Sometimes an entrepreneur’s financial problems are so severe that informal (consensual) restructuring or other forms of resolution are no longer an option and the entrepreneur must therefore take the insolvency route. But even insolvency does not have to mean the end of the business. A possible way out for entrepreneur may be the so-called pre-packaged reorganisation.

What is a pre-packaged reorganization?

A pre-packaged (or pre-prepared) reorganisation is a tool that allows an entrepreneur to overcome financial difficulties and preserve his business. Simply put, it can be characterised as a reorganisation agreed between the debtor and its major creditors in advance, i.e. before the commencement of the insolvency proceedings.

How does pre-packaged reorganisation work?

If the entrepreneur is interested in taking the pre-packaged reorganisation route, he or she must submit a reorganisation plan together with the insolvency petition, proposing reorganisation as a method of bankruptcy resolution. The reorganisation plan must be accepted by at least one half of all secured creditors and at least one half of all unsecured creditors. Creditors accepting the reorganisation plan are counted according to the amount of their claims (1 vote for each CZK 1 claim), not according to their number.

Main advantages of pre-packaged reorganisation

Pre-packaged reorganisation has a number of advantages. First of all, the approval of a reorganisation plan is much simpler and, in terms of the insolvency procedure, faster. The entrepreneur can also choose two important persons who have a major influence on the insolvency proceedings, namely the insolvency administrator and the plant valuation expert.

Prepackaged reorganisation also allows entrepreneurs, who would not otherwise meet the quantitative conditions for admissibility, to enter the reorganisation process. The conditions are total annual net turnover for the last period reaching a minimum of CZK 50 million, or at least 50 employees on employment contracts. This shows that classical reorganisation is primarily intended only for large entrepreneurs, while pre-packaged reorganisation can also be carried out by a smaller entrepreneur.

When does it make sense to do a (pre-packaged) reorganization?

Taking the pre-packaged reorganisation route only makes sense if the entrepreneur has a clear plan to save their business. The entrepreneur should come up with a rational and workable solution that will be acceptable to creditors and viable in the long term. The entrepreneur should have a clear idea of what he wants to achieve (the final state after the reorganisation) and what legal, economic and other means will need to be used to achieve it.

If an entrepreneur goes into reorganisation without a clear plan in order to at least buy some time, it is usually just a prolongation of the agony, which sooner or later will end with the declaration of bankruptcy.

Recapitulation

An honestly pre-prepared reorganisation is a tool that can save your business. The key to success is to start dealing with the situation early and have a clear rescue plan. If you delay unnecessarily, there will usually be nothing left to reorganise.

Since the preparation of a reorganization plan and successful implementation of the entire reorganization requires a perfect coordination of legal, economic and tax advisors, the ideal partner for an entrepreneur seeking a (pre-packaged) reorganization is a strong consulting group, where the entrepreneur receives all services under one roof.

At Grant Thornton, we have extensive experience in reorganisations and our team of experts is ready to help you at any time.