risk management in insolvency

Risk management in

insolvency:

Tax & Legal Conference, 23 March 2010

Mitigate your exposure

and protect your rights

Knowing the risks triggered by abusive

insolvency claims

3 © 2010 Deloitte Romania

Knowing the risks triggered by abusive insolvency claims

• Insolvency related proceedings clauses (mainly loan agreements)

- event of default

- limited remedy periods

• Issues with the suppliers (contractual or reputational)

• Market reputation risks

• Business interruption – loss of control

Risk management in insolvency: Mitigate your exposure and protect your rights


Knowing the risks triggered by abusive insolvency claims

• Practical aspects to be considered

• Take seriously all procedural steps (including potential recourse by the

claimant);

• In case where the insolvency procedure has been opened consider

extraordinary appeal possibilities - very limited use

• Possibility to close the insolvency procedure during the observance period:

• Not through bankruptcy or reorganization (possibilities expressly provided by

Insolvency Law 85/2006);

• Upon the debtor proving that it is not (anymore) in an insolvency status;

• High difficulty in case where the procedure is in an advanced status and other

creditors have registered their claims;

• Possibility endorsed by practice through interpretation of the general scope of the

insolvency procedure;

• Jurisprudence is not a source of law: risks that insolvency procedure continues.


Defense against abusive insolvency

claims


Defense against abusive insolvency claims

• Observing the procedure

• Contesting the insolvency claim in the term provided by Insolvency Law;

• Preparing proper defense in accordance with the law and court practice:

• Inconsistent practice of the courts of law with respect to the sufficient proof that a

company is not in insolvency: sufficient liquidity might not be…sufficient. Pay

attention to substantiation of reasons for non-payment

• Preparing defense with respect to the fulfillment of the legal criteria regarding the

claim of the creditor entitled to require the opening of the insolvency procedure

• Preparing proof that company is not in insolvency

• Cash availability – generally accepted proof by courts of law;

• Settlements with other creditors (assignment of receivables, extending

maturity terms etc).


Protect your rights in case of debtors’

insolvency


Protect your rights in case of debtor’s insolvency

• Preserving the right to propose a reorganization plan;

• Know your debtor:

• Your claim versus the total claims:

• Voting rights in the creditors’ assembly;

• The ability to propose a reorganization plan or to influence the decision to

bankruptcy;

• Other categories of creditors

• Influence the voting on a reorganization plan

• Up-dated value of secured assets

• take an informed decision on judicial reorganization vs bankruptcy

• defend versus illegal write-off’s

• Identify the possibility to cooperate with other creditors

• securing a majority decision on a reorganization plan (or its rejection)



Protect your rights in case of debtor’s insolvency

• Identify suitable liquidators

• Monitor closely the development of the insolvency procedure:

• Fulfillment by the judicial administrator of his/her/its obligations under the law

(e.g., publications of notifications in the Insolvency Bulletin);

• Attention to possible tricks used by the debtor in order to pass the

reorganization plan (e.g., setting up un-favored categories of creditors)

• Attention to agreements concluded during observance period (e.g.,

possibility of the court of law to deprive the creditor from its right to vote the

reorganization plan in case where the content of the agreement is reiterated

in the reorganization plan).


Insolvency as a tool of last resort: key

aspects you should know


Insolvency as a tool of last resort: key aspects you should know

Shareholder ‘s question: bankruptcy or reorganization?

• Advantages:


Aspects to consider when choosing bankruptcy

Advantages

Disadvantages

Strategic aspects

Possibility to obtain a better deal (limitation of penalties)

No insolvency claw-back

Possibility of the liquidator to inquire shareholders / directors‘ liability

Analysis of voidable transactions

Good market knowledge – know the potential buyers and their preferences


Insolvency as a tool of last resort: key aspects you should know

Shareholder ‘s question: bankruptcy or reorganization?

• Advantages:


Aspects to consider when choosing reorganization

Advantages

Disadvantages

Strategic aspects

Possibility to write off certain claims

May trigger withdrawal of management right

Business interruption risk: lose benefit of suppliers‘ credit

Relationship with judicial administrator prior to and upon entering the reorganization phase

Business recovery

Affecting reputation on the market

Relationship with other categories of creditors voting the reorganization plan

Managing directors/owners liability in case

of insolvency


Managing directors/owners liability in case of insolvency

• Judicial administrator/liquidator’s obligation to identify whether there are

persons to which insolvency of the company might be attributable.

• Recent amendment of Insolvency Law:

• even if the report above does not specify responsible persons, creditors

holding more than 50% of the claims may directly require the syndic judge

permission to engage directors/owners liability.

• Types of actions investigated:

• Use of company’s assets or credit for own benefit or other persons’ benefit

(in conjunction with bad-faith triggers qualification as a criminal offence

under Companies’ Law 31/1990);

• Decided for their own personal interest continuation of an activity which

undoubtedly led the company to cessation of payments;

• Payment/disposition to pay a certain creditor in fraud of other creditors in the

months preceding the cessation of payments.



Managing directors/owners liability in case of insolvency

• Action for liability:

• Subject to special status of limitation term (3 years, not earlier than 2 years

as of the date when the decision for opening the insolvency procedure has

been issued)

• Increased risk in case of liability under Insolvency Law in case where

liability under Companies’ Law may be retained

• Identifying remedies: review of suspect transactions

• Potential remedy: Preparing transfer pricing files for questionable

transactions

• Burden of proof for transactions with directors or shareholders (over

20%)


Avoiding insolvency: debt restructuring

recommendations


Avoiding insolvency: debt restructuring recommendations

• Revisit key contracts prone to insolvency related risks:

• Loan agreements

• Events of default / mandatory prepayments

• Remedy: prove the insolvency claim to be frivolous and close the case ASAP

• Keep in mind the claimant’s right to recourse – negotiate additional appropriate

remedy period

• Supplier agreements (protection under insolvency law vs termination caused

by opening of the insolvency procedure)

• Potential case of abusive exercise of rights (in case of frivolous claims)

• Transparency & confidence are key elements

• Independent business review might be requested

• Financial & legal knowledge is useful



Andrei Burz Pinzaru Partner | Reff & Associates SCA

Correspondent law firm of Deloitte Romania

Tel/Direct: +40 (21)207 52 05

[email protected] | www.deloitte.com/ro/legal

mailto:[email protected]

http://www.deloitte.com/ro/legal

© 2010 Deloitte Romania

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