Preventive Business Restructuring

Preventive Business Restructuring

Preventive restructuring is a procedure that allows a business to respond to financial difficulties before the company becomes actually insolvent and is forced to move into bankruptcy proceedings. Its main purpose is to preserve a viable business and agree with creditors on a new model for performing obligations. Preventive restructuring may include:

• deferral or installment payment of debts;
• changes to payment schedules;
• changes to interest rates;
• partial debt forgiveness;
• sale of certain assets;
• raising new financing;
• increase of charter capital;
• business reorganization;
• operational changes;
• changes to the structure of assets and liabilities.

Preventive restructuring is not bankruptcy, but an attempt to avoid it while the business still has economic potential and can perform a plan agreed with creditors.

Who Can Use Preventive Restructuring

The procedure may be initiated by a debtor that is:

• a legal entity;
• an individual entrepreneur.

At the same time, the law establishes certain exceptions, including entities for which bankruptcy proceedings are not permitted and legal entities providing financial services. In practice, the procedure may be relevant where:

• the company is still operating but is already facing a liquidity deficit;
• a large loan or several debts are becoming unmanageable;
• a material deterioration in the financial position is expected;
• creditors demand early or simultaneous repayment of significant amounts;
• there is a risk of enforcement proceedings;
• key assets are pledged;
• the business needs time to restore cash flow;
• the owners are ready to raise additional financing;
• there is a possibility of preserving the business as a going concern.

Benefits of Working with Prikhodko & Partners

Preventive restructuring lies at the intersection of law, finance, and creditor negotiations, so a single procedural document is not enough. We help:

• assess the company’s actual financial condition;
• determine whether there is a threat of insolvency;
• analyze the creditor and security structure;
• develop a restructuring concept and plan;
• negotiate with banks and other creditors;
• prepare an application to the commercial court;
• support the application of debtor protection measures;
• organize work with the restructuring administrator;
• support approval and confirmation of the plan;
• monitor legal implementation of the agreed restructuring.

When Preventive Restructuring Should Begin

The best time is not when the company’s operations are already effectively paralyzed. It is advisable to assess the procedure if:

• the cash flow forecast shows a future deficit;
• within several months the company may lose the ability to service its loans;
• one large debt threatens the entire business;
• the bank refuses an ordinary restructuring;
• several creditors have conflicting interests;
• creditors need to be legally bound by a single plan;
• temporary protection from enforcement is required;
• the business remains economically viable.

The earlier the owners identify the problem, the more tools can be used without liquidating the company.

Who Can Raise the Issue of Restructuring

The procedure itself is opened at the debtor’s initiative. However, a business may also be invited to consider preventive restructuring by:

• creditors;
• members of management bodies;
• an employee representative.

If such a proposal is made in connection with information about insolvency or a threat of insolvency, the company must consider it and adopt a reasoned decision. This makes preventive restructuring not only a tool for owners, but also an opportunity for creditors to propose a controlled scenario to the debtor before bankruptcy occurs.

What Can Be Restructured

The procedure may include monetary claims where:

• the due date has already occurred;
• the due date will occur during the procedure;
• future non-performance may lead to insolvency.

This makes it possible to deal not only with already overdue debt. For example, a company may know that a large loan must be repaid in three months, but projected cash flow will be insufficient. Preventive restructuring makes it possible to act before an actual default occurs.

How Preventive Restructuring Proceedings Are Opened

The procedure is conducted through the commercial court. To apply, an application and supporting documents must be prepared. Depending on the specific scenario, the materials may include:

• a decision of the debtor’s competent body to commence the procedure;
• information on the threat of insolvency;
• a preventive restructuring plan;
• or a restructuring concept in cases provided by law;
• financial statements;
• information about creditors;
• evidence that affected creditors were notified;
• documents concerning the administrator where their participation is required;
• other documents required by the Code.

After reviewing the application, the commercial court decides whether to open the procedure.

Preventive Restructuring Administrator

The administrator is an insolvency practitioner appointed by the commercial court in preventive restructuring proceedings. Their participation is mandatory in certain cases. For example, where:

• a complete plan is not yet available at the time of filing and only a concept is submitted;
• the court applies debtor protection measures provided by the Code;
• the administrator’s participation is required at the plan confirmation stage in cases provided by law.

The administrator does not replace the company’s management. The debtor continues to manage its own business, while the administrator may:

• provide recommendations;
• participate in developing the plan;
• facilitate negotiations with creditors;
• assess the viability of the plan;
• monitor protection measures;
• analyze creditor claims;
• supervise the company’s activities;
• inform the court of material violations.

Debtor Protection Measures

One of the key advantages of court-supervised preventive restructuring is the ability to obtain legal breathing space for negotiations and implementation of the plan. The law provides a system of protection measures. Within the applicable rules, restrictions may be introduced concerning:

• opening bankruptcy proceedings;
• accrual of certain financial penalties against affected creditors;
• enforcement under enforcement documents;
• recovery against pledged or mortgaged property.

Additional measures do not arise merely because the debtor requests them — the need for such measures must be justified before the court.

The purpose of protection measures is not to allow a business to avoid paying debts indefinitely, but to create a limited period in which a realistic solvency restoration plan can be agreed and implemented.

Restrictions on the Business During the Procedure

While receiving protection, the debtor also assumes additional obligations. During the procedure, assets cannot be freely withdrawn or the company’s financial condition worsened without control. Restrictions may concern:

• disposal of property;
• granting loans;
• non-refundable financial assistance;
• sureties and guarantees;
• encumbrance of assets;
• payment of dividends;
• management bonuses;
• other transactions that conflict with the procedure or approved plan.

