Bankruptcy in time of COVID-19                         

Bankruptcy actions in the time of COVID-19

The global COVID-19 pandemic has brought the world’s economy to a crushing standstill. Businesses and industries have been largely affected, and the economic impact and recovery will likely last for months or years. Uncertainty over how long this “new normal” economic environment will last cause significant risks for businesses. These circumstances are forcing companies and their boards to respond quickly to immediate challenges facing their organizations, such as unexpected revenue and cash flow disruptions.

The closure of businesses has had a tremendous impact on businesses, especially those that were previously hanging on month to month are likely finding themselves falling deeper and deeper into debt right now. Without any certainty as to when businesses in Albania will be able to return to business as usual, many may be considering bankruptcy, and rightly so.

One relevant consideration for companies that maintain business relationships with companies at risk of insolvency is that they should take special care now that the bankruptcy proceedings are suspended, due to judicial services suspension in all Albanian courts since several weeks now. Anyone who has a business relationship with a company at risk of insolvency must now react and take proactive steps to minimize the risks of restitutions (of payments or advance payments). It is possible, that with the new Government normative acts in place, a number of insolvencies will be merely postponed for some more weeks. Anyone receiving payments from a business that is threatened by insolvency potentially faces the risk of a later reimbursement of moneys required by the bankruptcy administrator in order to distribute the funds among all affected creditors.

To support the liquidity of companies that have experienced payment difficulties due to the corona pandemic and its aftermath, the government has announced that it will provide various access to liquidity and other instruments of help. But it is not guaranteed that such help will reach the companies within the 60 days deadline for insolvency application.

This following Question & Answer attempts to provide general guidance on the interpretation of some of the procedures of the bankruptcy law applied during the current COVID-19 pandemic.

1. Q: Can the creditors or the debtor file for bankruptcy or take bankruptcy actions against a party or their guarantor, during this time of health emergency?

A: Companies exposed to a constant cash shortage or when unable to pay their debts as they fall due and there is a loss of creditworthiness are obliged to file for insolvency within 60 days from the day they have or should have detected the insolvency. This applies regardless of whether the difficult cash situation is the result of mistakes by the management or whether the insolvency event was foreseeable. If the managing directors do not file the application with the court within sixty days at the latest, they risk facing criminal charges. Due to the health emergency, the judicial services and the time limits to file petitions are suspended, but there are no rules holding back the debtor or the creditors from taking bankruptcy actions. Of course the bankruptcy judges will start to examine the application when the court activity returns to normality.  

• Q: The Albanian Government through the Normative Act no. 9, decided to suspend the judiciary service, i.e. hearings in administrative, civil and criminal cases, which are postponed until the end of the health emergency. Time limits for filing lawsuits, appeals or any other procedural action, as well as the time limits for procedural actions by the bankruptcy administrators within the bankruptcy procedure are also postponed. How does this suspension affect the creditors or the debtor in taking any bankruptcy actions; is the debtor 60 days term obligation to file for bankruptcy suspended?

A:  Time limits to take bankruptcy actions in general are suspended and postponed to be reactivated when the court activity shall restart normally. For example, if the creditor has filed an application for the bankruptcy of his debtor, the debtor time limit to respond within 10 days is suspended. The same suspension applies for bankruptcy administrator procedural actions, although there are exceptions to emergencies protecting the bankruptcy estate from threatening damages. The normative acts do not specifically provide for the suspension of the statutory 60-days period obligation of the debtor, and it would be difficult to argue that since all procedural actions within a civil proceedings, including lawsuits and appeals are suspended, the obligation to file for bankruptcy is also suspended. Unlike some EU countries, the Government hasn’t adopted direct and more effective bankruptcy relief to companies during this unprecedented time. An alternative could be that through amendments in the bankruptcy law, to suspend the procedural 60 days deadline relating to filing obligation, and why not to facilitate the reorganization of small businesses.

Finally, the suspensions of all time limits referred here will terminate by the end of the health emergency, which would require another normative act to specify such ending period. However, many jurisdictions are making the necessary legislative changes and producing regulatory guidance to enable court proceedings by video link. The Albanian Government is also working in this respect, and it is hoped that these new amendments of the legislation will facilitate the continued administration of justice, at least in regard to civil proceedings.

