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Insolvency and the Urgent Amendments Thereto

Insolvency and the Urgent Amendments Thereto

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Emergency Ordinance no. 88 / 02.10.2018 on amending and supplementing certain normative acts in the field of insolvency and other acts, published in the Official Gazette of Romania, Part I, no. 840, starts with a number of reasons, circumstances and situations that the Romanian Government invokes to justify their action.

Thus, it is considered that the use by some debtors of the mechanisms provided by the insolvency law in order to avoid the payment of the amounts owed to the consolidated general budget affects the competitive environment and the civil circuit in general, in the context where in Romania there are more than 6,000 companies with a number of approximately 64,000 employees undergoing the insolvency procedure observation period. In this context, it becomes imperative to streamline insolvency procedures and improve the creditors' rights under these procedures in order to help revitalize the Romanian business environment, rebuild viable companies, and recover debts faster.

The Government considers it opportune to enact urgent measures to ensure the continuous provision of public services for the production and supply of heat and power by economic operators in difficulty, thus 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 Romanian Government considers that taking these emergency measures to amend the legislation in the field will lead to fulfilling the proposed aim to facilitate the recovery of the difficult economic situations that these companies are currently facing.

Besides the amendments to the acts in the field of insolvency (Insolvency Code and Ordinance on the organization of insolvency practitioners' activity), the Government has amended the Tax Procedure Code, and other acts, namely Ordinance no. 86/2006 on the organization of the activity of insolvency practitioners, Ordinance no. 89/2000 on certain measures for the authorization of operators and making entries in the Electronic Archive of Securities and Ordinance no. 2/2000 regarding the organization of the activity of technical and extrajudicial technical expertise.

In order to reach the objectives proposed in the explanatory statement, the legislator redefines, supplements and introduces several notions and definitions in the "Fundamental Principles" chapter of the Insolvency Code.

Thus, definitions of the concepts of business, and activity of public interest are inserted, the insolvency status of the insurance and reinsurance companies is redefined and the threshold value - in the case of the debtor requesting the opening of the insolvency procedure by own request, gains another dimension, in the sense that the amount of the budgetary claims must be less than 50% of the declared amount of the debtor's claims. By this additional condition, the debtor having predominantly budgetary receivables will no longer be able to benefit from the protective "umbrella" of the insolvency and suspend the mandatory enforcement measures initiated by the tax bailiffs. Given that the debtor's deed of non-submitting or late sub missal of the application to open the insolvency proceedings remains incriminated as fraudulent bankruptcy by the Criminal Code, it remains to be seen how bankruptcy judge judges will apply this measure.

With regard to the private creditor test, it is considered that the comparative analysis report of the degree of sufficiency of the budgetary claim by reference to a diligent private creditor can be performed by any evaluator or other specialist in the field, not only by the evaluators authorized members of A.N.E.V.A.R

The legislator establishes new duties for the official receiver who is in charge of the insolvency procedure. Thus, the supervision of the debtor whose administration rights has not been taken away shall be supplemented with monitoring the operations performed by the debtor on the basis of the prior notice sent by the official receiver. Also in this category dedicated to the duties of the official receiver, additional obligations are introduced whereby it will have to include in the activity report submitted monthly to the bankruptcy judge, namely the way of exercising the tasks related to monitoring the operations performed on the basis of the prior notice as well as the information regarding the debtor’s compliance with tax obligations, or information 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.

Within 10 days from receipt, the court administrator is required to review the claims for payment of current receivables filed by creditors during the observation and reorganization period. If the official receiver fails to rule on the payment claims within 10 days and the amount of the receivable exceeds the threshold value, the receivable holder may request the opening of the debtor's bankruptcy procedure. In this context, the application for directly opening the bankruptcy procedure formulated by the current creditors or the receiver is judged within 30 days from the date of its registration in the case file.

It is surprising that the previously-mentioned regulation 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, and, more importantly, how could they enforce their claim on such a debtor, in compliance with the fundamental principles governing insolvency: the principle of unity, collectivity and competitivity and the priority of this procedure over other debt recovery procedures, including in the tax field (he priority principle ov insolvency over tax law has been recently laid down by the HCCJ in Decision No 28/2018 published in OG dated 20.06.2018).

It is noteworthy that the lawmaker grants special attention to budgetary receivables.

Thus, a welcome clarification is introduced in art. 102 par. 1, which is but a confirmation of unitary practice in the matter, whereby budgetary receivables established by a tax decision made after the opening of the procedure but which concerns the previous activity of the debtor are also considered prior receivables.

If, as a result of the economic and financial analyzes, it appears that the debtor company can continue its activity and the conversion is viable, if the reorganization plan clearly shows that through the conversion of the budgetary receivable into shares, the rate of recovery of the state's claim is maximized in relation to the bankruptcy procedure, and whether this conversion is complete and carried out at the value of the state's budgetary receivable, and it can not be cumulated with the reduction of the budgetary claim, the lawmaker provided in art. 133 par. 5 (k) 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.

The possibility of converting the budgetary claim into shares in the debtor company will also apply to insolvency proceedings under Law no. 85/2006, 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 isolated cases as long as is does not contradict the T.F.U.E. provisions on state aid.

Next, the act presents the conditions and criteria where the budget creditor may approve the reorganization plan in which the substantiated measure of the reduction of the unsecured state budget receivable is proposed, with the performance of the private creditor test.

Starting from the objective set out in the substantiation statement, of extending the rights of creditors, the ordinance reduces from 50 to 30 percent of the amount of creditors' receivables necessary for the direct exercise of the action to attract the liability of the persons responsible for the debtor's state of insolvency, or to lodge an appeal against the decision to reject the action for attracting liability.

Another change with immediate impact concerns the prohibition in Art. 28 par. 4 of the Emergency Ordinance no. 86/2006 for insolvency practitioners, who can not simultaneously hold the capacity of official receiver/ liquidator of a debtor and of a creditor thereof. However, paragraph 5 of art. 28 provides that the prohibition does not apply if the receivable causing incompatibility is non-litigious in nature, or if the position of official receiver/ liquidator is performed by a SPRL, or a subsidiary or two different subsidiaries, or in the case of insolvency proceedings of the group of companies. The insolvency practitioner must, within 90 days of the entry into force of this law, opt for the exercise of the position of official receiver/ 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 official receiver/ liquidator, and any acts signed in the insolvency proceedings of the creditor after that period are under absolute nullity.

Also, by way of this ordinance, the legislator considered it appropriate to redefine and supplement a set of insolvency aspects regarding insurance and reinsurance companies, provisions containing rules of a particularly technical nature, which is why we will not address them herein.

For the coordination of the tax legislation with the amendments to the insolvency procedure, the lawmaker also supplemented the provisions of the Fiscal Procedure Code, regarding the assignment of tax receivables. 

By Mariana Popa, Partner Voicu & Filipescu

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