When a joint venture faces insolvency

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Author: Radu Damaschin, Partner

Insolvency that stems from the obligations assumed by a joint venture may concern any of the associates. Such proceeding, especially when it has an international dimension, requires a broader perspective on some of the requirements set forth by law with respect to the initiation and application of the proceeding.

Through its effects on the debtor, creditors and on the socioeconomic environment in general, insolvency is more than a mere legal procedure. A remedy – and ultimately a sanction – insolvency affects, in some cases quite brutally, destinies and businesses. For this particular reason, the insolvency proceeding is subject to extensive regulatory coverage in almost every aspect,  starting with the entities to whom it can apply. According to the legal definition, insolvency, in its broadest sense, entails a set of acts, actions and operations intended to cover the debtor’s liability and to offer the debtor, if possible, a chance to redress its business. As insolvency concerns both the assets and the liabilities of an entity, both of which are intrinsically tied to its legal capacity, the procedure provided in Law 85/2014 can applies only to entities who have legal capacity, namely entities who can acquire rights and undertake obligations by concluding legal documents.

Still, how does this rule fit in with the fate of certain “actors” who do not have legal personality (and therefore do not possess legal capacity per se) for whom the assets consist of the associates’ common fund, which is subject to the rules governing business-specific assets? The classic example in this respect is that of the joint venture, as defined in Art. 1949 of the Civil Code. With respect to this form of association, the Romanian insolvency law does not contain specific provisions even though the issue is an atypical one. When the proceeding entails a foreign dimension, the challenges become even more complex. Based on the provisions of the current insolvency law, it is clear that a joint venture cannot have the role of the harmed party in such proceeding.

From a strictly civil perspective, the liability of the joint venture towards third parties must be analyzed by reference to the provisions of Art. 1953 of the Civil Code. Pursuant to the aforementioned article, the associates who conclude contracts with third parties and do not mention that they are acting on behalf of the joint venture are personally liable for the obligations undertaken before the respective third parties. If an associate concludes a contract with third parties on behalf of the joint venture (and expressly states that he/she is acting on behalf of the joint venture), all the members of the joint venture are jointly liable towards the third parties. According to this reasoning, the idea of liability of the joint venture seems to be nothing more than an abstract concept. Liability always materializes through one or all members of the joint venture.

If we apply these general rules regarding the liability (of the members) of the joint venture to the insolvency proceeding, we can conclude that a third party is entitled to open insolvency proceedings, pursuant to the aforementioned distinction, against either the associate with whom the third party concluded the contract or the co-associate who is jointly liable. The condition is for the former to be unable to pay the joint venture’s debts that are certain, of a fixed amount and due.

In theory at least, things seem to be quite simple. But in practice the insolvency of the members of a joint venture, especially when contracts (in particular public procurement ones) refer to joint ventures consisting exclusively of foreign companies, may give rise to multiple complications. Some are caused by the cross-border dimension of the insolvency, other are not related to this issue but should be mentioned nonetheless.

First of all, in the case of a joint venture consisting of companies whose center of main interests  (in principle, their establishment) is located in other jurisdictions of the European Union, the Romanian courts do not have jurisdiction to open an insolvency proceeding with respect to all the assets of the debtor. Pursuant to Regulation (EU) 2016/848 of the European Parliament and of the Council, the Romanian courts may open and preside over, in accordance with the provisions of Law 85/2014, only a secondary or territorial insolvency proceeding, i.e. a proceeding with respect to the assets located on the territory of Romania that belong to the associate whose center of main interests is in another Member State, provided that the respective debtor has a secondary establishment on the territory of Romania. The secondary or territorial nature of the proceeding depends on whether a main proceeding exists in the State where the establishment is located.

Second, presuming that a secondary/territorial proceeding is opened and that valuable assets are located in Romania, the question arises whether the collective nature of the proceeding should apply strictly to the creditors of the joint venture or also to the creditors of the insolvent associate in the case of receivables originating from legal relations extraneous to the joint venture. In our opinion, both categories of receivables should be accepted on the table of receivables, except for the claims that derive from the performance of obligations that are not related with the insolvent associate’s secondary establishment in Romania. In the case of territorial insolvency proceeding, one might consider that the existence of a link between the obligation and the secondary establishment is a precondition for the verification and inclusion of the receivables on the table.

In the same context, the issue of proof of the debtor’s insolvency can give rise to an interesting discussion, namely, if this should be analyzed by reference to the general financial condition of the foreign company or only with respect to the financial results of the joint venture or of the debtor’s activity in Romania.

Without aiming to identify all the problematic aspects entailed by this scenario, we also note the situation in which the harmed party in the proceeding does not hold assets in Romania or the acquired assets are, pursuant to the provisions of Art. 1952 of the Civil Code, joint assets. This discussion is premised on the idea that, for the creditors, the activity conducted by the joint venture creates the appearance that there are certain substantial assets that could be sold quickly. Yet, the economic and legal reality could be significantly different; as the potential assets that exist or are generated by the joint venture’s activity could be owned by the other associate, who is not subject to the request for insolvency, or could be joint assets pursuant to the parties’ understanding, in which case, on top of the insolvency operations there could also be related proceedings for the division of the assets.

Finally, a last issue that we would like to address is that in a crossborder insolvency proceeding based on the unperformed obligations of a joint venture, much more so than in any other joint legal liability proceeding, there are consequences at a reputational and operational level that are very difficult to quantify and to manage. We refer to the relation of the joint venture with the subcontractors, with the beneficiary, or to the relation of the associate subject to the insolvency proceeding with their own business partners (including with the other member of the joint venture), with the public authorities or to the potential financing difficulties that may occur in the future. In addition, an insolvency, even a territorial one, remains an insolvency and it will also affect the reputation, not only the business conducted in Romania.

As specified above, the purpose of this material was not to give an in-depth presentation of these issues, which would have required a much more complex analysis, but only to signal to those who are interested in the topic a few ways in which insolvency proceedings might interact with the rules applicable to joint ventures.

Both contractors and lawyers agree that the joint venture mechanism may, in certain circumstances, give rise to extremely difficult and complex issues. The solutions are even more difficult to identify as the problems characteristic to the joint venture are juxtaposed on the challenges characteristic to insolvency. Regardless of whether the legislator  will consider it appropriate to intervene in this field, identifying specific constructive solutions must always be based on accommodating the essential function served by the two institutions, namely, facilitating the mobilization of resources and the improvement of the economic environment.

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