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Introduction |
The
implementation of Law 85/2006 revising Romania’s insolvency procedures,
enacted in compliance with European Commission directives, should bring
some order to the Romanian market which is overflowing with insolvent
entities. According to published statistics from the National Union of
Practitioners in Reorganization and Liquidation, in 2005, 10,813
insolvency cases were brought of which 71% were bankruptcy cases, 13%
were reorganizations and 8% were liquidation cases. Considering that
there are 1.2 million companies registered with the Trade Registry,
there has obviously been something awry with Romania’s approach to
bankruptcy if only 10,813 companies availed themselves of Romania’s
bankruptcy procedures. Hopefully, Law 85/2006 will change this
unfortunate phenomenon.
Many observers believe that the reason for such low user rates is that
bankruptcy in Romania is a taboo issue that is often perceived as a
humiliation and not as a solution for the recovery of a business. The
new insolvency law, which became effective on July 21, may remedy this
cultural impediment by making it much easier for non-viable companies to
exit the market. For one thing, under the former law, it took six months
merely to start an insolvency procedure; now an applicant will know
immediately after submission of the request whether a bankruptcy or a
general procedure which may lead to bankruptcy or reorganization is
applicable. The new law also introduces a simplified procedure
applicable in certain situations such as, for example, where legal
entities are devoid of assets in their patrimony. By streamlining
bankruptcy rules, Romania hopes that it will induce more insolvent
companies to use the benefits of the nation’s insolvency procedures. |
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The Insolvency Assessment |
Most
insolvency cases in Romania are filed by creditors as a collection
mechanism against the debtor. However, large corporate debtors have also
filed and sought reorganization.
There are basically two situations in Romanian law where insolvency
procedures can kick in: one provides that a debtor that can no longer
cope with its outstanding debt with the money available to it may file a
petition with the court to become subject to the insolvency law. The
other and more frequently used method provides that any creditor, who
has a debt that is liquid, due and amounting to no less than US $3,000,
may file a petition with the court against a debtor who, for at least 30
days, has stopped payment. This method is generally described as an
inability to pay one’s debts as they become due.
The new law protects a debtor who files for insolvency protection by
entrusting it to draft the reorganization plan and continue managing the
company. However, unanticipated requests for insolvency or requests made
in bad-faith are punishable for the damages caused. The debtor also
bears responsibility in cases where it deceitfully contests its
insolvency status and the court denies the petition. The new law
stipulates that in cases like these the debtor is no longer entitled to
draft the reorganization plan. Parliament introduced this amendment as a
penalty for the debtor’s whose intent was to delay the proceedings. The
law also makes it a felony (in Romanian bancruta simpla)
punishable by imprisonment in certain circumstances where a debtor fails
to initiate an insolvency procedure or for initiation of the proceedings
after the prescribed period of time. |
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More Rights for Creditors |
The new law provides creditors with more recovery rights than the former
law. For example, a creditor holding at least 50% of the total value of
a debtor’s obligations may appoint a judicial administrator at the first
meeting of the Creditors’ Assembly. This way, the creditor in question
is assured that the entire procedure will be conducted by an insolvency
practitioner with recognized competency. Also, a creditor may ask the
syndic judge to waive the right to administer the debtor when there is
an indication that losses in the debtor’s assets have continued to occur
or there is no likelihood of a reorganization plan being worked out.
 The
creditors organized under the Creditors’ Assembly may even take the
debtor’s company under their administration or sell the debtor’s shares.
Another power granted by the new law to creditors is one permiting them
to approve the recommendation of a judicial administrator that
insolvency procedures should commence against a debtor. Where there is a
positive decision, the creditors can submit a plan for the business
reorganization of the debtor for final approval. The Creditors’ Assembly
may also request the opening of a bankruptcy procedure in cases where
the obligations of the debtor provided for in the reorganization plan
are not fulfilled.
