Bankruptcy and restructuring: a basic overview

Bankruptcy and restructuring are two tools for dealing with the situation of a company in difficulty that is unable to pay its debts. Although both terms are associated with insolvency, their aims are fundamentally different – one leads to the end of the company, the other, on the contrary, to its rescue. In this article, we explain the difference between them in a clear and comprehensible way.

What company insolvency means

We speak of insolvency when a company is unable to pay its debts or is over-indebted – in other words, it cannot meet its obligations to its creditors. In such a situation, it is no longer possible simply to carry on doing business without a care; a solution has to be actively sought. This is exactly where bankruptcy and restructuring come into play.

Bankruptcy – winding up and satisfying the creditors

Bankruptcy leads to the realisation of the company’s assets and the proportionate satisfaction of its creditors. The company usually ceases its activities for good, and its assets are managed from the outset by an appointed trustee. The aim is to distribute the available funds as fairly as possible among all those to whom the company owes something.

• Identifying and making an inventory of the company’s assets.
• Creditors lodging their claims.
• The trustee realising the assets.
• Proportionate satisfaction of the creditors.

Restructuring – a chance of rescue

Restructuring, by contrast, gives a company a real opportunity to overcome temporary difficulties and continue operating. It is carried out on the basis of an approved plan that sets out precisely how, and to what extent, the individual debts will be satisfied. The aim is not to wind the company up but to preserve a functioning business, jobs and value for the creditors, who in this way often receive more than they would in bankruptcy. That is precisely why restructuring is regarded as a gentler tool, one that makes sense above all for companies with a viable core business.

How the process works

Both processes are court-supervised and formalised, and they proceed in these general stages:

1. Filing a petition and opening the proceedings.
2. Appointing a trustee and establishing the company’s situation.
3. Lodging and reviewing claims.
4. Carrying out the bankruptcy or the approved restructuring plan.

Liability and obligations of statutory representatives

When insolvency is imminent, managing directors have special obligations, above all to respond to the worsening situation in good time and responsibly. Neglecting them, for example by sinking further into debt instead of solving the problem, can even lead to the personal liability of the statutory representative. That is why it is extremely important to monitor the company’s financial situation continuously, not to turn a blind eye to problems and to act in time, while there is still room to choose a suitable solution.

Warning signs you should not overlook

The key to coping with difficulties is recognising problems early. A company does not usually fall into insolvency overnight – it is preceded by warning signs that can be picked up if the finances are monitored continuously. This is exactly what makes the difference between ending up in bankruptcy and managing to turn the situation around through restructuring or other measures.

• Repeated late payments to suppliers.
• Growing overdue payables.
• A lack of funds for day-to-day operations.
• Losing track of the company’s financial situation.

Why advice is important

The subject of bankruptcy and restructuring is complex, and timing is crucial. Bilvao’s accountants will help you assess the company’s current financial position, point out any warning signs and steer you towards the right solution. Always check the current deadlines and conditions against the applicable legislation.

Related articles: Transferring an ownership interest in an s.r.o., Liquidation of an s.r.o.: how to close a company properly, What happens to a company after the death of its owner or managing director.

Frequently asked questions

What is the main difference between bankruptcy and restructuring?

Bankruptcy leads to the realisation of the company’s assets and the satisfaction of its creditors, and the company usually ceases its activities. Restructuring gives the company a chance to overcome its difficulties and continue on the basis of an approved plan. The first process brings the company to an end; the second tries to save it.

When does a managing director have a duty to act if insolvency is imminent?

When insolvency is imminent, managing directors have special obligations and must respond to the situation in good time. Failing to do so can even lead to personal liability. That is why it is important to monitor the company’s financial situation continuously and to check the specific obligations against the applicable legislation.