The world will be “under water” for the next 6 months. Is your organization “watertight”?
09.04.2020 – Authors: Alina Radu, Valentin Voinescu, Stefan Ionescu, Catalina Dan
Probably the usual situation faced many companies in Romania is an abrupt fall in both cash and effective demand, thus causing a dual effect on both immediate (cash flow) and long term prospects of the company (balance sheet).
Companies and financial institutions are impacted, and the situation could “spiral” out of control, causing unintended consequences.
In our article How the “coronacrisis” is causing insolvency and financial difficulty and the law does not (yet) address this we have argued that businesses and banks are basically exposed, because the current law is not protecting them.
We have outlined below a number of practical steps that companies and banks can take right now to prevent this unwanted outcome.
For companies
Check your legal status and your obligations
Is the company in insolvency or in imminent insolvency?
According to the legal definition, the Insolvency Law regulates two types of insolvency:
- presumed insolvency: a debtor does not pay its debt within 60 days as of the maturity date; and
- imminent insolvency: there is already evidence that the debtor will not be able to pay the debt at maturity, due to lack of available funds.
The procedure may be initiated upon the request of either the debtor or any creditor which has a certain, liquid, due and payable claim out-standing for more than 60 days. In both cases, the outstanding debt must be of at least RON 40,000 (approximately EUR 8,000).
Given that the current measures in place do not provide a suspension of the debtor’s insolvency filing obligation, it is essential that companies carefully asses their financial situation and their payment obligations.
In case the company finds itself in an insolvency scenario, it should timely take all actions required by law, as debtors are obliged by law to file for insolvency within 30 days as of the date the company becomes insolvent. It is important to note that pursuant to the Insolvency Law, should a debtor be involved, in good faith, in out-of-court negotiations at the end of the 30 days period, he must file an insolvency claim with the relevant court only within 5 days after the negotiations have failed.
Failure to comply with the legal terms provided by the Insolvency Law is a criminal offense for the debtor’s directors. However, this is the case only for presumed insolvency – on the other hand, a debtor in imminent insolvency, while it is entitled to file a insolvency claim, it does not have a legal obligation to do so.
Is your financing impacted?
The current measures taken in order to prevent the spreading of the novel coronavirus will most likely have an impact on financing agreements as well. As all activities are brought to a halt and companies witness a dramatic drop of demand, it may consequently be difficult for a company to comply with the provisions of its financing arrangements.
While failure to comply with payment obligations is the most common, there may be several other provisions that can deal a blow to a company’s financing.
For more information on the impact of the coronavirus pandemic on credit agreements clauses, please see our in-depth analysis here.
Are you in financial difficulty?
We have already pointed out that absent of clear legislative measures assuring a quick access to a an out-of-court procedure to stay enforcements and block claims, the company needs to give serious consideration to contractual measures – basically concluding standstill agreements with key counterparties, most importantly banks.
Are you subject to hardship or force majeure?
Face to the rapidly deteriorating economic climate, most companies think of ways to construct their defence. That is why there is a large debate with respect to the possibility of invoking force majeure or hardship in case the company is not able to timely fulfil its obligations.
More on hardship and force majeure can be also accessed here.
Taking preventive action
One of the most important steps is ensuring an appropriate standstill agreement is in place between the company and its main creditors and partners, ensuring stability during the following 3-6 months.
Typically, such agreements ensure three key aspects:
- Suspend enforcements against the company
- Ensure access to information by the parties
- Create the space for conclusion of an in-depth well-planned restructuring plan.
For more advice on how to successfully conclude standstill agreements, please contact our Financial Restructuring Team.
For banks
Our experience in restructuring and insolvency is that the more time passes for issues to become chronic without (i) access to information and (ii) coordinated action, the more the approach moves from managing going concern to planning liquidation.
With that in mind:
Actively identify key large corporate clients with significant impact on the supply chain
These clients are likely to be concerned that they have to file for insolvency, that are likely to enter into financial difficulty, that are problematic in terms of measures of stabilization and continuity.
Set up “clusters of protection” and conclude standstill agreements
The point of establishing clusters of protection is that, in any business ecosystem, it is not only the client which is affected, but usually a number of key suppliers and business partners of that client.
A very important point of a standstill agreement, besides the obvious relief of liquidity and enforcement issues, is the ramping up of information covenants, which are absolutely critical. Most often information is historical and unhelpful to gauge the actual impact on the client’s business.
For more advice on how to successfully conclude standstill agreements, please contact our Financial Restructuring Team.
Start planning for preventive restructuring, following standstill period
Planning for a worst case scenario is fundamental and working collaboratively with clients in this respect has the advantage of committing the client to actions which in the long term are mutually beneficial.
Emergency Action Kit
Critical due-diligence
This can include an analysis of:
- debt exposures, risks and key provisions, major contractual problems;
- key commercial relations, analysis of provisions and risks;
- employment issues; and
- tax issues.
Standstill Agreements
Indispensable tool for “stopping the clock”, ensuring cooperation and mutual access to information in real time.
For more advice on how to successfully conclude standstill agreements, please contact our Financial Restructuring Team.
Monitoring
Fast reporting of changes in legislation specifically impacting the client, including the measures taken during the coronavirus crisis buy government, authorities and courts
Ongoing support
Constant contact addressing any question related to the coronacrisis and any current impact
Dedicated Emergency Support Team, available 24/7.
