Recent Changes to Insolvency Legislation

Recent Changes to Insolvency Legislation

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At a time when in Romania's business environment there are more than 6,000 companies with a number of approximately 64,000 employees undergoing the insolvency observation period procedure, the Government considers it opportune to take urgent measures to amend the legislation in the field, with the aim of facilitating the recovery of the difficult economic situations that these companies face.

In the explanatory memorandum to the Emergency Ordinance no. 88/02.10.2018 on amending and supplementing certain acts in the field of insolvency and other acts, published in the Official Gazette of Romania, Part I, no. 840, the Government underlines the need for changes to insolvency legislation for a number of reasons, such as:

  • Impairment of the competitive environment and the civil circuit in general, through the abusive use by some debtors of the mechanisms provided by the insolvency law in order to avoid paying the amounts owed to the general consolidated budget;
  • The need to streamline insolvency procedures and improve creditors' rights in these procedures to help revitalize the Romanian business environment, restore viable companies, and faster recover of debts, including to the state budget;
  • Adopting provisions to allow for the conversion, reduction or assignment of budgetary claims in certain situations and conditions, in order to avoid bankruptcy of several national strategic interest companies with real potential for viability;
  • The need to put in place urgent measures to ensure the continuous provision of public services for the production and supply of heat and power by economic operators in difficulty.

In this respect, the Government has amended several normative acts having a direct impact on insolvency legislation, namely Law no. 85/2014 on Insolvency and Insolvency Prevention Procedures (Insolvency Code) and Emergency Ordinance no. 86/2006 on the organization of the activity of insolvency practitioners, as well as other acts such as Ordinance no. 89/2000 on certain measures for the authorization of operators and making the entries in the Electronic Archive of Securities and Ordinance no. 2/2000 regarding the organization of the activity of technical and extrajudicial technical expertise. Law no. 207/2015 on the Fiscal Procedure Code was also amended to coordinate it with the new provisions in force.

EGO no. 88/2018 redefines and supplements several notions whose significance is stated in art. 5 of the Insolvency Code, of which we mention:

  1. The characteristics of the insolvency procedures of insurance and reinsurance companies;
  2. The supervision exercised by judicial administrator in cases where the debtor was not relieved of the right of administration - the judicial administrator has a new attribution in this respect, namely the follow-up of the operations performed by the debtor on the basis of the prior approval given by the judicial administrator;
  3. The private creditor test - the comparative analysis report of the degree of sufficiency of the budgetary receivable by reference to a diligent private creditor can be performed by any evaluator or other specialist in the field;
  4. The capped value - in the case of the debtor requesting the opening of the insolvency procedure by his own request, an additional condition is introduced that the insolvency judge will have to verify when considering the debtor claim, namely: "the amount of the budgetary receivables should be less than 50 % of the total declared debtors' claims." Thus, the debtor with predominantly budgetary receivables can no longer be placed under the protection of the insolvency law, suspending the mandatory enforcement measures initiated by tax executors. It remains to be seen how this new provision will be corroborated with the provisions of art. 240 of the Criminal Code regarding the simple bankruptcy offense - the debtor's failure to submit or the late submission of the application to open the insolvency proceedings, within a term exceeding by more than 6 months the term provided by the insolvency law shall be punishable no less than 3 months and no more than 1 year of imprisonment or by a fine.

In addition to these changes, in the last points of art. 5 of Law 85/2014, the legislator introduces new definitions of the concepts of commercial fund, and activity of public interest.

In the chapter devoted to the attributions of the judicial administrator, the legislator introduces additional obligations that they will have to include in the monthly activity report submitted to the insolvency judge, respectively the way of exercising the tasks related to the monitoring of the operations performed on the basis of the prior notice, of the tax obligations related to obtaining or the necessity of updating the authorizations/permits for carrying out the activity, and the control documents concluded by the competent bodies.

Furthermore at art. 75 par. 3 of Law 85/2014, the legislator sets a 10-day time limit by which the judicial administrator must analyze the claims for payment of current receivables submitted by creditors during the observation and reorganization period. If the judicial administrator fails to rule on the payment claims within 10 days and the amount of the claims exceeds the capped value, the debt holder may request the opening of the debtor's bankruptcy procedure under the conditions provided by art. 75 par. 4 of Law 85/2014. In this context, the request for direct entry into the bankruptcy procedure formulated by the current creditors or by the judicial administrator in the conditions of art. 143 par. 1 and. 3 of Law 85/2014 shall be judged within 30 days from the date of its registration in the case file.

