The general purpose of the insolvency regulations is to create the appropriate legislative framework for the collective recovery of debts from an insolvent debtor. Under Romanian law, the state of insolvency is defined as the impossibility for a debtor to pay its creditors. Therefore, a debtor will be subject to insolvency procedures if there are no funds available to make the necessary payments, even if that debtor's assets are sufficient to satisfy the creditors' receivables.
Common legal background
The debtor's assets may serve towards the satisfaction of the creditors' claims either through the reorganisation of the debtor's activity, the liquidation of certain assets belonging to the debtor or through bankruptcy. Details regarding the means whereby such steps are pursued according to Romanian law are regulated by Law 85/2006 Regarding Insolvency Proceedings, as amended (Insolvency Law). From a European harmonisation perspective, the Insolvency Law is in keeping with EU norms in the field in that it creates a fast and simplified procedure for the analysis and measure-taking mechanism when dealing with insolvent debtors.
The Insolvency Law encompasses not only regular commercial companies but also consumers' cooperative companies and organisations, agricultural companies and any other private entities carrying out economic activities in general.
As a rule, the Insolvency Law institutes an obligation for the debtor in a state of insolvency to lodge to the competent court a request (together with accompanying documentation) for the commencement of the procedure within 30 days of the date the insolvency state occurred. In particular, the most important part in insolvency proceedings is played by the syndic judge (judecatorul sindic), whose main role is to supervise the legality of the operations undertaken during the procedure.
To safeguard creditors' interests, any creditor who has a claim that is certain, determined and due and greater than LEI10,000 ($3,000) may file with the court a request for commencing insolvency proceedings against an alleged insolvent debtor.
The judicial administrator or liquidator (as appropriate) appointed by the syndic judge shall notify the debtor or creditor (as appropriate, depending on which of them initially filed the insolvency request with the court), as well as the Commercial Registry where the debtor is registered. Additionally, the notification will be published in a newspaper with high distribution and in the Insolvency Procedure Gazette (Buletinul Procedurilor de Insolventa).
It is noteworthy that once the insolvency procedure has been initiated all claims, irrespective of whether they have a judicial or non-judicial character, directed for satisfying the debtor's creditors regarding their claims towards the debtor's assets, are suspended by operation of law. The opening of the insolvency procedure also has the effect of preventing the accrual of any interest or penalty pertaining to claims having a date before the opening of the proceedings.
A particular feature is that shares issued by listed companies are suspended from trading from the date the Romanian National Securities Commission receives a notification in this respect from the syndic judge and until a reorganisation plan is confirmed.
The debtor loses the right to manage its assets, apart from where it intends to reorganise itself and, consequently, to carry out its activity in these conditions. The debtor's directors are prohibited from transferring, without the syndic judge's approval, their shares held in the debtor.
Two procedures may be commenced as an effect of the opening of the insolvency proceedings: (i) judicial reorganisation; and (ii) bankruptcy.
Judicial reorganisation may be decided upon in the event that, after a careful analysis of the facts pertaining to the debtor's insolvency state, the syndic judge decides to approve a plan intended to restructure the debtor's activity in view of its financial recovery and complete realisation of the creditors' claims. Once judicial reorganisation is approved, the syndic judge shall also approve an administrator.
In the event that the debtor's reorganisation is not successful, if a reorganisation plan is not approved by the syndic judge, if the judicial administrator proposes a plan for the application of the bankruptcy procedure or if the debtor chooses so, the syndic judge is entitled to decide the commencing of the debtor's liquidation and, eventually, bankruptcy procedure.
At any stage of the proceedings, if it is acknowledged that the debtor does not have enough assets to cover administrative costs and no creditor makes advance payments for this purpose, the syndic judge may decide to close the insolvency proceedings and to de-register the debtor from the Commercial Registry.
Safeguarding creditors' rights
The Insolvency Law provides certain advantages to creditors for safeguarding their interests. Such remedies are available only to the judicial administrator (or the liquidator, as appropriate), who is entitled to exercise them in the name of creditors whose interests need to be safeguarded.
