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Business Intelligence Fine line between the business decision of the creditors to an insolvent company and the viability analysis of the insolvency judge, when confirming the reorganisation plan

Fine line between the business decision of the creditors to an insolvent company and the viability analysis of the insolvency judge, when confirming the reorganisation plan

by Wolf Theiss Rechtsanwalte GmbH & Co KG November 15, 2023

Main purpose and guiding principle of the insolvency procedure, as this has been generally stated, is for the creditors to recover their receivables held against the insolvent company. The procedure is a collective one, where all interested creditors have the option to participate. For this reason, the decision-making powers within the procedure are given to the creditors, that can set its course by the vote given in the Creditors' Assembly or Committee. For the same reason, the main duty of the insolvency judge is to ensure that the procedure is conducted in accordance with the law.

Given the above, there is a pivotal distinction made in the insolvency practice between the business (opportunity) decision of the creditors and the legality decision of the insolvency judge, in the sense that the creditors have been given the right to establish the course and conduct of the procedure (e.g. to decide the sale of certain assets, the actual sale procedure and the sale starting price) as long as such decision is not in breach of the applicable legal provisions (e.g. there is no legal prohibition for the sale of assets from the estate of the insolvent company). It can be even stated that there should be no interference of the insolvency judge in the business decision of the creditors; the creditors are mainly interested in taking the appropriate measures for their receivables to be recovered.

The distinction is certainly not an absolute one and, within the interpretation given to the relevant legislation by the courts of law, we observed various approaches which are blurring the distinction between the two concepts and give a sense of variability to the application of the law.

One of the main reasons for the interference of the judges in the business decisions taken by the creditors are the other guiding principles that should lead the insolvency procedure, mainly the one according to which the procedure should allow the debtors a chance for efficient business recovery. This was generally seen in practice as a secondary principle; however, given the current focus of the European legislator to the mechanisms for the restructuring of businesses (see Restructuring Directive (EU) 2019/1023), it is very likely that this will be given a greater amount of importance in the future.

The existence of this fragile balance between the power of the creditors in insolvency and the possibility of the courts to interfere with the creditors' decision must be known and considered by any agent on the market, which is required at a certain time to participate as creditor in an insolvency procedure.

The context when it appears to be the most difficult to determine the exact limit up to where the business decision can take effects, without any interference and assessment of the insolvency judge is when a reorganisation plan must be confirmed. The case-law confirms such difficulty.

A reorganisation plan submitted in the insolvency procedure is deemed as being approved by the creditors if the votes have been cast in accordance with Articles 137 and 138 of the Insolvency law and if the plan has been approved by the majority established in accordance with Articles 139 par. (1) letters (A), (B) and (C). Further, in accordance with Articles 139 par. (1) letter (F) or the Insolvency Law, when confirming the reorganisation plan, the insolvency judge must assess not only if the plan has been approved in accordance with the law and contains all the legal elements, but also on its feasibility/viability.

Our understanding is that a non-viable reorganisation plan means a plan which does not have real chances of success or to obtain the results estimated in such plan. Moreover, the implementation of a non-viable plan may reduce the possibility to obtain proceeds from the sale of the assets of the insolvent company. The viability could be assessed from a double perspective: (i) the details in the plan must prove that its implementation will restore the viability of the company on a long term; (ii) the plan must contain enough details to ensure the conduct of the reorganisation process, without being necessary to amend or supplement it.

In light of the different terminology terms used by the law and the general principles, the business decision taken by the creditors with regard to the reorganisation plan (especially with regard to the restructuring measures and mechanisms) should not overlap with the viability of the plan. Another interpretation would mean to fully take from the creditors their powers to assess and decide on the business perspectives of the company and (especially) on potential concessions/settlements they may agree to support the recovery of the insolvent company.

Nevertheless, professionals working in the insolvency field have expressed the idea that in fact the insolvency judge, when verifying the viability of the reorganisation plan, should establish that the measures proposed in the plan are appropriate or not considering the economic data regarding the insolvent company and thus the business decision will go under the further scrutiny of court of law. 

Along these lines is also the reasoning of a recent decision issued by Timisoara Court of Appeal in which it was retained that as long as the law establishes for the insolvency judge duties that exceed the assessment over the legality of the plan, in that way increasing through the jurisdictional control also the chances of success of the plan, the court deemed that the verification of the viability of the plan includes also the verification of its opportunity (business appropriateness).

We however emphasize that establishing a general rule in the sense mentioned above is certainly based upon an excessive interpretation of the law, fully invalidating the decision-making powers of the creditors in insolvency, and ignoring the general concept of a business decision. We do not exclude that, in certain situations, the aspects which are related to the opportunity of the reorganisation plan to be also relevant for the feasibility/viability of such a plan. But the assessment over such aspects should be only done on a case by case basis and the interference of the judges in the business assessment and the decision of the creditors should be always a proportionate one. 

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