Grant Thornton Baltic’s partner Artur Suits, head of advisory services and sworn auditor, has helped logistics company Nordnet in difficult times as the reorganization advisor and has advised many other clients in optimizing their businesses or improving and managing liquidity. The reorganization procedure of Baltika, the flagship of the Estonian clothing industry, is currently underway, where Artur Suits is acting as the reorganization advisor.
Suits’ experience shows that the proverb "the sooner, the better" is certainly true when initiating reorganization proceedings. If a company in debt and liquidity issues waits too long and hopes for the conditions to improve, reorganization may no longer help and the company may go bankrupt. The following is an interview with Artur Suits.
Reorganization is being used to help a company that has temporarily become insolvent, for example due to the current pandemic and crisis. It is important to emphasize that a company can be reorganized if the business model is sustainable, and the difficulties are temporary. Reorganization helps to overcome temporary insolvency problems and thus prevents bankruptcy.
Reorganizing and restructuring a business is a very complex task: reorganization could mean changing the existing business model, closing some business units and focusing on what creates value. For instance, it may be the case that there is one business unit in the company that is viable and profitable, but another business unit that is not. The goal is to get liabilities under control and eliminate the risk of bankruptcy, so that the company could focus on the reorganization process.
There are various ways to satisfy the claims of creditors: deferral or reduction of payments, conversion of debt into shareholding, provision of additional guarantees, offering shareholdings in the future. The measures are proposed by the company and must be approved by the creditors. To be more specific, a reorganization plan submitted to court is approved by the creditors if at least half of all creditors, holding at least 2/3 of all votes, approve it.
Reorganization is a voluntary procedure and it can be done if the company requests it. The management board of the company applies to the court to initiate reorganization proceedings and together with the reorganization advisor they draw up a reorganization plan. This must be confirmed by the creditors and / or the court.
This, of course, depends on the company and its condition, but the reorganization plan cannot be longer than five years.
Indeed, the greatest art is the timely commencement of the reorganization. Unfortunately, reorganization is often started too late, which is why liabilities have accumulated and temporary insolvency has arisen. The circuit court has stated in one of its decisions that there must be no interruption of payments by the time the reorganization proceedings are initiated. However, we have seen in practice that the need for reorganization becomes apparent when payments have already been stopped. But then it's too late.
There can be several reasons for the delay. First, people may not be aware of what the reorganization process means and what is the purpose. Secondly, reorganization has unfortunately a negative image in society, to which the media has also contributed - it is believed that reorganization implies an end of a company. Therefore, it is not surprising that as soon as the company's intention to begin reorganization becomes public, the flow of incoming calls from suppliers with the message that the next purchases can only be done by prepayments will rise drastically. Consequently, it is necessary to thoroughly explain to cooperation partners and creditors what reorganization is and what is the goal and purpose of it.
Definitely. You must be transparent with creditors and cooperation partners, and it is worth communicating as early as possible in order to discuss the situation and inform about the start of the reorganization, so that they are not frightened. It is necessary to clarify that the focus is on restructuring the business so that creditors do not lose their money. It should also be clarified that reorganization achieves a better result than bankruptcy proceedings: in case of bankruptcy, the company's assets are usually sold at a bankruptcy auction price, but reorganization creates a precondition for increasing the company's assets and value and selling them at a fair price if necessary.
The aim of a reorganization is to keep the company in business and preserve its value, so everyone should come out as winners: the owners, employees and the creditors.
Identifying the right moment is possible if the company has a good budgeting and forecasting system that works consistently. This means that the financial results, orders, revenue etc. are constantly monitored, and the forecasts are not done looking in the rearview mirror, for instance based on last year's results. This way you can react in a timely manner if problems start to arise.
Secondly, I recommend involving external experts in the supervisory boards of companies in addition to your family members and acquaintances. Though the company is like one’s child, whom you know best, an external expert can sometimes look at the company with an impartial view and notice when problems start to arise.
