New mechanisms introduced by GEO 88/2018 in the field of insolvency proceedings

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Author: Marius Ezer

On October 2, 2018, the Official Gazette of Romania published GEO 88/2018 for the modification and supplementation of certain normative acts in the field of insolvency and of other normative acts, which instates significant changes related to the current conditions in which companies subject to the insolvency proceedings may access a part of the protection mechanisms provided by the law.

These changes were adopted by the Romanian Government in the context in which, only during the first seven months of this year, over 5,200 companies underwent insolvency proceedings.

One of the new provisions instated by GEO 88 is highly controversial and states that, in consideration of the existing debt titles, the State may become a shareholder even with a minority stake in the companies. The problem is that the State is registered last on the creditors’ list which gives it a very low chance of recovering anything from the outstanding debt; however, the law allows for several interpretations on these issues, given that there are no specific criteria for choosing the companies in which the State will become a shareholder.

One of the most disputed changes in this field is the fact that the companies that have outstanding debt towards the State can no longer be allowed to resort, under any conditions, to the protection mechanisms offered by insolvency proceedings when they are facing financial problems.

According to the newly instated provisions, it is prohibited to initiate insolvency proceedings when the company owes more than 50% of its debt to the State budget. As caselaw on this issue continues to develop, the legal practice will continue to develop, we will see whether this additional requirement will have a positive effect or it will instead lead to a significant increase in the number of bankruptcy proceedings, as opposed to the redress mechanisms specific to judicial reorganization proceedings.

Another modification that had a positive impact over the current status of the creditors of companies undergoing insolvency proceedings consists in the instatement of a 10 day term during which the judicial receiver must analyze the payment requests for the debt titles created before the date of initiation of the insolvency proceedings. This term did not exist before this change, which led to delays in practice, which most of the times were unacceptable in answering certain legitimate payment requests for valid debt titles raised by the few providers who accepted to continue their cooperation with the insolvent debtors.

The law also provides another related sanctioning mechanism: the judicial receiver may be sanctioned with a fine if it does not comply with this term. The creditor who filed the payment requests receives the right to request the application of the fine and the replacement of the receiver by the syndic judge.

The mechanism that is currently in place is significantly stricter than the previous mechanism, which only allowed the current creditor to request the initiation of the bankruptcy proceedings in case of an unjustified delay in the payment of the amounts owed pursuant to the debt titles created during the proceedings.

Furthermore, a significant change brought by GEO 88/2018 is that currently a company must meet 4 requirements instead of 3 in order to write off up to 50% of its debts towards the state.

The three requirements were the following: the measure of reduction represents the optimal method whereby an unsecured budgetary debt may be recovered, in cases where debtors initiate the bankruptcy proceedings; the debtor has a fonds de commerce that allows it to continue its activity; the measure of reduction has the effect of rendering the company viable again. In addition to these requirements, companies must also meet a forth requirement, which may be one of the following: at least 50% of the current fiscal obligations owed during the period of execution of the reorganization plan when compared to the annual average level thereof before the initiation of the insolvency proceedings; the debtor company must carry out a public interest activity; the debtor company must carry out a strategic activity in a specific economic area.

The new ordinance also brings changes at the level of the assignment of debt titles by specifying certain conditions that must be met. Here, we can note a difference from the previous ordinance, which only set forth that it was possible to include the assignment of debts in the reorganization plan. Under the currently applicable law, this is no longer possible. The requirements that must be cumulatively met by the offeror are the following:

  • the price of the assignment is at least equal to the amount of the budgetary debt and ensures the recovery in full of the budgetary debt recorded in the final consolidated list of debt titles;
  • the price of the assignment will be paid and the budgetary debt will be recovered within a period of maximum 3 years from the date of execution of the assignment agreement; the assignee must justify a public interest for the debt title to be assigned;
  • the assignment agreement is concluded between the date on which the consolidated debt titles table is finalized and the date of approval of the reorganization plan. The assignee of the budgetary debt takes over, as a result of the assignment of the debt title, all the rights of the budgetary creditor.
  • if the price of the assignment is paid within a period longer than 30 days from the date of conclusion of the assignment agreement, an interest will be owed, in accordance with the provisions of the Fiscal Code.
  • if the assignee does not pay to the budgetary creditor the price of the assignment by the dates set forth in the contract, the assignment agreement will acquire the power of a writ of execution for the budgetary creditor, and its debt title will become a budgetary debt that may be recovered as per the provisions of the Fiscal Code.

Another highly controversial provision sets forth that, in consideration of the debt titles, the State may become a shareholder even if it acquires only a minority stake. Nevertheless, the law opens the way for certain interpretations because there are no criteria for selecting which companies will be the ones in which the State will become a shareholder and there is no clear methodology for assessing and establishing the share equivalent of certain debt titles. Another impediment in the actual application of this mechanism is that, in its capacity of shareholder, the State is the last on the creditors’ list, which is why its chances of recovering the amount of the debt titles would be significantly reduced.

From the analysis of the almost 4 years of the application of the provisions of Law 85/2014, it follows that the new mechanisms introduced in 2014 did not result in a substantial improvement of the decision-making mechanisms that would ensure that re-insertion into the business environment of the debtors that resorted to the insolvency law mechanisms.

The actual practice will show over time the extent to which the new modifications will prove useful in  unblocking certain mechanisms that continue to operate slowly and result in the accumulation of additional debts due to the lack of clarity in the decisions regarding the management of insolvencies.

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