Why do most insolvency proceedings fail?

Why do most insolvency proceedings fail? There are several key factors that contribute to such outcome. 1️⃣ Firstly most of insolvency procedures are bankruptcies because there is no intention to pursue a restructuring of the business. 2️⃣ Another important point is that in the majority of the judicial reorganization procedure, the reorganization plan is drafted and proposed by the debtor and not by the creditors, whereas the support form creditors (or lack thereof) can lead to a successful reorganization or, on contrary to its failure. Below we highlight the main factors that prevent a successful reorganization: 🔹 Lack of restructuring Mindset: Insolvency is not just a procedure; it is genuine strategy, this of course excluding purely formal procedures. This means that the decision makers need to set for a long-term strategy, potentially with major changes to the way the business is carried out, and just simply use the procedure to restructure debts. Also, the historical and cultural perception of businesses undergoing insolvency, along with the negative stigma associated with it, can influence how it is approached by the stakeholders. Sometimes, it is seen as a personal failure of the entrepreneur, leading to reluctance in seeking and implementing restructuring measures. It’s important to understand that insolvency can be an opportunity for the business if the mindset is there. 🔹 Late intervention (also because of the negative stigma associated with insolvency): In many cases, insolvency proceedings are initiated too late, when the business is already in a critical state. In such situations, relationships with essential suppliers may have already been compromised, and finding new contractual partners becomes difficult. For effective restructuring, timely intervention is crucial, allowing for the business partnerships to be conserved. Also, it is in such scenarios that the decisionmakers have alternatives and solutions cand be identified and implemented. 🔹 Reluctance to sale  non-core asset sales: Debtors are often reluctant to sell non-core assets, which can limit liquidity and at the end of the day hinder business restructuring. 🔹 (lack of) Creative solutions: In most cases, restructuring focuses on the reorganization of debts significant changes to the way the business is carried out. On the other hand, in most scenarios this is not enough. Generally, it is the way the business has been carried out that lead to the potentially critical state in the first place so that of course needs changing. Also, creative solutions often can be seen implemented in successful reorganization, whereas forward thinking is a must. 🔹 (lack of) Support from the state creditors: Difficulties may arise in the relationship with state creditors, such as government institutions. This category benefits from extensive rights within the insolvency procedure. There have been cases where the was little to no support from such creditors and restructuring without such support was difficult to impossible. 🔹 Effective communication with all stakeholders, including therein the debtor’s employees. In lack thereof, key employees may leave the company and de disengaged. Of course, there are many other at play for a successful restructuring, such as the debtor’s possibility to secure financing. Although the law has changes to better accommodate financing for the debtor undergoing insolvency in many cases financing is not available or just to expensive.

Trends in insolvency

Our founding partners, Emeric Domokos and Daniel Barbu were speakers at ”Trends in insolvency” conference, organised by JURIDICE.ro. Emeric Domokos talked about the concept of COMI in insolvency. COMI, short for “Center of Main Interests,” is a crucial concept in international insolvency law. It determines the jurisdiction in which the main insolvency proceedings should take place for a company or an individual with assets and debts in multiple countries. The COMI concept is vital in determining which country’s laws and courts should handle the insolvency proceedings. Some key points related to COMI: Definition: The COMI is the place where a debtor conducts the administration of its interests on a regular basis, reflecting its economic activities and decisions. It is essentially the main hub of a debtor’s business operations. Determining the COMI: The determination of a debtor’s COMI is a factual assessment and varies from case to case. Factors considered in determining the COMI may include the location of the company’s headquarters, the place where management decisions are made, the place of its main assets or trading activities, and the place where it is registered. Rebuttable presumption: The European Union’s Regulation on Insolvency Proceedings (Recast) provides a rebuttable presumption for corporate debtors that their COMI is the place of their registered office, in the absence of proof to the contrary. Importance of COMI: The COMI concept is important because it helps establish a single, main jurisdiction for insolvency proceedings. This avoids fragmentation and conflicting decisions in multiple jurisdictions, provides legal certainty, and facilitates coordination and cooperation between courts and stakeholders. Jurisdiction for insolvency proceedings: Once the COMI is determined, the country where the COMI is located generally has jurisdiction to open main insolvency proceedings. This means that the main proceedings, such as liquidation or reorganization, will be conducted in that jurisdiction, and the laws of that country will govern the process. Secondary proceedings: In situations where a debtor has assets or operations in other countries, secondary insolvency proceedings may be opened in those jurisdictions. The purpose of secondary proceedings is to protect and administer the debtor’s assets located in those countries. Cross-border cooperation: International insolvency laws, such as the UNCITRAL Model Law on Cross-Border Insolvency and the EU Regulation on Insolvency Proceedings, aim to facilitate cooperation and coordination between courts in different jurisdictions. They provide mechanisms for recognizing and enforcing foreign insolvency proceedings and ensuring communication and coordination between the main and secondary proceedings. It’s important to note that the application and interpretation of COMI may vary depending on the legal framework of different jurisdictions, and there may be specific rules or case law that further shape its implementation.   Daniel Barbu talked about the status of claims of secured creditors in proceedings initiated against third-party guarantors. In insolvency proceedings, the status of claims held by secured creditors becomes a critical aspect, particularly when such proceedings are initiated against third-party guarantors. This topic focuses on understanding the position and rights of secured creditors in these specific situations. When a debtor defaults on their obligations, secured creditors who hold collateral or security interests have a distinct legal position compared to unsecured creditors. These secured creditors have the right to enforce their claims against the specific assets or property provided as security. However, when a third-party guarantor is involved, complications can arise. In the scenario of insolvency proceedings initiated against a third-party guarantor, the key question is how the claims of secured creditors are affected. Typically, the guarantor has pledged assets or provided a guarantee to secure the debtor’s obligations. The insolvency proceedings against the guarantor could impact the rights and interests of the secured creditors. Understanding the implications involves analyzing several factors. Firstly, it is necessary to determine the validity and enforceability of the guarantees or security interests provided by the third-party guarantor. This examination ensures that the secured creditors can assert their rights and access the collateral despite the guarantor’s insolvency. Secondly, the priority of claims in the insolvency proceedings needs to be considered. Depending on the applicable legal framework, secured creditors may have a higher priority compared to unsecured creditors, which could be advantageous in realizing their claims. However, the claims of secured creditors may be subordinated to certain statutory or contractual priorities, and it is crucial to assess such provisions to understand their impact. Furthermore, the relationship between the debtor, the secured creditors, and the third-party guarantor must be examined. It is necessary to establish whether the guarantor’s insolvency triggers an event of default or acceleration, potentially allowing the secured creditors to enforce their claims immediately. This analysis helps determine the timing and process for realizing the collateral and satisfying the claims of secured creditors. Overall, this subject explores the complex dynamics between secured creditors, third-party guarantors, and insolvency proceedings. It delves into the legal rights, priorities, and implications for secured creditors when pursuing their claims against collateral in the context of insolvency proceedings initiated against third-party guarantors.