The observation period during the insolvency procedure
The observation period is the term between the opening date of the procedure and the confirmation date of the reorganization plan or, by case, of the bankruptcy.
During the observation period, the company in insolvency can carry out its current activities, the trade ones and any standard financial operations, normally, such as:
- Continuation of the contracted activities, according to the object of activity;
- Performance of cashing and payments operations related to these;
- Ensuring the funds for the working capital, within the current limits.
During this observation period, when nothing irreversible happens in relation with the state or assets of the debtor, there are established the causes of the insolvency, the reorganization chances, and the possible people in default for leading the debtor in insolvency, being also concluded the inventory of the debtor’s assets and the table of receivables.
Also, during this observation term, the legal administrator shall analyze the accounting documents of the debtor company and conclude a report based on which there would be reflected the causes that lead to insolvency and who is guilty for them, if the debtor company can be saved by reorganization and which is the dimension of the company’s “estate”, meaning the so-called active assets, comparative with the total receivables against the debtor, which will entitle the holders to participate at the procedure.
This comparison between the debtor’s assets and liabilities may be an indicator of the probability or impossibility of legal reorganization. If the debtor is insolvent, obviously a legal reorganization shall be excluded, except the case when there is a credible funding source. It should be noted that in this phase, it is not established the value of such assets. The valuation of assets is, usually, an operation prior to the liquidation (although it is also possible a sale of the assets, during the observation period, with the approval of the bankruptcy judge or of the creditors’ committee).
In the insolvency procedures where the reorganization is excluded, the operations performed by the legal administrator during the observation period shall be performed by liquidator, as first measures of the bankruptcy procedure. This is why the analysis of the observation period and of these measures, taken normally during the observation period by the legal administrator is valid, adequately, with reference to the first measures taken during the bankruptcy procedure.
It is obvious that, certain rules of the observation period, like the “business as usual” and the rule of continuing the debtor’s contracts in process to be performed shall not be applicable during the bankruptcy procedure, whereas the debtor’s activity stops, the procedure being exclusively oriented towards the liquidation of its assets and distribution of the funds obtained by the creditors.
DEBTOR’S ACTIVITY DURING THE OBSERVATION PERIOD
- Continuing its current activities;
- Performing payments towards the known creditors, entitled based on the normal conditions for exercising the current activities, as follows: -Under the supervision of the legal administrator, if the debtor submitted a reorganization request and it was not withdrew its administration right;
-Under the management of the legal administrator, if the debtor does not have anymore the administration right.