken into account now. But you must be able to demonstrate that you have made every effort. There are a number of specific do’s and don’ts for business owners that should therefore be studied.

Why does it often go wrong?

Sometimes a company is still generating a profit on paper. But if customers default on their payments, liquidity problems arise that ultimately make it impossible for you to perform your obligations. Although business is going well, you are nevertheless faced with problems. Drawing up a liquidity forecast will allow you to take timely action. If you don’t have enough money in the bank to pay your overheads, or if you expect that will happen in the near future, you really must take action. Banks are lenient at the moment when it comes to the repayment of loans, but if they call in loans in the future there is a risk of default management measures being taken and of the bank taking financial control.

What does a restructuring entail?

There are three possibilities. The first is a voluntary restructuring. In that case we investigate together with the business owner whether divisions of the company are healthy enough to save. They could be continued within a new structure in order to make a viable restart. The unhealthy divisions can then be declared insolvent. Large companies often have a holding company with a number of operating companies that perform the various activities. Those subsidiaries can be individually assessed and, if they are healthy, sold to another (new) holding company in which you yourself also have a share.

A second possibility is a restart. The company is declared bankrupt, after which you try to reach a deal with the trustee in order to take over part of the company. The advantage of this procedure is that you take over only what you want and leave behind the debts in particular. Another advantage is that you are not required to take over the employees. A possible disadvantage is that the trustee may also invite other parties to make an offer and that you therefore cannot be certain that you can proceed with the business.

And the third possibility is related to a new Act?

That’s right. That new act is the Wet homologatie onderhands akkoord (Court Approval of a Private Composition (Prevention of Insolvency) Act – the “Act”) that enters into force on 1 January 2021. It allows a business owner to investigate whether agreements can be made with creditors and certain claims can be cancelled in part, for instance. That can be done by offering a private composition. This option therefore essentially constitutes debt restructuring. If a business owner fails to reach agreement with its creditors, court proceedings can be avoided, but often not in the case of a large group of creditors. The Act has been introduced to make this type of agreement binding: the court is requested to declare the private composition generally binding, in which case all the creditors are bound by it.

That was not a specialist area at Vestius until recently. How do you know what a company’s best options are?

When I saw what problems many companies, including existing clients, are facing, I realised that there are many possibilities, also when a company is in dire straits. But all those arrangements involve serious legal complications. That’s why it’s essential that companies obtain sound and timely advice and assistance. We want to help companies drawn up sound recovery plans. To be able to do that well, I have taken a number of additional courses these past few months in the field of restructuring. We are now able in one day to analyse what a company is faced with and what steps are desirable or necessary.

For more information about our Corporate Recovery practice, please contact Henk Brat (+31-6-55394459).

This article was published in the Newsletter Vestius of December 2020