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Alternatives to court restructuring

Historically, restructurings performed before Romanian courts have been inefficient due to lengthy and complicated court procedures. Only 1.5% of restructurings performed through the court are completed successfully. The rest end in bankruptcy.

Law 381/2009, published on December 14 2009 and entering into force on January 13 2010, brings two alternatives to restructuring procedures, designed to help the good-faith debtor in saving its business from bankruptcy in an early stage of financial distress, before reaching insolvency. These procedures are the ad-hoc mandate (mandat ad-hoc) and the composition (concordat preventiv).

The new proceedings are more flexible and quick. They are to a large extent consensual and require only limited court intervention, which has reduced freedom to decide based on opportunity criteria. Law 381/2009 only applies to legal persons, and certain categories of debtors are excluded.

The most relevant of the procedures regulated by Law 381/2009 is the composition. This is an agreement between the debtor and a qualified majority of its creditors, under which the debtor proposes a plan for the recovery of its business and the payment of debts, while the creditors support the debtor's efforts to overcome its financial difficulties.

Adelina Iftime, Wolf Theiss

The composition procedure is opened at the request of a distressed debtor, which will propose a temporary conciliator from among insolvency practitioners.

Within 30 days, the debtor and the conciliator must prepare a list of creditors and a draft composition agreement. This agreement includes information on the financial status of the debtor, the reasons for distress, the measures already taken and the estimates for the next six months, as well as a recovery plan for overcoming the financial distress. This plan must cover at least: (a) operational restructuring measures, such as management or personnel restructurings and closure of secondary units; (b) financing alternatives, such as share capital increase, bank loans and asset disposals; (c) the estimated percentage of claim recovery, which cannot be reduced by more than 50% after the implementation of the proposed recovery measures (which could consist, for example, in the postponement of the due date, cancellation of receivables or only of interest or of late penalties); and (d) the deadline for the payment of the debts, which may not exceed 18 months from the date of the composition agreement.

Within 30 days of the composition offer, the creditors must vote on the draft agreement and the conciliator initially appointed by the court. The composition agreement is approved by the positive vote of creditors representing at least two-thirds of the value of the uncontested debts.

The composition agreement may either be acknowledged or approved by the court. If acknowledged, all the individual enforcement proceedings initiated by the creditors that approved the draft composition agreement are suspended by virtue of law. If the court approves the agreement (which requires the prior approval of the composition agreement from creditors representing 80% of the total value of receivables), it is binding on all creditors, including those that did not sign the agreement, are not known yet or are contested by the debtor, and it leads to the suspension of individual enforcement proceedings initiated by these creditors.

Moreover, during the approved composition, no insolvency proceedings may be initiated against the debtor.

The composition may be challenged in court for nullity reasons by any interested person or by creditors that voted against the composition. Moreover, the general meeting of the creditors that approved the composition may ask for the rescission of the composition in the case of severe breaches of the debtor in performing its duties under the agreement.

The final role of the court in the composition procedure is to acknowledge its finalisation. If the composition is successful, the amendments brought to the receivables against the debtor become irrevocable, as approved via the composition agreement. The composition can also be declared unsuccessful, in which the case the procedure will be declared closed.

The composition was intended by its initiators as an alternative to court restructurings. To avoid the prolongation of procedures caused by bad-faith debtors, the failure of a composition agreement should lead to bankruptcy. Law 381/2009 in its final form does not make any cross-reference to the insolvency legislation. Therefore it appears that, at least for the moment, compositions and court restructurings will coexist. It is however expected that an unsuccessful composition may be a reasonable ground for the rejection of the debtor's application in a court restructuring (therefore in case of insolvency), since this may be seen as a presumption that the business is not viable.

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