The Creditor’s Assembly must also be informed of all reports of the
judicial administrator or liquidator, which it may analyze and if
necessary contest. The creditors may appeal the measures taken by a
judicial administrator or a liquidator, as well as the liabilities
listed in the preliminary or final table of liabilities, and the plan of
distribution of the funds owed. |
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The Administrators |
The debtor company is managed by a special or judicial administrator or
a liquidator, depending upon the circumstances. The special
administrator is appointed by the debtor’s General Assembly of
Shareholders to safeguard their interest while the judicial
administrator and liquidator are appointed by syndic judge at the
creditors’ suggestion. The judicial administrator, in his capacity as a
supervisor of the debtor’s activities during the insolvency period and
throughout the judicial reorganization process, analyzes all the
documents issued by the debtor three years previous to the opening of
the insolvency procedure. He may request the cancellation of all
agreements concluded by the debtor to the detriment of the creditors.
The same powers are vested with the judicial liquidator, the person
concerned with running the debtor’s business when the bankruptcy
procedure has commenced against the debtor.
The new law extends the scope of conflicts of interest for persons
acting as administrators to enforcement agents and liquidators whose
spouses or relatives up the 4th degree have relevant connections with
the creditors or the debtor. |
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Netting Arrangements |
In an effort to harmonize Romanian legislation with EU regulations and
to better protect creditors, netting arrangements are specifically
regulated in the new law and there are specific provisions dealing with
qualified financial agreements.
A qualified financial agreement is defined as any agreement whose object
is transactions with financial derivative instruments traded on
regulated markets, assimilated markets and over-the-counter markets.
 Netting is described in Romanian as a bilateral set-off (”operatiune de
compensare bilaterala”), and is defined as: (i) any agreement or clause
in a qualified financial agreement, concluded between two parties,
providing for a netting of certain payments, or a fulfillment of certain
obligations or a performance of present or future rights, derived from
or in connection with a qualified financial agreement (a netting master
agreement); (ii) any netting master agreement concluded between two
parties, providing for a netting between two or more netting master
agreements (master-master netting agreement); or (iii) any guarantee
agreement which follows or is in connection with a netting master
agreement (the guarantee agreement being defined as any agreement or
guarantee instrument of a netting agreement or of a qualified financial
agreement, including pledges, guarantee letters, personal guarantees and
other similar agreements).
Netting operations involve the performance, in relation to a qualified
financial agreement, of one of the following operations: (i) the
termination of a qualified financial agreement, the acceleration of any
payment, the fulfillment of an obligation or the realization of any
right derived from a qualified financial agreement, based on a netting
agreement; (ii) the calculation or the estimation of a set-off value,
market value, liquidation value or replacement value of any of the
obligations or rights above; (iii) the conversion into one currency of
any of the above; or (iv) the set-off, in order to obtain a net amount
(off-set) of any values calculated above and converted into one
currency, as mentioned above.
The new insolvency law expressly recognizes that any transfer,
fulfillment of an obligation, exercise of a right, act, or fact based
upon qualified financial agreements, as well as any netting agreements,
is valid, can be enforced and opposed against an insolvent contracting
party or an insolvent guarantor of a contracting party and is valid
grounds for the registration of the receivables in the insolvency
procedures. The only obligation derived from a netting agreement
recognized by the new insolvency law is the commitment to perform the
net obligation derived under the netting agreement to the other
contractual party, and its corresponding right (to receive the net
claim).
The new insolvency law protects the contracting parties to a netting
agreement by stating that no attribution granted by the law to a person
or entity in the application of insolvency procedures will obstruct the
termination of the qualified financial agreement and/or the acceleration
of the fulfillment of the payment obligations or the performance of a
right based on one or more qualified financial agreements, having as a
basis a netting agreement, such powers being limited to the net amount
resulting out of the application of the netting agreement.
In addition, with the sole exception of proving the fraudulent intention
of the debtor, no liquidator or court of law can hinder, request the
nullity or decide the termination of transactions with financial
derivate instruments, including the performance of a netting agreement,
based on a qualified financial agreement. |
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Conclusion |
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According to a 2004 survey, Romania had the lowest percentage of debt
recovery in Eastern Europe. In only 6.9% of the total number of bankrupt
companies in Romania did creditors actually recover some of their
claims, while in Croatia the percentage was 26%, in Hungary it was 30%,
and in Bulgaria it was 34%. There really is no excuse for such a poor
track record in Romania. It is, however, expected that the new
insolvency law, now similar to those in the rest of the European Union
member states, will bring Romania’s debt recovery proportion up to the
levels of its neighbors. |
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Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2006 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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