• Q: Debtors may evoke the cause of Force Majeure as the reason for failing to perform their contractual obligations. In these circumstances, is the term of debt maturity suspended or it continues to run notwithstanding the health emergency?

A: Filing for bankruptcy or taking any bankruptcy actions requires the existence of insolvency for a company or individual. The actual health emergency cannot be considered a barrier beyond control to perform payments, as it would be the case of a financial crisis when Banks are shut down and access to liquidity is restricted. But even in such case, the maturity of debts is not suspended unless a contract or a statute provides for it.

• Q:  What should be the debt threshold to file for bankruptcy and is it affected/increased during the time of the health emergency?

Answer:    Such a threshold in the amount of debt is not specified by the law. Being in the state of insolvency for a company/individual is the sole and sufficient condition for a bankruptcy judge to decide the opening of the bankruptcy procedures. The amount of insolvent debt is left to the discretion of the judge. Under such provisions, it can be argued that the health emergency may have certain influence on the judge, who could increase the threshold more than the usual practice, existing before COVID-19.  

• Q: How can the debt be restructured and is there any legal protection for the companies that have performed well before the Covid-19? 

A: The purpose of bankruptcy is to give a fresh start to individuals and businesses who become overwhelmed by debt, particularly due to unforeseen circumstances that are beyond their control. The financial impact many are feeling as a result of COVID-19 certainly fits the bill. The new Law on Bankruptcy foresaw the need for bankruptcy and it has provided in the first place for the possibility of the debtor to reorganize, get back in control of their finances and continue to perform their activity to satisfy the creditors’ claims (pre-insolvency procedure), on condition that reorganization is possible or can benefit the insolvent entity. Otherwise, all debtor’s property and income shall be liquidated. The debtor is entitled to seek by the creditors an agreement on debt restructuring and reorganization plan. Such plan may also be proposed by 20% of the creditors or the bankruptcy administrator. In the end, the reorganization plan should get the votes of the majority of the recognized creditors divided in classes and ranks. They are entitled to grand the approval of the plan. Once the plan is approved, it becomes binding for all creditors. However, the creditors that opposed the plan or the debtor may appeal the court decision that has approved or rejected the plan. Such appeal does not suspend the implementation of the plan.

• Q:  Why is reorganization important and how is it implemented?

A: The debtor benefits from an automatic injunction of all lawsuits, foreclosures,, repossessions, bank levies, wage enforcements,  and other collection activities. The automatic stay is immensely helpful for debtors who are facing aggressive collection action by creditors and is the first step in reorganization. With the publication of the court’s decision approving the plan, not only enforcement procedures related to claims before bankruptcy will stay for the time of the implementation of the reorganization, but they might be dismissed if expressly provided in the plan. One of the advantages of reorganization is that debtors can use the reorganization process to adjust certain interest rates. For example, excessively high-interest rates on loans secured by commercial equipment, vehicle, or certain real estate can be lowered.

The bankruptcy administrator is in charge for monitoring the implementation of the reorganization according to the approved plan. He must provide yearly reports for the creditors on the performance of the company and its compliance with the reorganization plan. However, another scenario of administration of the monitoring process may occur; it may be done by the debtor in cases when there’s no bankruptcy administrator appointed by the court. In any case, failure to perform according to the reorganization plan will trigger the initiation of liquidation procedures.      

7.   Q: What are the benefits of filing for expedited reorganization?

        A: Under Chapter IV of the new Law on Bankruptcy, the debtor who finds himself in a situation of inevitable insolvency may require the initiation of expedited procedure of reorganization. The purpose of Chapter IV is to give the debtor the opportunity to overcome a situation of inevitable insolvency by entering an agreement with its creditors. The agreement is entered in an out-of-court procedure and is approved by the court on an expedited procedure. 

The expedited reorganization suspends all executions on assets of the debtor that are necessary for its ongoing commercial activity. Existing contracts may continue to apply and new contracts may be entered into, and they will not be affected by the expedited reorganization procedures.

*This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

Florian Piperi – Optima Legal & Financial, April 2020