Company on the Brink of Bankruptcy. Crisis or New Opportunity for Success?

Analysis of data on the phenomenon of company bankruptcy in Europe, according to available records, allows us to conclude that the scale of the phenomenon of bankruptcy in Poland is not as large as in western European countries. Therefore, is bankruptcy as the end of a company's existence perceived in the same way in Europe? Are there tools protecting against bankruptcy and do entrepreneurs use them?

In Europe, around 30% of new companies go out of business in their first three years. Within five years, this percentage rises to around 50%. Estimates suggest that annually around 1 in 10 companies may go out of business for a variety of reasons, including bankruptcy.

2024 has shown that the number of insolvency applications from EU companies has been increasing for six quarters. Compared to the last quarter of 2023, the number of insolvencies increased by 8.4 per cent, reaching its highest level since data collection began in 2015, Eurostat reported. An analysis of insolvencies by activity shows that all sectors of the economy saw an increase in insolvencies in the second quarter of 2023 compared to the previous quarter of '23.

The largest number of insolvencies was recorded in the sectors:
- accommodation and food services (+23.9 per cent),
- transport and storage (+15.2%)
- and education, healthcare and social activities (+10.1 per cent).

According to preliminary statistics, In February 2024, the number of bankruptcy petitions filed under normal regulations increased by 18.1 per cent compared to the previous year. In January 2024, the increase was 26.2 per cent.

According to official figures, 17,814 companies filed for bankruptcy in Germany in 2023, which is an increase of more than a fifth (22.1 per cent) compared to the previous year. By comparison: in 2009, during the financial and economic crisis, almost 33,000 companies in Germany fell into financial difficulties.

Small and medium-sized enterprises (SMEs) are more vulnerable to bankruptcy than larger companies, due to their smaller financial resources and greater sensitivity to market changes.

Despite the difficulty in obtaining accurate figures, there is a broad consensus that business failures are a common phenomenon across Europe, and their number is closely linked to the economic condition and government policy. Entrepreneurs need to be aware of the risks and take steps to minimise the chances of failure.

Company bankruptcy in Poland is a phenomenon that is monitored by various institutions and agencies. In recent years, the number of company bankruptcies in Poland has been at the level of:

The perception of corporate insolvency in Europe varies by country, business culture and legal framework. Each country in Europe has its own unique insolvency laws. For example, Germany has a well-defined insolvency law that emphasises restructuring and preserving businesses, while insolvency law in the UK is more flexible and seeks to balance the interests of creditors and debtors. The business culture in countries such as France, Spain or Italy shows that insolvency carries a certain stigma but is not perceived as a business failure.

In contrast, in Nordic countries such as Sweden and Finland, bankruptcy is more often seen as part of the business life cycle and not necessarily as a final failure. In Anglo-Saxon countries such as the UK and Ireland, the approach to bankruptcy is more pragmatic. Entrepreneurs who have experienced bankruptcy are often more likely to be given a second chance, which promotes innovation and risk-taking.

In some European countries, there are well-developed programmes to support companies in financial difficulty. In France, for example, mechanisms are in place to protect companies from bankruptcy by allowing debt restructuring. The European Union is taking steps to harmonise bankruptcy rules. Already in 2019, a Preventive Restructuring Framework Directive has been introduced, which aims to facilitate the restructuring of indebted companies across Europe before they go bankrupt. In Poland, the Restructuring Law whose overarching goal is to protect companies from bankruptcy came into force in 2016.

Bankruptcy, as the termination of a company, is viewed differently in different European countries, depending on local regulations, business culture and attitudes to risk and entrepreneurship, but we should as a society remember that this is the normal life cycle of a business and not link bankruptcy to personal failure. In particular, education is important, as a huge percentage of entrepreneurs are unaware of existing support tools and sometimes afraid to use them for fear of failure.

A crisis situation in a company is often perceived as a failure, which can cause feelings of shame, as many entrepreneurs equate their professional success with their personal value, so failure can hit their self-esteem.

Of course, as entrepreneurs, we set ambitious goals which makes failure difficult to accept. Business failure of a company most often leads to serious financial problems, which adds to feelings of shame. Losing their own or other people's (e.g. investors, families) funds can create feelings of responsibility and guilt. Entrepreneurs often fear being judged by family, friends, employees and business colleagues. In such situations, the fear of losing reputation and trust leads to hiding failures. It is not insignificant that business failures spill over into the private sphere which deepens the crisis. Such behaviour does not allow action to protect and recover from the crisis. Noticing the problem, communicating clearly and looking for solutions is the way to go.

