Dealing with distressed borrowers
Andrei Burz Pinzaru
Bucharest, 17 February 2010
Legal rights, options, deadlines
Preventing insolvency
3 © 2010 Deloitte Romania
Preventing insolvency
• “Conventional” inter-creditors agreements and loan restructuring
• “Ad-hoc mandate” - no clear advantages
• Moratorium (“concordatul preventiv”)
Dealing with distressed borrowers: legal rights, options, deadlines
4 © 2010 Deloitte Romania
Preventing insolvency
• Moratorium (“concordatul preventiv”)
• Long term commitment: up to 2 years
• possible measures: postponement of payments, waiver of claims, novation
through change of debtor etc.
• Limited flexibility (no conditional approval permitted)
• In general: unenforceable versus third parties – potential significant
disadvantage for signing parties
• In the particular case of creditors holding 80% of total claims: enforceable
versus all creditors.
• Commercial risk / opportunity, depending on whether you are or not together
with the creditors holding 80% of the claims
• Legal risk: new legislation, no relevant doctrine , no court precedents –
significant litigation risks!
• Dealing with distressed borrowers: legal rights, options, deadlines
5 © 2010 Deloitte Romania
Preventing insolvency
Dealing with distressed borrowers: legal rights, options, deadlines
Voluntary reorganization Judicial reorganizationAdvantages:
Flexible negotiation framework
No specific legal restrictions
Potentially add new securities
Advantages:
Potentially may limit further increase of
the borrower’s liabilities
May result in an increase of the borrowers’
assets (insolvency claw-back)
Risks
Risk of insolvency claw back activated
Risks
Limited control
Possible decrease of the bank’s rights
(receivables and collateral)
Being creditor to an
insolvent borrower
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The observation period
Generally any judicial and extrajudicial action against the debtor shall be
automatically suspended (limited exceptions)
Potential change of management
• Management right of statutory administrators may be withdrawn:
• ! If not expressly provided in the court decision - the management right shall be deemed to
be withdrawn, unless the debtor has expressed its intention to reorganization.
Limited permitted payments:
• towards known creditors in the ordinary course of business – without any approval from
creditors;
• outside the ordinary scope of business – must be approved by the judicial administrator
(irrespective whether the debtor has maintained its management right or not) and further by
the Creditors’ Committee.
• The case of loan repayments – special attention
Dealing with distressed borrowers: legal rights, options, deadlines
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The observation period
Voting within Creditors’ Assembly – based on value of the claim.
Lending new funds:
• permitted – may be subject to approval by judicial administrator/Creditors’
Committee depending on:
• the purpose of the loan, whether it qualifies as in the ordinary or outside the
ordinary course of business (i.e. ensuring current working capital is expressly
provided by law as in the ordinary course of business);
• the management right of the debtor (if withdrawn or deemed as withdrawn,
approval will be necessary in all cases).
• privileged status – third in row (if un-secured) after insolvency related
payments and labor claims in case of liquidation in bankruptcy.
• !if a reorganization plan will be further approved repayment of new funds will
be subject to payments schedule.
Dealing with distressed borrowers: legal rights, options, deadlines
9 © 2010 Deloitte Romania
The reorganization period
Prior to proposing, the expression of an intention is mandatory (“initiative”)
Who can have the initiative, and when?
• The borrower, provided that the intention has been expressed either when it
requested the opening of the procedure / 10 days upon receiving the copy of
the creditor’s request for insolvency.
• The judicial administrator, provided that it expressed the intention to
propose the reorganization plan before the voting by the Creditors’ Assembly
of its report on the debtor’s status (i.e., legal term is of maximum 95 days as
of its appointment, however in practice it may vary).
• One or more creditors, provided that they expressed the intention to
propose the reorganization plan prior to the voting by the Creditors’
Assembly of the judicial administrator’s report on the debtor’s status (i.e.,
legal term is of maximum 95 days as of judicial administrator appointment,
however in practice it may vary).
Dealing with distressed borrowers: legal rights, options, deadlines
10 © 2010 Deloitte Romania
The reorganization period
Who /when can propose a reorganization plan
• The borrower: with the approval of the general assembly of shareholders, within 30
days as of publication of final creditors’ table of claims;
• The judicial administrator: as of the date when he was appointed and until the end
of a 30-day period as of the date of publishing the final creditors’ table of claims;
• One or more creditors: which hold individually or together at least 20% of the total
value of the claims included in the final creditors’ table of claims, within 30 days as of
the date of its publishing.
Alternative plans are permitted
The bank must know the impact of any step/action during insolvency, in
order not to miss deadlines and thus prejudice its rights.
Who decides on the approval of the reorganization plan?
• majority of the categories of claims mentioned in the payments schedule, provided that
at least one category of “discriminated” creditors approves the plan;
Dealing with distressed borrowers: legal rights, options, deadlines
11 © 2010 Deloitte Romania
The reorganization period
Lending new funds:
• permitted only if mentioned in the reorganization plan;
• repayment of the loan shall be made in accordance with the loan agreement
which should follow the payment schedule approved through the
reorganization plan;
• privileged status – third in row (if un-secured) after insolvency related
payments and labor claims in case of liquidation in bankruptcy.
Dealing with distressed borrowers: legal rights, options, deadlines
12 © 2010 Deloitte Romania
Insolvency hidden threats
The bank is 1st rank secured creditor…or is it?• Privilege versus mortgage;
• Special case of mortgage under Mortgage Lending Law.
Illegal write-off’s in reorganization plans• Incorrect qualification of other creditors claim as disfavoured claim
(approving the write-off)
• Inequitable write-off
The bank is the largest creditor and therefore has the final word in the
creditors’ assembly…or maybe not?• Specific voting procedure for the purpose of approving the reorganization
plan (majority of creditors’ classes not of claim amounts)
• Other decisions are made by the Creditors’ Committee (majority of members
not of claim amounts)
• How “final” is the final creditors’ list?• Not final, if the judicial administrator does not publish the notification to the
creditors’ in Insolvency Procedures Bulletin.
Dealing with distressed borrowers: legal rights, options, deadlines
"KYC" before an insolvency related event (or "a banking lawyer's view on insolvency"…in brief)
14 © 2010 Deloitte Romania
Know your borrower, its business, its assets, its creditors
The bank’s claim versus the total claims - your voting rights in the creditors’ assembly
- the ability to propose a reorganisation plan
Other creditors: how many categories? - will influence the voting rights on a reorganisation plan during insolvency
Insolvency “claw-back”
Up-dated value and nature of the secured assets - take an informed decision on judicial reorganisation vs bankruptcy
- Ask for permission to proceed with foreclosure during insolvency
- defend versus illegal write-off’s
In general, any and all information you need in order to approve/reject a
potential reorganisation plan
Identify the possibility to cooperate with other creditors (secure majority)Dealing with distressed borrowers: legal rights, options, deadlines
The "insolvency maze"
and (ideally) not having
to deal with it
16 © 2010 Deloitte Romania
The “insolvency chart” above is a draft used for exemplification only;
it does not include all the phases of a insolvency procedure
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
© 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.
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