dealing with distressed loans: a lender's brief guide to borrowers insolvency

Dealing with distressed borrowers

Andrei Burz Pinzaru

Bucharest, 17 February 2010

Legal rights, options, deadlines

Preventing insolvency

3 © 2010 Deloitte Romania


• “Conventional” inter-creditors agreements and loan restructuring

• “Ad-hoc mandate” - no clear advantages

• Moratorium (“concordatul preventiv”)

Dealing with distressed borrowers: legal rights, options, deadlines



• 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




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


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• Management right of statutory administrators may be withdrawn: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be withdrawn, unless the debtor has expressed its intention to reorganization.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



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.



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).




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;




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.



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.


"KYC" before an insolvency related event (or "a banking lawyer's view on insolvency"…in brief)


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


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

mailto:[email protected]

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

© 2010 Deloitte Romania

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dealing with distressed loans: a lender's brief guide to borrowers insolvency

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