Vol. XI No.7
August 2006


New Insolvency Law May Improve Debt Recovery

New Insolvency Law May Improve Debt Recovery...

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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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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