New Remedies for Companies in Financial Distress. Brief Considerations on the Restructuring Agreement
In Romania, even the most optimistic estimates show that only a handful of companies (less than 10%) manage to reorganize through insolvency, as previously regulated by Law 85/2006 and then by Law 84/2014 on insolvency prevention and insolvency proceedings (“Law 85/2014”).
Legislative intervention was much needed, both in Romania and in other European countries, to maintain business continuity, especially in the context of major financial crises which have shown that the recovery and revitalisation of the European economy is essential, and that failure to achieve this objective may have the effect of falling behind in the global race, through a constant loss of competitiveness.
Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks (“Directive on Preventive Restructuring”) was adopted in 2019 with the aim of reinforcing companies’ capacity to recover from a crisis, and included the following requirements:
- putting in place clear and transparent early warning tools allowing companies to detect the circumstances that could give rise to the likelihood of insolvency and warning them of the urgent need to act;
- introducing a viability test[i] in the national law, provided that this test is designed to exclude debtors with no prospect of viability and is carried out without detriment to the debtor’s assets;
- availability/implementation of preventive restructuring frameworks;
- debtor in possession;
- automatic stay of individual enforcement actions;
- content/adoption/confirmation of restructuring plans;
- imposing a restructuring plan despite objections by dissenting classes of creditors;
- protecting new financing, interim financing and other restructuring-related transactions (fresh money priority);
- access to discharge of debt;
- supervision and remuneration of practitioners;
- monitoring/data collection/creating statistics.
As observed in practice, insolvency proceedings in Romania have often proved ineffective in securing business recovery, raising serious problems in terms of the significant workload of courts, with insolvencies that extend for significant periods of time (in some cases even exceeding 10 years).
The Directive on Preventive Restructuring was implemented in the national legislation by Law 216/2022 amending and supplementing Law 85/2014 on insolvency prevention and insolvency proceedings, as well as other regulatory acts, which introduced a new preventive restructuring procedure, in addition to the composition procedure – the Restructuring Agreement (the “Agreement” / “Restructuring Agreement”) designed to support companies in difficulty.
The Restructuring Agreement is a remedy for companies facing difficulties caused by any circumstance that results in a temporary impairment of business and gives rise to a real and serious threat to the debtor’s present or future ability to pay its debts as they fall due unless appropriate measures are taken. Under this procedure, the debtor submits to the insolvency judge, for confirmation, a restructuring agreement negotiated in advance with the creditors whose claims are affected and approved in accordance with the law, based on which the debtor secures the recovery of its business and pays all or part of the affected claims within the period laid down in the restructuring agreement.
The following elements are specific to the Restructuring Agreement:
- the existence of a debtor in difficulty; for the purposes of the application of Law 85/2014, a debtor is presumed to be in difficulty in any of the following cases: (a) turnover fell by at least 20% in the last six months as compared to the same period of the previous year, and the operating result was negative; (b) negative net current assets; (c) the occurrence of any event that may be reasonably expected to lead, in the following six months, to one of the outcomes presented in points (a) or (b);
- optimal collaboration between the debtor and its creditors, as starting point for discussions for the negotiation of such an agreement, especially from the perspective of the affected creditors, without major constraints;
- early identification of financial problems, or the use of all early warning signs[ii] by the debtor in difficulty;
- preparation of an agreement covering pat of the debtor’s claims, in accordance with the minimum legal requirements;
- hiring a restructuring trustee;
- court intervention (a limited one), only after the negotiation and approval of the Agreement, to confirm its legality; the procedure is non-judicial, in chambers, without summoning the parties, and the Agreement can only be rejected on grounds of illegality;
- the time limit for implementing the Agreement is not legally regulated; the parties may decide to negotiate this aspect;
- the costs of implementing the Restructuring Agreement are limited to the 3-year period (36 months) during which the restructuring trustee monitors the implementation of the Agreement, even if the Agreement runs for a longer period;
- insolvency proceedings cannot be opened while the restructuring agreement is in progress.
