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Risk Management In Insolvency

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Risk management in insolvency. Presentation of legal aspects relevant for creditors and companies in insolvency

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Risk Management In Insolvency

  1. 1. Risk management in insolvency: Mitigate your exposure and protect your rights Tax & Legal Conference, 23 March 2010
  2. 2. Knowing the risks triggered by abusive insolvency claims
  3. 3. 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 3 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  4. 4. 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. 4 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  5. 5. Defense against abusive insolvency claims
  6. 6. 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). 6 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  7. 7. Protect your rights in case of debtors’ insolvency
  8. 8. 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) 8 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  9. 9. 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). 9 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  10. 10. Insolvency as a tool of last resort: key aspects you should know
  11. 11. Insolvency as a tool of last resort: key aspects you should know Shareholder ‘s question: bankruptcy or reorganization? Aspects to consider when choosing bankruptcy • Advantages: Possibility to obtain a better deal (limitation of penalties) Advantages No insolvency claw-back Possibility of the liquidator to inquire shareholders / directors‘ liability Disadvantages Analysis of voidable transactions Strategic aspects Good market knowledge – know the potential buyers and their preferences 11 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  12. 12. Insolvency as a tool of last resort: key aspects you should know Shareholder ‘s question: bankruptcy or reorganization? Aspects to consider when choosing reorganization • Advantages: Possibility to write off certain claims Advantages Business recovery May trigger withdrawal of management right Disadvantages Business interruption risk: lose benefit of suppliers‘ credit Affecting reputation on the market Relationship with judicial administrator prior to and upon entering the reorganization phase Strategic aspects Relationship with other categories of creditors voting the reorganization plan 12 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  13. 13. Managing directors/owners liability in case of insolvency
  14. 14. 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. 14 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  15. 15. 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%) 15 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  16. 16. Avoiding insolvency: debt restructuring recommendations
  17. 17. 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 17 Risk management in insolvency: Mitigate your exposure and protect your rights © 2010 Deloitte Romania
  18. 18. Andrei Burz Pinzaru Partner | Reff & Associates SCA Correspondent law firm of Deloitte Romania Tel/Direct: +40 (21)207 52 05 aburzpinzaru@deloittece.com | www.deloitte.com/ro/legal 18 © 2010 Deloitte Romania
  19. 19. © 2010 Deloitte Romania Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/ro/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Risk management in insolvency: Mitigate your exposure and protect your rights

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