Before initiating insolvency which automatically leads to bankruptcy procedure, they are establishing new companies, most often in the names of others, to which they transfer their major contracts (strategic suppliers and clients), and a portion of the assets. These transfers are so well covered up that lenders who are supposed to oblige companies to repay their debts fail to recover much of the credit. According to several sources in the business law market, the phenomenon is currently quite extensive.
“These things have been happening for a very long time, not just in this time of crisis. But people are now more creative than ever before. This year, because there are more insolvency files open, the number of such operations is automatically rising,” Attorney Arin Octav Stănescu, President of the National Union of Insolvency Practitioners in Romania (UNPIR), told Business Standard. The insolvency specialist said that he has heard about very ingenious attempts to avoid repaying debts in this period, such as the splitting of firms followed by mergers with offshore companies.
“The crisis has given some company managers the legal basis for filing for bankruptcy, without taking responsibility for their personal possessions. Some are taking advantage of this opportunity to escape debts and liability,” Attorney Nicolae Scorei, Managing Partner of the Scorei&Asociaţii law firm, said.
“This illegal operation is quite common at present, even if not very large-scale. It is a type of clever financial engineering. But lenders do have instruments to fight this,” said Gheorghe Piperea, an Attorney specializing in insolvency cases.
The phenomenon of establishing new companies to take over the profitable contracts of enterprises beleaguered by debts is also reflected in the relatively high number of newly-founded companies in this year of crisis. In the first half of 2009, the number of newly-established companies fell by only 15 percent year-on-year, to 63,400 from 76,200. According to Stănescu, a good insolvency practitioner can track down a suspicious transfer of assets that took place before the company filed for bankruptcy. “This is actually the first thing an insolvency practitioner does: he or she verifies all the company’s operations in the previous years. If the practitioner notices any fraud in the past three years, he or she can request that these [the transfers] be cancelled,” Stănescu added.
Consultant Alexandru Milcev, Partner with the Ernst&Young Romania company, said that the attempt to trick lenders by filing for bankruptcy and establishing a new company can be easily brought to light. On the other hand, Piperea makes mention of cases on the market where financial engineering is difficult to attack. “Before bankruptcy is declared, you enter into debt enforcement, and sell a part of the assets at a very low price. You handle things in such a way that the buyer is that very company, through which you want to continue your business,” Piperea said.