At European level, other countries, such as the United Kingdom, the Netherlands, Germany, etc., have already taken steps to define more clearly the mechanisms for preventive restructuring, for example:
- CIGA (“Corporate Insolvency and Governance Act 2020”), the regulation by which the UK has created both short-term and long-term mechanisms to facilitate the rescue of viable companies in difficulty, such as:
- granting moratorium for initial periods of 20 business days, offering companies protection from creditors, or a payment holiday for certain debts that are falling due prior to, and during,r the moratorium;
- the invalidation of clauses in certain contracts for the supply of goods or services if those clauses state that the contract will terminate if the company becomes subject to relevant insolvency proceedings;
- the Restructuring Agreement, also referred to as “Super-scheme”, representing an agreement of the debtor with the creditors/shareholders of the company; what is specific to this measure is that, in the event of its judicial approval by the court, certain creditors will be forced to accept, against their will, revised terms regarding the claims they hold, if they belong, for example, to a category of minority creditors or because that particular class of creditors has been subject to a cross-class cram-down;
- WHOA (“Wet Homolagtie Onderhands Akkoord”, also known as the “Dutch Scheme” or “CERP” – Court confirmation of extrajudicial restructuring plans), the regulation by which the Netherlands created preventive restructuring mechanisms in line with the Directive on Preventive Restructuring, being among the first countries to take steps to implement it, the regulated procedures having the flexibility of the UK measures. The following are specific to WHOA:
- minimum payments of 20% for small creditors, that provide goods or services;
- secured creditors will be part of “secured” and “unsecured” classes;
- secured creditors may not object to an agreement even if they are not granted payments equal to the amounts they would have received in the insolvency proceedings;
- StaRUG (“Unternehmensstabilisierungs- und -restrukturierungsgesetz”) is the general framework for company stabilisation and restructuring in Germany, providing a range of tools designed to allow companies in difficulty, but not yet insolvent or over-indebted, to be reorganised based on a restructuring plan accepted by a majority of creditors, without the need for insolvency proceedings. This act was subsequently complemented by a new regulation – SanInsFoG (“Gesetz zur Fortentwicklung des Sanierungs- und Insolvenzrechts”), which truly represents a new era in company restructuring in Germany, establishing flexible mechanisms for preventive restructuring, adapted on a case-by-case basis, with the intervention of the courts being considerably limited.
In a dynamic business environment going through structural changes, the Restructuring Agreement procedure can be an effective remedy for the recovery of companies facing economic difficulties and can thus mitigate, in the long run, major crises with unforeseeable social effects.
Presently, there is a limited initiative by companies in Romania to implement this preventive restructuring mechanism, but interest in it is growing, as the procedure can help companies in distress to recover through a strategic approach, in line with the fundamental principles of prudence and good management, thus preventing insolvency.
Ultimately, the success of the preventive procedures depends, in any case, as also stated in the Directive on Preventive Restructuring, on (a) early detection of financial distress; (b) the existence of clear, up-to-date, concise and user-friendly information about preventive restructuring procedures; (c) one or more early warning tools; (d) stakeholders’ appetite for financing.
In the long term, the proper application of preventive restructuring mechanisms also has the potential to reduce the workload of the courts involved in the reorganisation of companies, therefore allowing for an increase in the quality of justice.
[i] The viability test would contribute, along with other elements set out in recital 24 of Directive (EU) 2019/1023, to avoiding misuse of preventive restructuring frameworks.
[ii] Article 3 of the Directive requires Member States to ensure that debtors have access to one or more clear and transparent early warning tools to detect circumstances which could give rise to the likelihood of insolvency. These tools may be financial indicators (such as warning mechanisms when the debtor fails to make certain payments), but a distress situation cannot be fully analysed by reference to financial indicators alone. Therefore, early warning tools should also consider non-financial information. This is also in line with the provisions of the Directive, which recognises that a state of difficulty can be non-financial but affect the long-term situation of the debtor (the Directive provides the classic example of a loss of contracts important to the debtor’s business).
- the Greek legislation has introduced an electronic early warning system, which is supervised by the “Special Secretariat for Private Debt Administration of the Ministry of Finance”, and under which debtors are classified into three risk categories (low, medium, high);
- in Denmark, the Early Warning Denmark system is in place – this is a system that provides impartial and confidential assistance to businesses in difficulty, at no cost. The system brings together professionals from various fields who have sound business knowledge (from several areas such as law, accounting, management, strategic planning, marketing, logistics). Insolvency specialists also contribute to the scheme advising companies heading towards insolvency.
- Early Warning Europe Project – a Europe-wide project inspired by the Danish model; the project brings together public institutions and organisations assisting SMEs in difficulty from Belgium, Denmark, Germany, Greece, Italy, Poland and Spain. It also aims to extend to Croatia, Finland, Hungary, Lithuania, Luxembourg and Slovenia.
- Italy uses early warning tools in the form of obligations to alert certain entities.