When is reconstruction appropriate?
Reconstruction is appropriate when the company has a viable operation but an unbalanced balance sheet or an acute liquidity crisis. It provides protection from enforcement during the process and enables a composition with creditors.
The main steps of the process
The application is filed with the district court, which appoints a reconstructor. A reconstruction plan is prepared describing the future viability of the business, the causes of the crisis and the remedial actions. The plan usually contains a composition — a write-down of unsecured claims of typically 25–75 per cent.
The plan must be approved by creditors with a qualified majority in each class and confirmed by the district court.
What the owner needs to prepare
A 13-week cash-flow forecast, a list of all creditors with amounts and security, a description of how the business will be restructured, and a clear plan for how working-capital financing will be secured during the process. Without this the process fails quickly.
The role of the advisor
An experienced advisor contributes structure, creditor communication and relief for management, who must be able to focus on operations. A reconstruction handled amateurishly frequently converts into bankruptcy.
- LFR protects viable companies from enforcement during the process.
- Compositions of 25–75 per cent on unsecured claims are common.
- A 13-week cash-flow forecast is the starting point.
- External advisory increases the probability the process is completed.
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