Place and role of valuation in insolvency proceedings

Most business owners turn to a valuation of the company only for Over time, working on valuation reports for companies in insolvency proceedings, I "put through its paces" Law No. 85/2014 on insolvency prevention and insolvency procedures and I have tried to understand as best as possible the place of the valuation and the importance of its outcome in this procedure.

As authorised valuators, we must comply with both the Asset Valuation Standards (AVS) valid at the time of the valuation and the legislation in force. Analyzing all the articles of Law No. 85 in which reference is made to the valuation, I realized that understanding the procedural stage in which the company is found is essential.

After identifying the stage of the proceedings, following discussions with the insolvency practitioner, we determine the type of value (market value and/or liquidation value) to be estimated and the premise on which the value will be estimated. For example, according to the AVS, the liquidation value can be determined in two premises: orderly sale or forced sale.

According to the Asset Valuation Standards, the premise of value or assumed use describes the conditions under which a good is used. Depending on the situation, one or more premises of the value shall be used.

The differences between the market value and the liquidation value in the premise of forced sale may be significant. It is therefore very important that the type and premises of value are discussed and established with the insolvency practitioner before the start of the assessment.

The law provides for the need to prepare valuation reports during the insolvency proceedings in several stages of the insolvency proceedings. In this article we tried a correlation between the stages of the procedure and the usual requests to produce the valuation reports we receive from insolvency practitioners.

Observation stage

At the observation stage,the judicial administrator analyses the legal and property situation of the company to determine whether there are real prospects for saving the company, on the basis of a reorganization plan, or, where appropriate, whether the company needs to be wound up, as it can no longer be revitalised.

At this stage (before the vote on the reorganisation plan), the valuation may take into account:

• valuation of the guarantees relating to the beneficiary claims of a case of preference, in accordance with Article 103 of Law 85/2014;
• valuation with a view to substantiate the reorganisation plan.
• valuation for the purpose of simulating bankruptcy proceedings (Article 133, paragraph 4, point (d).

The reorganisation plan may provide, without limitation, together or separately:

1. (a) operational and/or financial restructuring of the debtor;
2. (b) corporate restructuring by modifying the share capital structure;
3. (c) the restriction of the activity by the partial or total liquidation of the assets of the debtor's estate;

Depending on what the plan provides, we are required to produce evaluation reports aimed at:

• business evaluation within the reorganisation procedure;
• valuation for the preparation of the proposed merger/division project by the reorganisation plan;

Bankruptcy stage

At the bankruptcy stage,all the operations of the proceedings are directed towards the liquidation of the debtor's estate. Thus, the valuation may be requested for:

• liquidation of assets in bankruptcy proceedings;
• the determination of the value of the assets to be assigned to the shareholders following the completion of the winding-up and coverage of the list of creditors;

In the bankruptcy stage, the assets of the debtor's estate will be valued both in bulk and individually. The bulk valuation shall consider either the assessment of the totality of the assets in the debtor's estate or the assessment of functional subassemblies.

As a rule, we are required to valuate the assets both in bulk and individually, and we report the estimated values with the specification of the creditor for which the asset is mortgaged.

In addition to the two steps presented above, we draw up valuation reports at the request of the judicial administrator or liquidator also in other situations provided for by law – Article 5 paragraph 71, article 39 paragraph 6, article 123 paragraph 11 letter a) and letter b), article 131 paragraph 2 lettre b) point 2, article 133 paragraph 5 letter G, article 153 paragraph 3.

What we need to know about valuation in the insolvency proceedings

Regardless of the stage of the procedure, there are some very important aspects for us, the authorised valuators, for the production of a full and useful valuation report for all participants in the insolvency procedure, which must also be known by the applicant for the valuation report (insolvency practitioner and liquidator respectively):

• In order to identify the assets under valuation, the valuator shall request the judicial administrator/liquidator for the inventory report of the assets of the company under insolvency, with all related annexes, specifying the assets subject to mortgages, pledges, distraint or other rights assimilated to mortgages.
• If the valuation is carried out for assets grouped into functional assemblies, the goods forming the functional assembly will be identified and the valuation will be carried out both functionally and individually, depending on the purpose of the assessment. Grouping by functional assemblies can be done by the valuator together with the insolvency practitioner and possibly with other specialists (e.g. in the case of complex technological lines, we turn to specialists in the field in which the equipment operates).
• For the assessment of immovable property, their identification shall be carried out both by analysing the accounts and the results of the inventory, as well as on the basis of entries in the Land Registry and the field inspection.
• The appraiser must know whether an asset will be sold individually assuming that the other assets are available to the same buyer, or whether the item will sell the individual assuming that the other assets are not available to the same buyer.
• For the assessment of unfinished real estate investments, the project documentation and the stage of execution shall be identified in the reference terms.
• Machinery, equipment and installations intended to provide different services or utilities to a building are often integrated into the construction and, once installed, cannot be separated from it. Such examples refer to installations for the supply of electricity, gas, heat, air conditioning or ventilation and to equipment such as elevators. For this reason, if they are highlighted separately in the inventory lists, they will not be assessed individually, their value being included in the value of the construction to which they belong.
• For the valuation of intangible assets it is very important that they are clearly defined in terms of their type and legal rights or interests.
• For the assessment of stocks, the assessor must identify the goods by categories of use (electrical materials, building materials, fuels, etc.) and it would be very useful if the division by these categories were carried out at the very time of the inventory, thus shortening the time required for the preparation of the evaluation reports.
• A particularly complex and much-discussed case in recent times is the assessment of the debtor company's claims in insolvency proceedings. This presupposes, above all, the identification and understanding of the context underlying the creditors' acceptance of this type of guarantee.

These are just a few very important issues that should be known to both the evaluator and the assessor and the assessor and that should be established before starting the evaluation work. Close collaboration between insolvency practitioners and assessors is needed to ensure that the terms of reference are correctly identified and that the assessment's premises are clearly established from the outset.

The evaluation standards specify the need to establish, on the basis of a written contract, terms of reference which are intended to ensure that all aspects are clearly established and agreed by both parties (the assessor and the applicant for the evaluation report) before starting the evaluation work.

It is obvious that knowing the premise in which the assessment is made (by default the stage at which the company is in insolvency proceedings) and the type of value required for each stage (market value or liquidation value), increase the chances that the valuation reports will be appropriate with their use in decision-making in the insolvency proceedings.

In insolvency proceedings, the authorised valuator is one of the actors with a very important role, this role being fulfilled provided that he knows and understands very well the impact of the outcome of the valuation on the decisions that the parties involved must make for those companies.

Article written by Anuța Stan, published in the magazine Phoenix - Insolvency Magazine No. 65 (Jul-Sep 18) – https://www.unpir.ro/documents/phoenix/pdf/revista-phoenix-65.pdf

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