At the same time, the company continues its ordinary business activities within the applicable limits.

Can Creditors Terminate Contracts Because of Restructuring?

The mere opening of the procedure should not automatically destroy existing business relationships. The special regime is aimed at preserving a viable enterprise, so the opening of the procedure itself should not automatically be grounds for:

• termination of a contract;
• refusal to perform it;
• a demand for early performance of obligations;
• worsening contractual terms solely because of the restructuring procedure.

This is particularly important for businesses that depend on long-term supply, lease, lending, or other key contracts.

Preventive Restructuring Plan

The preventive restructuring plan is the central document of the entire procedure. It must demonstrate not merely that the company wants to pay less, but that there is a realistic economic recovery scenario. The plan may provide for:

• deferral of debt;
• installment payments;
• partial debt forgiveness;
• changes to the interest rate;
• changes to the method of performing obligations;
• sale of part of the assets;
• restructuring of assets;
• increase of charter capital;
• contributions from participants;
• attracting an investor;
• new financing;
• operational changes;
• reorganization or change of business profile;
• other measures aimed at restoring solvency.

The plan should include a business forecast and explain why the proposed scenario is economically realistic.

Negotiations with Creditors

Preventive restructuring is largely based on negotiations. It is necessary to determine:

• which creditors are included in the procedure;
• the amount of their claims;
• whether security or mortgages exist;
• which terms can be offered to each category;
• how the repayment period will change;
• whether part of the debt will be forgiven;
• whether new financing is required;
• what each creditor will receive compared with the debtor’s bankruptcy.

The last criterion is particularly important: the plan must take into account the best interests of creditors.

Classes of Creditors

For voting purposes, creditors may be divided into separate classes. Basic categories include:

• secured creditors;
• creditors under budgetary obligations;
• unsecured creditors;
• related unsecured creditors;
• founders or participants — where the plan changes their rights.

The plan may also provide for other classes where there is an economic and legal justification. Proper formation of creditor classes is important because it directly affects voting and subsequent confirmation of the plan by the court.

Can the Plan Be Approved If Some Creditors Object?

In certain cases — yes. The Code provides a mechanism for court confirmation of the plan even without support from all creditor classes, provided that the statutory conditions are met. This mechanism helps prevent an economically justified restructuring from being blocked by one class of creditors where, overall, the restructuring is a better alternative to bankruptcy. However, to use this mechanism properly, it is necessary to:

• form the classes correctly;
• conduct the voting properly;
• demonstrate compliance with creditors’ interests;
• show that the economic outcome is distributed fairly.

New and Interim Financing

A distressed business often needs not only a deferral of debts, but also additional funds to continue operating. The law distinguishes, among other things:

• interim financing — intended to support the company before the plan is approved;
• new financing — financing provided for under the approved plan itself.

Such financing may be critical if the company needs funds for:

• purchasing raw materials;
• payroll;
• maintaining production;
• completing a project;
• preserving asset value.

Simplified Preventive Restructuring

For situations where the business has already reached agreement with creditors before applying to court, the Code provides a simplified procedure. It may be used where:

• the plan has been prepared in advance;
• it has already received the required creditor support;
• there is an appropriate positive opinion from the administrator;
• the affected creditors have received the plan.

In other words, the main negotiations effectively take place before the court procedure is opened, and the court then reviews and confirms the already agreed scenario. This format may be appropriate where the number of creditors is limited and the parties are willing to negotiate constructively.

Preventive Restructuring or Bankruptcy

These are different tools.

Stages of Cooperation with a Lawyer

1. Financial and legal audit. We analyze debts, assets, income, creditors, and security.
2. Business viability assessment. We determine whether the company has an economic future after restructuring.
3. Strategy development. We prepare a concept for working with creditors.
4. Plan preparation. We determine timelines, financing, asset sales, and other measures.
5. Negotiations with creditors. We agree acceptable terms.
6. Application to the commercial court. We prepare the procedural documents.
7. Protection measures. Where necessary, we justify the appropriate debtor protection.
8. Plan approval. We support creditor meetings and voting.
9. Court confirmation. We represent the debtor during court proceedings.
10. Implementation of the plan. We support the legal aspects of restructuring through completion of the procedure.

Cost of Preventive Restructuring

The cost of legal support depends on the scale of the business and the structure of its debt. The price is affected by:

• the number of creditors;
• the amount of liabilities;
• the existence of bank financing;
• pledges and mortgages;
• the number of creditor classes;
• the complexity of the financial model;
• the need to raise new financing;
• the scope of negotiations;
• the need for a restructuring administrator;
• the existence of enforcement proceedings;
• the scope of court support;
• the need for further monitoring of implementation of the plan.

The statutory remuneration of the preventive restructuring administrator must also be taken into account in cases where their participation is mandatory or agreed by the parties.

Common Situations for Preventive Restructuring

Conclusion

Preventive restructuring gives a viable business the opportunity not to wait for actual bankruptcy, but to restructure its debt burden in advance and negotiate with creditors within a controlled court procedure. The effectiveness of this mechanism depends on timely action, a realistic financial plan, and the ability to demonstrate to creditors that preserving and restructuring the business is more beneficial than bankruptcy.

Is the company still operating, but its debts are already creating a real threat of insolvency? Submit a request on the Prikhodko & Partners Law Firm website. We will analyze the financial and legal situation, assess whether preventive restructuring is available, and develop a plan for creditor negotiations and court support.