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New insolvency law

Law 85/2006 regarding insolvency procedures, published in the Official Gazette 359 on April 20 2006, will enter into force on July 21 2006 and has replaced in full the former bankruptcy law, enacted in 1995.

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 has been translated in Romanian as bilateral set-off operation (operatiune de compensare bilaterala), and is defined as:

  • any agreement or clause stipulated 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);
  • any netting master agreement between two parties, providing for a netting between two or more netting master agreements (master agreement or master netting); or,
  • 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).

The netting operations involve the performance, in relation to a qualified financial agreement, of one of the following operations:

  • 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;
  • 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;
  • the conversion into one currency of any of the above; or,
  • 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, are valid, can be enforced and opposed against an insolvent contracting party or an insolvent guarantor of a contracting party and are 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 obligation 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/ institution in the application of the 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 ground a netting agreement, these powers being limited to the net amount resulted out of the application of the netting agreement.

Also, 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.

Mihaela Maxim

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