The document discusses risk management in insolvency proceedings. It outlines various risks faced during insolvency such as contractual issues with suppliers, market reputation risks, and business interruptions. It provides recommendations for mitigating exposure, including carefully following procedural steps, considering appeal options, and preparing a strong defense arguing the company is not insolvent. The document also discusses protecting creditors' rights, managing directors' liability, and debt restructuring options to avoid insolvency proceedings.

1. Risk management in
insolvency:
Mitigate your exposure
and protect your rights
Tax & Legal Conference, 23 March 2010

2. Knowing the risks triggered by abusive
insolvency claims

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. 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. Defense against abusive insolvency
claims

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. Protect your rights in case of debtors’
insolvency

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

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. 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. Managing directors/owners liability in case
of insolvency

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. 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. Avoiding insolvency: debt restructuring
recommendations

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. 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. © 2010 Deloitte Romania
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and its network of member firms, each of which is a legally separate and
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Risk management in insolvency: Mitigate your exposure and protect your rights