Lawyer: catering bankruptcies – are there alternatives?

In recent days, the media have been abuzz with the news of the catering bankruptcies that operates well-known restaurants in Lithuania. This is not the first such case in the last few weeks. Recent statistics show that catering businesses are one of the most frequent bankruptcies. In the context of these current events, the question naturally arises: what should a business do when faced with financial difficulties? Are there alternatives to bankruptcy? About this topic talking Simona Danylė, law and an associate partner in the firm’s Dispute Resolution practice

There is a lot of debate about what causes financial difficulties for businesses in the catering sector. Some point to fierce competition, changing consumer behaviour. Others put more emphasis on the high operating costs (increase in rent, raw materials, personnel costs) and changes in the tax environment (the return of the standard VAT rate of 21%). The reasons for the high number of insolvencies in the food service sector should not be generalised, as solvency problems in business are often caused by very individual factors. However, whatever the causes of financial difficulties, they can be addressed, but it is essential that decisions and actions are not delayed.

Bankruptcy is a measure of last resort and is not intended to solve solvency problems but to deal with their consequences. Bankruptcy is not aimed at preserving the business, but at liquidating it and paying creditors as much as possible. Unfortunately, statistics show that a very significant proportion of creditors’ claims remain unsatisfied during bankruptcy. In addition, jobs are lost and the added value created by the business is lost, so bankruptcy is not in anyone’s interest.

When faced with financial challenges, bankruptcy is far from being the only option. Action should start with identifying the problem and finding commercial solutions. Here, the business still has the “help of the courtroom” and can turn to financial and legal advisors to work out with them a plan of action and possible solutions. When the problem is not persistent, a rapid reorientation of the market and the adoption of timely commercial solutions can bring a positive result.

The State also offers support mechanisms for businesses in difficulty. In this context, various guarantees, subsidies, soft loans (ILTE – National Development Bank), tax deferral and deferral of social security contributions can be mentioned. Businesses can also benefit from consultancy assistance (Versli Lietuva, Lithuanian Innovation Centre). However, here again, the key to making such support mechanisms really help business is not to delay.

Business restructuring can be achieved not only through commercial means, but also through legal means by initiating a restructuring process. Restructuring allows, with the help of the court, to find a compromise with creditors, to agree on the repayment of accumulated debts according to an agreed plan, to preserve the most important contractual relationships and to rethink the business strategy, by abandoning the loss-making activities of the business and focusing on the “healthy” part of the business. Restructuring before the tipping point may be the most realistic option to save the business.

Naturally, at one stage or another, many businesses face operational downturns and financial challenges. Sometimes it is the cyclical nature of business that makes it difficult for businesses to properly assess whether the challenges they are facing are just a temporary and non-threatening phase, or whether they are financial difficulties that need to be addressed proactively and immediately. When in doubt, a “sideways glance” and insights from external experts can really help to identify the problems and develop a clear plan to overcome them, so that bankruptcy is an option that the business does not need.