The judicial administrator (or the liquidator) may file with the syndic judge claims for the invalidation of operations whereby rights have been created or transferred to third parties through various means, such as:
- transfer acts concluded without consideration within the last three yeas before the opening of the proceedings;
- commercial operations concluded within the last three years before the opening of the proceedings, through which the benefit received by the debtor as a consequence of the operation is obviously smaller than the value of the service performed;
- acts concluded within the last three years before the opening of the proceedings, to the detriment of creditors' interests;
- property transfer acts concluded with a creditor within the last 120 days before the opening of the proceedings, provided the value of the receivable that the creditor may obtain as a result of the insolvency proceedings is smaller than the price under the transfer act;
- the creation of a movable security for securing a receivable that was initially unsecured or prepayments of debts payable at a moment subsequent to the opening of the proceedings, both if they are made within the last 120 days before the opening of the proceedings; or
- transfer acts or the assuming of obligations concluded or made by the debtor within a period of two years before the opening of the procedure, with the intention of hiding or delaying its insolvency state or to fraud creditors deriving such quality from certain operations involving derivatives.
For the above cases, the Insolvency Law presumes that they have caused damages to creditors, which the creditors do not need to prove. However, the judicial administrator or liquidator is entitled to appreciate whether it should file an annulment claim with the syndic judge.
In addition, the Insolvency Law provides the possibility for the annulment of any operation, concluded within the last three years before the opening of the proceedings, by the debtor with certain persons (for example, shareholders holding at least 20% of the share capital, directors or managers).
Credit institutions' insolvency
The Insolvency Law is not applicable to all types of legal entities. For example, credit institutions are not subject to the general regime set out by the Insolvency Law, but they enjoy a different treatment under a special law: Government Ordinance 10/2004, as amended (Ordinance 10).
Ordinance 10 is applicable not only to Romanian credit institutions but also to their branches having their headquarters in other countries.
As regards the concept of insolvency, Ordinance 10 refers to three situations, either: (i) the obvious incapacity of payment of due debts by using the available funds; (ii) the reduction under 2% of the solvability ratio of the respective credit institution; or (iii) the revocation of the functioning authorisation of the credit institution due to the impossibility of its financial straightening (redresare financiara). One may notice that, should the banking authorisation of the credit institution be revoked on grounds other than failure to comply with the supervision measures imposed by the National Bank of Romania (NBR) aiming at remedying its financial difficulty, the insolvency procedure may not be started.
As regards the persons entitled to request the opening of credit institutions' insolvency procedures, Ordinance 10 allows not only the credit institution or its creditors to file such a request but also the NBR, in its capacity as supervising authority of the Romanian banking system.
There are certain differences in respect of these entities as compared to the common legal regime established by the Insolvency Law. For example, while the debtor is entitled to lodge a request for the opening of the procedure even in the event that its insolvency state is imminent, a credit institution may not do so. Also, creditors may file a request for the opening of insolvency proceedings only for receivables that are certain, determined, due and not fully repaid within 30 business days from maturity, in the case of credit cooperatives, or seven business days in the case of other credit institutions.
Following the notification of the parties involved in the insolvency procedure, the NBR has the obligation to appoint an interim administrator, which may be either the special administrator designated within the procedure of special administration (if such procedure was initiated by the NBR in accordance with Government Emergency Ordinance 99/2006 regarding credit institutions) or a special person appointed to this purpose, instead of the board of directors of the insolvent credit institution (if the special administration procedure was not initiated).
As in the common regime, all claims or actions aimed at realising the receivables against the credit institution are suspended and no operations or payments performed by the credit institution subsequent to the opening of the procedure are valid. Also, no penalty or interest may accrue in relation to claims against the insolvent credit institution starting from the date the insolvency proceedings have been opened. However, for credit institutions, the type of claim (secured or unsecured) is not relevant, as it happens under the common regime set forth by the Insolvency Law (interest may accrue under the Insolvency Law for secured claims even after the opening of the insolvency procedure, unlike for credit institutions).
An interesting effect of the opening of insolvency proceedings is the freezing of deposits, which become unavailable to their owners. From that moment, deposit owners are entitled to receive compensations for the sums available in the deposit accounts. In any event, the Fund for Guaranteeing Deposits in the Banking System is subrogated by effect of law in all of the rights of the guaranteed deponents, proportionately with the amount representing the guaranteed value of the deposits.
