Reorganization of companies in Estonia

Owner of T1 shopping center, Baltika, Stockmann (Finland) – these are companies that have just chosen to rescue themselves though reorganization procedure. It is obvious that many other companies will also have to make a decision soon – whether to permanently close down or to make a last effort for continuing of their activities. If bankruptcy generally leaves creditors empty-handed, a reorganization may be a better outcome for all involved parties. Estonian Reorganization Act has been in force since 2008. The reorganization of a company means the application of a set of measures in order for a company to overcome economic difficulties, to restore its liquidity, improve its profitability and ensure its sustainable management. The nature of the reorganization procedure is, in particular, to restructure debts that have already become due (it is possible to amend loan agreements and postpone the future payments if otherwise the continuity of the company’s business will not likely be possible). The initiation of reorganization is decided by a court on the basis of the application from the company. The court shall determine the term by which the reorganization plan adopted by creditors must be submitted to the court. During this period, creditors’ claims against the company are frozen (incl. enforcement proceedings are suspended). The reorganization plan must describe and justify the manner and extent to which the creditors’ claims will be restructured. Main reorganization measures are deferral and reduction of creditors’ claims. It is also possible for a creditor to acquire a shareholding in a company against a claim. The approval of at least 1/2 of the creditors is required for the adoption of the reorganization plan, and their claims must together account for at least 2/3 of the sum of all claims. The adopted and court-approved reorganization plan is mandatory for those creditors who voted against the plan, ie the majority of creditors decide over the minority. By approving the plan by the court, a existing claim is essentially “frozen” and the reorganization plan creates a new debt obligation alongside it, which will be fulfilled according to the plan. If the plan is complied with, the initial claim is also deemed to be fulfilled.

When is the right time to start reorganization?

Reorganization should start when the first payment difficulties occur. It should be borne in mind that only a solvent company can be reorganized. Reorganization proceedings are excluded if bankruptcy proceedings have already been initiated against a company.

There is nothing to lose

The widespread recession caused by the pandemic crisis should highlight the benefits of a reorganization. It may be easier for creditors to agree to restructuring of their claims in the context of current business disruption of unprecedented proportions. In case economic difficulties are inevitable, I encourage entrepreneurs to take a moment and ask yourself and your advisor two questions: (i) whether my company’s business model can work at all in the post-crisis period, and (ii) whether, in the new situation, cash flow could cover existing liabilities to a greater extent than in the event of immediate bankruptcy. If the answer to both questions is in affirmative, steps should be taken immediately to initiate a reorganization. If you are unable to convince creditors of the success of the measures set out in the reorganization plan, bankruptcy is only a matter of time. All in all – there is nothing to lose. Even with potential for failure, by putting a reorganization alternative on the table, you have done almost everything you could to save your company.