The legal instrument of reorganization plan is in practise often misued. For example, the plan is proposed just to to obtain a period of moratorium (in which the execution proceedings can not be run against the debtor), there are subsequent reorganization plans (so called „Chapter 22“) for the same debtor and plans are proposed even where there are no real economic grounds.
Reorganization should be available to commercial entities which have real chances for the realization of the plan. This legal institute give opportunity for the fresh start to the insolvent debtor, but on the other side, it can have negative effect on economy, as it protects companies which are generating losses. Reorganization, therefore, has a serious impact on competition on the market, having in mind that it creates benefits for companies which are in financial distress. Having this in mind, a minimum moralality should be respected in insolvency law, i.e. plans should be submitted in good faith.
We will here present some cases for which we deem that they depict bad faith plan proposals in Serbia.
1) Classes of creditors
Insolvency law prescribes the general obligation to respect equal treatment of creditors, which is defined as equality between creditors which belong to the same class of the reorganization plan. In our opinion, this principle should be interpreted broadly then a pure gramatical sense. Namely, establishing a connection between this principle and the principle of good faith conduct, the analysis can be made in regard to equality between creditors which belong to different classes.
The difference between treatment of each creditors classes should be made with arguments and in a reasonable manner. Such inequalities should be justified and necessary for the changes in business activities of an insolvent debtor.
2) Feasibility of the plan
Feasibility is an important precondition for the acceptance of the plan. Courts in Serbian practise are usually satisfied with the statement provided by the auditor that the plan is feasible. However, in our opinion, the court should at least check minimal preconditions for the fulfillment of the plan. For example, if a debtor plans to pay off its debt by organising a distribution of goods on the market, the court should check if there is a valid distribution agreement.
The problem of the „Chapter 22“ presents the possibility of new insolvency plans, which are proposed after the initial plan has not been successfull. Usually, where the initial plan has not been realised, the new plan does not have reasonable chances for fulfillment.
In the USA, there are some typical cases which are deemed as been filed with bad faith.
These are 1) the syndrom of the new debtor - If an insolvent debtor tries to organise o new business activity, 2) a debtor proposes a plan without reasonable economic base for the reorganization, 3) debtor does not have the real intention for reorganization, but it wishes to terminate existing contracts which are not beneficial for the debtor.
Having this in mind, there is a necessity for careful examination of reorganization plans. Acceptance of such plans by the court, if there are no reasonable economic basis for the fulfillment of the plan is detrimental for economy.