It is noteworthy that this legal provision is supplemented in the sense that "For the debts accumulated during the insolvency procedure which are older than 60 days, mandatory enforcement can be started." Given that mandatory enforcement can only be ordered on the basis of a writ of enforcement, and the recovery of creditors' rights can only be done during insolvency proceedings (Article 75 § 1 of the Insolvency Code), it remains to be seen how creditors can obtain writs of enforcement against a debtor in insolvency proceedings, in compliance with the fundamental principles governing insolvency: the principle of the priority of this procedure over other debt recovery procedures, including in the tax field (principle recently laid down by the HCCJ in Decision No 28/2018 published in Official Gazette dated 20.06.2018), the principle of unity, collectivity and competitivity of the insolvency procedure.

A welcome clarification is introduced by the legislator in art. 102 par. 1, which establishes that prior receivables are also budgetary receivables established by a tax decision made after the opening of the procedure, but which concerns the previous activity of the debtor. 

Perhaps the change with the most significant impact on the Romanian insolvency legislation is the one stipulated by art. 133 par. 5 (k), whereby the legislator provided for the possibility of converting state budget receivables into shares, with the express consent of the budgetary creditor expressed by vote on the reorganization plan including such conversion proposal. Then, there are several conditions to be fulfilled cumulatively:

  • After the economic and financial analyses, it can be concluded that the debtor company can continue its activity and the conversion measure is viable;
  • It is clear from the reorganization plan that by the conversion of the budgetary debt into shares the recovery rate of the state's claim against the bankruptcy procedure is maximized;
  • Conversion must be integral and carried out at the value of the state budget claim, and can not be cumulated with the measure of the reduction of the budgetary receivable;

It should also be mentioned that the possibility of converting the budgetary receivable into shares in the debtor company will also apply to insolvency proceedings started under Law no. 85/2006 on insolvency proceedings provided that the reorganization plan had not been approved by the creditors' meeting until the entry into force of Ordinance 88/2018.

The measure of the conversion of state receivables into shares is highly controversial, generating numerous discussions in the private business environment and beyond. If the legislator had considered applying this measure to local and national companies, which are among the only ones that can secure a significant number of jobs in a high unemployment area, the legal provision may be beneficial in some cases as long as they do not contradict the T.F.E.U. provisions on state aid.

As regards the reduction of the State's unsecured budgetary receivable, the budget creditor may approve the reorganization plan in which such a measure is proposed only in compliance with several criteria and conditions set by the legislator in Article 133 51 to 53 of Law 85/2014.

At art. 169 of Law 85/2014, the percentage of the amount of the receivables for exercising the action to attract the liability of the persons guilty for the debtor's state of insolvency by the creditors is reduced from 50% to 30% of the value of the receivables registered in the creditor's table. Also, in this respect, the appeal against the decision to reject the action for attracting liability may be declared by any interested creditor who holds more than 30% of the value of the receivables registered in the creditor's table.

Regarding the statute of limitations of the action to attract liability of responsible persons, the 3-year term remains unchanged, but an objective time from which it starts to run is also introduced, respectively at the latest from the date of publication in the BPI of the report of the judicial administrator/liquidator on the causes and circumstances that led to insolvency.

The legislator considered it appropriate to redefine and supplement a number of aspects on insolvency of insurance and reinsurance companies, provisions containing rules of a particularly technical nature, which is why we will not deal with them herein.

Another change with immediate impact concerns the prohibition provided by art. 28 par. 4 of the Emergency Ordinance no. 86/2006 for insolvency practitioners, who can not simultaneously hold the capacity of judicial administrator/liquidator of a debtor and of a creditor thereof. However, paragraph 5 of art. 28 provides that the prohibition does not apply under the following conditions:

  • The receivable creating the incompatibility is non-litigious in nature;
  • The position of judicial administrator/liquidator is performed by a SPRL, a subsidiary or two different subsidiaries of a SPRL, or in the case of insolvency proceedings of the group of companies.

The transitional rule provided in Art. VI of the Emergency Ordinance no. 88/2018 expressly provides that the insolvency practitioner must, within 90 days of the entry into force of this law, opt for the exercise of the position of judicial administrator/liquidator either in the insolvency proceedings of the debtor or of the creditor, notifying the insolvency judge in this respect. If, within 90 days, the insolvency practitioner does not opt for any of the positions, they shall remain the debtor's judicial administrator/liquidator, and any acts signed in the insolvency proceedings of the creditor after that period are null. 

By Mariana Popa, Partner and Alexandru Dan, Associate Lawyer Voicu & Filipescu