Specific insolvency legislation: other domains
Specific rules for regulating insolvency matters are also to be found in Law 503/2004 Concerning the Financial Recovery and Bankruptcy of Insurance Companies (Law 503). Though the procedure to be followed may easily be compared with the one set out by the Insolvency Law, the Romanian Insurance Supervisory Commission is entitled, as part of its role of supervising authority for Romanian insurance companies, to perform several interventions aimed at recovering the financial situation of insurance companies (redresare financiara). The Insurance Supervisory Commission may also file with judicial courts the request for opening the insolvency procedure regarding an insurance company. Also, a court decision opening insolvency proceedings automatically results in the revoking by the Insurance Supervisory Commission of the insurance licence of the respective debtor.
International private law
Law 637/2002 (Law 637) contains international private-law norms applicable to insolvency proceedings. The hypotheses taken into account by such norms are: (i) cases where a foreign court seeks assistance in Romania with respect to foreign insolvency proceedings; (ii) cases where assistance is sought in a foreign state regarding an insolvency procedure opened in accordance with the Insolvency Law; (iii) cases where simultaneous insolvency proceedings are opened for the same debtor; and (iv) cases where the debtor or other interested person in a foreign state seeks the commencement of the insolvency procedure under the Insolvency Law or to take part in an already commenced insolvency procedure.
Law 637 uses the concept of the foreign representative to designate the individual or legal entity authorised, during a foreign procedure, to manage the reorganisation and/or liquidation of the debtor. Such foreign representatives have the right to access directly the Romanian courts, for requesting the opening of proceedings, provided that all conditions required for opening the procedure under Romanian law are fulfilled. If the foreign representative wishes to intervene in a procedure that is already opened, this is only possible subject to the recognition of the foreign procedure by Romanian courts.
The recognition of such procedure is subject to certain steps established by Law 637. As an effect of the recognition, no individual claims or actions regarding the debtor's assets may be filed with courts or, if already commenced, they are suspended by effect of law. Also, the acts and any measures having the nature of individual enforcement of the debtor's assets are also suspended or prohibited from occurring. Apart from this effect, Law 637 also sets out that, starting from the date when the foreign procedure is recognised, the right to sell, charge or otherwise dispose of the debtor's assets is suspended. Thus, the creditors are not allowed to enforce their security over debtor's assets from the moment the foreign procedure has commenced. For usual operations performed by the debtor, such an interdiction is not applicable.
From the date the foreign procedure has been recognised by the Romanian courts, the foreign representative is entitled to lodge such annulment claims with respect to the legal acts concluded by the debtor to the detriment of its creditors that may be filed by the liquidator or administrator. However, it is noteworthy that the conditions for invoking such claims are the ones mentioned in the Insolvency Law, even for such foreign representatives. Also, no special privileges exist for such foreign representatives regarding domestic (Romanian) creditors.
Additionally, Law 637 contains special rules regarding insolvency-related relations with EU member states, especially regarding recognition procedures, third parties' in rem rights, compensation, payment systems and financial markets, among others.
Centre of main interests (Comi)
Regulation 1346/2000 on insolvency proceedings (Regulation) came into force across Europe on May 31 2002, with the exception of Denmark. The Regulation starts from a general remark that the activities of undertakings have more and more cross-border effects and are therefore increasingly regulated by EU law. In this context, there is a need for a coordination of the measures to be taken regarding an insolvent debtor's assets, all the more as the insolvency of such undertakings is likely to have a negative impact on the proper functioning of the internal market.
The Regulation is not applicable to insolvency proceedings concerning, among other things, insurance companies, credit institutions and investment undertakings providing services involving the holding of funds or securities for third parties.
The Comi is not defined as such in the Regulation. However, one could argue that the Regulation indirectly regards the debtor's registered office as the centre of a debtor's main interests. Such an assumption may be overturned by an interested person by proving that the debtor's main interests are located elsewhere. On the other hand, according to Recital 13 of the Regulation, the Comi corresponds to the place where the debtor conducts the administration of its interests on a regular basis, being therefore ascertainable to third parties.
According to the Regulation, the courts of the member state in which the debtor's Comi is located are the ones entitled to open main insolvency proceedings regarding that debtor. Any other proceedings (secondary insolvency proceedings) in other member states with respect to that debtor may be opened only if the debtor possesses an establishment (a place of operations where the debtor carries out a non-transitory economic activity) within the territory of those states. However, all of the effects of such proceedings shall be limited to the debtor's assets located in the territory of that member state.
Basically, the opening of main insolvency proceedings by a court of a member state, which is recognised in another member state, shall permit the opening in that member state of secondary insolvency proceedings, without the debtor's insolvency being examined in that other state. In any case, any creditor may lodge its claim, both in the main proceedings and the secondary proceedings.
