Relaunch after bankruptcy: three legal routes for entrepreneurs

Bankruptcy does not have to be the end of the line. When the core of a business is still viable, a relaunch can actually be a valuable and realistic option. Think of a hotel and catering business that closes its doors after difficult years, but thanks to a strong concept and the support of loyal customers is still revived – this time with a fresh financial structure and better organization.

In this article, we discuss three legal forms of restart in bankruptcy: the agreement with creditors, the share transaction and the asset transaction. Each route has its own advantages, risks and concerns.

1. The agreement: reaching a settlement with creditors

Companies in dire financial straits can make a proposal to their creditors whereby they receive only part of their claims while the remainder is discharged. We call this a private bankruptcy agreement. If a majority of creditors agree, the bankruptcy can be discharged. Do some creditors not cooperate? Then it is possible to obtain a so-called homologation through the court, which makes the agreement still binding for everyone.

Advantages:

• The trade name and contractual relationships are preserved.
• Creditors usually get back more than in a full liquidation.
• The settlement of the bankruptcy proceeds relatively quickly.

2. The share transaction: new shareholder, same company

An alternative route is the transfer of shares to a new shareholder – for example, an investor or other interested party. The legal entity continues to exist, but changes hands.

Advantages:

• Existing contracts and name recognition remain intact.
• The company does not have to be reincorporated.

Points of attention: Check carefully for so-called “change of control” clauses, which can cause contract termination.

The new shareholder also takes over any known and unknown debts, and will usually have to contribute financially, for example through a direct investment or deposit into the trustee’s estate account.

3. The asset transaction: continuing with the assets, in a new entity

The trustee may decide to sell the assets of the bankrupt company – such as inventory, customer base and brand name – to another party. This is often an existing stakeholder, such as a former director or shareholder, who continues operations from another entity.

Advantages:

• The buyer can start without historical debts or liabilities.
• The transfer can occur quickly, with the approval of the bankruptcy judge.

Disadvantages:

• The original company ceases to exist, as does its trade name.
• There may be commercial or reputational damage, especially if the relaunch is seen by outsiders as detrimental to creditors.

Questions?

Do you have any questions about this article or other questions regarding trade names? Please contact one of our attorneys by email, phone or fill out the contact form for a no-obligation initial consultation. We are happy to think with you.