Financial difficulties do not necessarily mean bankruptcy
Lithuanian law provides businesses experiencing financial difficulties with the opportunity to restructure. However, this is not a way to avoid bankruptcy at any cost – its purpose is to preserve a viable business.
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A company may face financial difficulties for various reasons: a large loan repayment deadline may arrive, an important client’s payment may be delayed, operating costs may unexpectedly increase, or revenues may temporarily decrease. In such cases, the company may lack the funds to meet current obligations, although the business itself remains fundamentally promising.
If the company has customers, its goods or services are still in demand, employees are working, contracts are being fulfilled, and the activity can generate sufficient income, restructuring can be a real alternative to bankruptcy. Restructuring measures can vary – from agreements with creditors on longer debt repayment terms, partial debt forgiveness or conversion into equity, to attracting a new investor, additional financing, selling assets or part of the business, abandoning unprofitable activities, or reorganizing costs.
The essential criterion – is the company still viable?
The Law on Insolvency of Legal Entities of the Republic of Lithuania links restructuring to a key criterion – the viability of the legal entity. Simply put, a viable company is one whose operations reasonably allow the expectation that it will be able to meet its obligations in the future.
When assessing restructuring prospects, a simple question can be asked: what would remain if we restructured the company’s debts and gave it additional time? If a functioning business remains, with customers, employees, market demand, and the ability to generate sufficient cash flow, there is a basis to consider restructuring. However, if even after reducing the debt burden the activity remains unprofitable and there is no real plan to change this, the problem lies beyond just the debts.
When should the red flag go off?
The possibility of restructuring a business should be evaluated very critically if the company is already unable to meet current obligations – consistently delays paying wages, fails to meet tax obligations, accumulates new debts to suppliers – this is already a serious signal.
Other warning signs include asset or account seizures, forced collection, suppliers refusing to work without prepayment, significant loss of employees or customers. But perhaps the most important sign is when new debts accumulate because the company’s daily operations generate losses. In such a case, merely extending the deadlines of old debts will not solve the problem.
“Imagine a company that today cannot repay a significant loan, and the creditor agrees to postpone repayment for two years. If during this time the company can restore profitable operations and accumulate enough funds to meet obligations, such a decision makes sense. But if after two years it will have not only the same debt but also new obligations, then the postponement did not solve the problem – it only deferred it to the future,” says a senior lawyer at “Cobalt.”
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Therefore, one of the most important questions is very practical: what will be different in the company after restructuring? If there is no concrete answer – lower costs, a new investor, a changed business model, asset sales, or other real measures – additional time alone will not save the business.
The biggest mistake – starting too late
One of the most common practical problems, according to I. Strunkienė, is that restructuring is considered too late. Managers and shareholders hope that sales will increase, the bank will extend financing, an investor will appear, or it will be possible to sell assets. But in the case of financial difficulties, time has a cost. Every month of delay can increase new debts, reduce cash reserves, lose employees and customers, and worsen relationships with creditors. Ultimately, when the company decides to undertake restructuring, it may already be too late to save it.
Therefore, restructuring should be considered not when the company is already unable to settle with practically anyone, but much earlier – at the first signs of serious financial difficulties.
Restructuring can also end in bankruptcy
The mere filing of a restructuring case by a company does not mean it will be accepted. When deciding on this matter, the court assesses the company’s viability and real chances of overcoming financial difficulties. If the court determines that the company is not viable, the restructuring attempt may end with the initiation of bankruptcy proceedings, even if no party initially requested it.
The senior lawyer at “Cobalt” suggests not to consider restructuring as a last resort. The earlier financial difficulties are identified and addressed, the better.
“So in the case of ‘airBaltic,’ the most important question is not only the size of the financial difficulties the company is experiencing today, but whether the measures taken will truly allow the restoration of a viable and sustainably operating company. This is what will show whether the current crisis is surmountable or the problems are only postponed to the future,” says I. Strunkienė.
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