Cash-flow test: relevance to financing
Generally, the inability of a company to pay its debts is considered to constitute evidence of its insolvency. As shown above, a debtor is deemed to be in an insolvency state if it encounters difficulties in paying its debts as they fall due. This commercial cash-flow test involves the analysis performed by the syndic judge strictly in relation to the capacity of debtors to meet the deadlines for paying their debts. In this case, it is often irrelevant if the value of the debtor's assets exceeds its liabilities.
If a company has negative cash flow, it must borrow money to operate its business. On the contrary, a positive cash flow enables a company not only to deal with its current operations and pay its current debts but also to spend sums on expanding its activity and to pay dividends to its investors.
Having in mind the strong message that such an indicator may transmit, banks often include in credit agreements liquidity or cash-flow covenants, which relate more closely to the idea of ensuring the survival of the debtor than to the possibility for the debtor to meet its interest obligations out of the resulting profit. From a technical viewpoint, income will be recorded in a company's accounts as arising when earned and not necessarily when it is received by the company. Therefore, cash-flow indicators are more reliable sources for banks to be warned as early as possible of any dangerous deteriorations in the borrower's financial status, which may lead to insolvency-related risks.
In addition, insolvency-related events of default established in loan agreements quite often focus on a cash-flow test by connecting the event-triggering default to the borrower's capacity to meet its debts to the extent they become payable (which is a quite different approach as compared to financial covenants, which tend to be tested against balance-sheet figures and that crystallise the borrower's financial position at a specific point in time). At the same time, grace periods are hardly accepted by creditors for such defaults, as creditors prefer to exert a maximum pressure on the defaulting borrower, without the intervention of other creditors, which might diminish the chance of recovering a maximum amount of the outstanding debt.
Generally speaking, the wording of the insolvency-related events of default is generously drafted so as to include all kinds of arrangements that may imply restructuring talks with the debtor that would probably take place before the formal opening of any insolvency proceedings. This highlights the importance that banks and other types of credit institutions in general attach to the setting-out events of default that would give early warnings in relation to the financial condition of the borrower. Therefore, creditors protected in this way will benefit from a certain priority over other creditors in an insolvency situation, as they will have an indirect control over any attempts of the borrower to engage in restructuring mechanisms with other creditors that would draw them out of the remedial measures scheme.
| Author biographies |
Bogdan George Bibicu, partner
Bulboaca & Asociatii
Before joining Bulboaca & Asociatii, Bogdan was an associate with the banking and finance practice of the Bucharest office of a magic circle law firm. He provides advice to a wide range international and local financial institutions, as well as to borrowers and sponsors in a variety of projects and financing transactions. Bogdan has expertise in a broad range of banking and finance and projects work including syndicated lending, acquisition finance, debt restructuring and property finance. His experience also includes advice in creating and perfecting security. In addition, Bogdan has been involved in significant project-finance and asset-finance transactions. His banking expertise is completed with sovereign lending, involving several Romanian ministries, local municipalities and state-owned companies as obligors. In this context, he also acted in connection with negotiating and issuing sovereign guarantees, letters of comfort and local guarantees.
He is the author of several articles published in the press and in specialised legal publications, as well as having spoken on several legal matters at many local and international conferences.
Bogdan graduated from Bucharest University and is a member of the Romanian Bar Association. He also holds a master's in European Union law from Bucharest University and a degree in studies on the future of the European Union and the acceding countries from Freie University, Berlin. He is fluent in English.
Email: bogdan.bibicu@bulboaca.com
Catalin Florin Georgescu, associate
Bulboaca & Asociatii
Before joining Bulboaca & Asociatii, Catalin was a junior associate with both the corporate and banking practices of Linklaters, Bucharest office. He has experience in various matters pertaining mainly to banking and finance, corporate (M&A), privatisation and real estate. Catalin has particular expertise in a variety of banking and finance transactions involving local and international financial institutions, borrowers and sponsors, such as acquisition finance, property finance and project finance, including creating and perfecting security related to such financings.
Catalin graduated from Bucharest University and from the University of Paris I – Panthéon Sorbonne, Faculty of European Law, and is a member of the Romanian Bar Association. He holds a Master DESS in European and international business law from Paris I – Panthéon Sorbonne, and an LLM from Bucharest University. Catalin is fluent in English and French.
Email: catalin.georgescu@bulboaca.com |