When handing over distressed companies, it is absolutely essential that the handover takes place in the correct way, as otherwise you can incur liability towards
the company’s creditors.

In the event that a company gets into financial difficulties, it is important that the liquidation of the company takes place in the correct way, so that the management does not incur a liability towards the creditors. There are several different proposed solutions for this.

This article focuses on the situation where you no longer see an opportunity to continue the operation of the company under the current management and therefore want to hand over the company’s assets and/or activities.

This transfer can take place to a subsidiary or sister company, but the company can also be transferred to a completely third and outside buyer.

Transfer to a subsidiary or sister company
If the subsidiary model – also called the dropdown model – is used, the healthy assets and activities of the distressed company are transferred to a subsidiary. The subsidiary can be an existing company, as well as it can be a newly founded company. The hallmark of a subsidiary is that the parent company, i.e. the company in distress, owns more than half of the shares/shares and thus has a decisive influence. In this construction, the distressed company’s status as parent company means that the company receives shares/shares from the subsidiary as payment for the transfer of the assets, instead of a cash purchase price.

The purpose of this model is to create a foundation for a subsequent sale of the subsidiary. After this, the creditors of the company in distress can be paid with the purchase price of the parent company’s shares (shares/shares) in the subsidiary.

If the sister company model is chosen, the first step in the process is the same as in the subsidiary model. A transfer of the healthy assets and activities of the distressed company is also carried out. Where the characteristic of the subsidiary is that the company in difficulty has a decisive influence, the sister company, on the other hand, is on an equal footing with the company in difficulty. Both companies also have the same ownership group here. However, unlike the subsidiary, the sister company must pay for the transferred assets and activities.

The sister company model aims to bring in a cash purchase price which can subsequently be used to pay the creditors.

Transfer to others
In both of the aforementioned models, the assets and activities of the failing company are transferred to a company connected to the failing company. It is of course also an option to transfer the company to a completely third and outside party.

The purpose of transfer to a third party is, as with the sister company model, to bring in a cash purchase price that can be used to pay the company’s creditors.

The purpose of transfer to a third party is, as with the sister company model, to bring in a cash purchase price that can be used to pay the company’s creditors.

Pay particular attention
In general, there are some conditions that you must be aware of if you choose to transfer the company’s assets and activities using one of the above options. There is an overarching requirement that the creditors must not be disadvantaged after the transfer of the business.

The solution models mentioned are an expression of what is collectively called extrajudicial reconstruction. The reconstruction thus takes place outside the system used for internal judicial reconstruction.

This means that the business transfer is not protected against the company’s creditors, which means that any creditor can make a claim along the way. Furthermore, the company is not protected against attachment being made or a bankruptcy petition being filed.

Valuation
Particular attention must be paid to the valuation of the assets that are transferred to a sister company or to a third party upon sale. When the company is transferred, an assessment must be carried out, after which the purchase price is determined.

Both a sister company and an external third party must pay for the transferred assets and activities. The correct price is determined based on whether the distressed company is in operation or whether it may no longer be. If the company is in operation at the time of the transfer, the assets and activities must be determined at the value they could have brought into the ongoing company. Such a sale will always generate the best price and will therefore benefit the creditors. If, on the other hand, this is not possible, as the company no longer has an ongoing operation, the assets must be determined at the market price at the time of the transfer.

It is important that the assets are valued and transferred at the correct price, as this ensures that the assets do not simply disappear from the distressed company and thus the creditors are harmed.

If the transfer takes place to a subsidiary company, the company’s values are automatically preserved within the company structure, as the failing company retains the value of the assets and activities, but now only as ownership shares in the subsidiary company. In this way, the values do not disappear from the company to the disadvantage of the creditors.