A few years ago, while working on valuation reports for companies undergoing insolvency proceedings, I took “for a pittance” Law No. 85/2014 on insolvency prevention and insolvency procedures and tried to understand as well as possible the role and importance of valuation within this procedure. (As authorized valuers, we must comply with both the property valuation standards and the legislation in force.) So I analyzed all the articles in Law No. 85 that refer to valuation and I realized that understanding the procedural stage the company is in is essential.

After identifying the stage in the procedure, following discussions with the insolvency practitioner, the valuer determines the type of value to be estimated and the context in which the value will be estimated. According to valuation standards, the premise of value or assumed use describes the conditions under which an asset is used. Depending on the situation, one or more premises of value are used.

The law requires the preparation of an evaluation report during the insolvency procedure, within several stages of the procedure. The most important of these are:

1 – the observation period, during which the judicial administrator analyzes the legal and patrimonial situation of the company to determine whether there are real prospects for saving the company, based on a reorganization plan, or, as the case may be, whether the company must be liquidated because it can no longer be revitalized.

At this stage (before voting on the reorganization plan), the assessment may consider:

• going concern – hypothesis in which the appraiser estimates the market value and
• cessation of activity – hypothesis in which the appraiser estimates the liquidation value.

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In turn, the liquidation value can be determined in two scenarios: orderly sale or forced sale.

In developing the reorganization plan, the valuation of the collateral for each creditor is also taken into account. Usually, their valuation is carried out at the opening of the insolvency procedure, for entry in the table.

The differences between market value and liquidation value in the event of a forced sale can be significant. Therefore, it is very important that the type and premises of the value are discussed and established with the insolvency practitioner before the valuation begins.

During the observation period, a very important step is the evaluation of the collateral for inclusion in the receivables table. It is advisable that, in the case of movable assets, for example, the evaluator be presented with the premise in which they were evaluated, at the stage of granting the credit. For certain movable assets, the differences between the results can be very large simply because the evaluation was made in the assembled premise (as is where it is) or in the dismantled premise (released from the site).

Also at this stage, there are two articles of law that provide for the possibility of valuing certain assets from the company's assets. Here are some excerpts from the two articles:

• “… in the absence of liquidity in the debtor's assets, the judicial administrator / judicial liquidator will identify assets that are free from encumbrances and that are not essential for the reorganization, and will proceed to their urgent sale, at least at their liquidation value, established by an appraiser.”
• “The creditor holding a claim that benefits from a preferential cause may request the syndic judge… to lift the suspension provided… with regard to his claim and to immediately realize it…”

In the case of companies in the observation and reorganization period, an appraiser can also be called upon to prepare valuation reports for:

• financial reporting (evaluation according to accounting policies);
• taxation – the taxable value of the building is only updated if a final decision has not been made to initiate bankruptcy proceedings.

2 – In the situation where either a reorganization plan was proposed and implemented, but it failed, or it was decided that it was not viable and the bankruptcy stage was passed directly, the law provides that an evaluation report will be drawn up.

In bankruptcy proceedings, the assessment concerns all assets in the debtor's estate and is different from that of assets affected by preferential causes, which is done in order to draw up the definitive table.

During the bankruptcy stage, the assets of the debtor's estate will be evaluated both en bloc and individually. En bloc evaluation considers either the evaluation of all the assets of the debtor's estate or the evaluation of functional subassemblies.

Some examples of assets subject to valuation would be: real estate, machinery, equipment, machinery, manufacturing lines, inventory items, contracts (contract, rental, leasing), inventories, intangible assets (licenses, patents, trademarks), financial assets (participations in other companies).

These are just a few very important aspects that should be established with the insolvency practitioner before starting the evaluation activity.

The evaluation standards specify the need to establish, based on a written contract, terms of reference that aim to ensure that things are clearly established and agreed upon by both parties (evaluator and applicant for the evaluation report), before starting the evaluation activity.

Knowing the premise in which the valuation is made (implicitly, the stage the company is in within the insolvency procedure), as well as the type of value required for each stage (market value or liquidation value), increases the chances that the valuation reports will be appropriate for their use in making decisions within the insolvency procedure.

Within this procedure, we are, together with the insolvency practitioner, one of the actors with a very important role, provided that we know and understand very well the impact of the evaluation result on the decisions that must be made for the respective companies.