In recent years, attitudes to failure have begun to change in many circles. Many companies and business communities are beginning to recognise the value of learning from mistakes. Entrepreneurial associations are emerging, where sharing experiences, learning, mutual support, and positive attitudes are principles that help entrepreneurs grow. As an entrepreneur, I belong to a group of https://bniwoman.pl where the exchange of experience, mutual action for business development, learning, support are core values. 

Entrepreneurs these days have access to support and mentoring networks, that help them deal with and learn from failure. Failure is increasingly seen as an integral part of the innovation and entrepreneurial process and this is something we should strive for. The growing interest in positive psychology and building mental resilience is helping entrepreneurs to cope better with failure.

Although the shame associated with failure within the company is still common, changing attitudes to failure are helping entrepreneurs to cope better. Entrepreneurs who are able to learn from their mistakes and keep trying are often successful in the long term.

Responding to a company crisis requires a considered and systematic approach to minimise the damage and restore the normal operation of the company and, when the economic situation indicates this, to declare bankruptcy with simultaneous action to protect the management from liability for the company's debts.

Here are the basic steps to take if you notice problems in your company:

1. Assessment of the situation:
   a) Gather information about the problem,
   b) Identify the causes of the crisis and its potential impact on the company,
   c) Contact a professional Restructuring Advisor,
2. Preparation of a common architecture for restructuring operations/ bankruptcy where appropriate
3. Development of consistent internal and external communication
4. Develop an action plan that includes short-term and long-term steps
5. Prepare a restructuring plan and identify the tools to be used to achieve the restructuring objective,
6. Implementation of actions,
7. Monitoring of activities,
8. Willingness to make changes to the plan if the situation requires it,
9. Evaluation of the effects of the measures taken,
10. Make changes to the company's procedures to prevent similar situations in the future.

It is important to act quickly, but at the same time to analyse each step carefully. It is also crucial to maintain open and transparent communication with all stakeholders. As PMR Restructuring Law Firm, we actively support entrepreneurs not only in the restructuring journey itself, but also in many other key areas. Our team of experienced experts assists in effective communication with creditors, which is an indispensable element of successful restructuring. Thanks to our professional services, entrepreneurs can count on negotiating favourable terms for the repayment of liabilities and building constructive relations with creditors. In addition, we offer extensive business support, advising on strategic, operational and financial issues, which enables entrepreneurs not only to survive difficult times, but also to develop dynamically and achieve long-term goals.

It is important to remember that a Restructuring Advisor is a specialist who can play a key role in helping a company in financial difficulty. Both small and large problems in a company require an outside view. Thinking that I know myself best, that I know my company best (even though this is true) in such a situation is not good. Stressful situations, deepening crisis, often financial problems require support from a Restructuring Adviser. Let us remember that in such situations there are additional obligations which, despite the entrepreneur's will, cannot be carried out by him or herself in an appropriate period of time. And as we know, we cannot wait, we must act.

The Restructuring Advisor will conduct a detailed financial analysis of the company, identifying key financial and operational issues. Together with the entrepreneur, he or she will identify the causes of the problems, such as excessive debt, liquidity problems, management errors, declining sales or changes in the company's external environment. He then develops a detailed restructuring plan, which may include cost reduction, debt restructuring, changes to the organisational structure, optimisation of operational processes and a timetable for action, indicating specific steps to be taken within a specific timeframe.

If negotiations with creditors are required in order to obtain more favourable debt repayment conditions, such as a reduction in interest rates, an extension of the repayment period or a write-off of part of the debt, the adviser as a professional external specialist, often working alongside negotiators, is able to achieve much more than the entrepreneur himself.

It should also be borne in mind that the Restructuring Advisor, acting as a court authority in restructuring proceedings (court supervisor, court administrator) will guide the entrepreneur through the process of both judicial and extrajudicial restructuring. In the so-called simplified restructuring (proceedings for approval of an arrangement), it is the adviser in 95% who leads the company's restructuring process and the Court only approves the arrangement with the creditors concluded in the restructuring proceedings. By working with an adviser, we are assured that all restructuring activities comply with the applicable laws, minimising legal risks.

The restructuring adviser is a key partner in the company's recovery, which provides the necessary knowledge, experience and support to enable the company to overcome its difficulties and compete in the market. In the event that the company's existence has to be terminated by declaring bankruptcy, this should also be prepared in the cooperation with the Restructuring Advisorso as not to incur risks. 

The available data on company bankruptcies both in Poland and Europe allow us to conclude that a crisis in a company is a natural phenomenon, and how we get through it depends directly on ourselves. Individual countries in Europe, including Poland, have the tools to prevent bankruptcy and keep a company on the market if economic considerations allow it. Conscious management and taking action in a crisis situation allows to achieve the goal that has been set.