Important amendments to the insolvency law – new preventive framework

Romania has enacted new legislation in insolvency matters by Law no. 216/2022 which revises Law no. 85/2014 on the procedures for the prevention of insolvency and insolvency. This comprehensive reform aligns with the EU Directive 2019/1023 on preventive restructuring frameworks, discharge of debt, and disqualifications. Although introduced in 2009 and revised in 2014, the existing mechanisms - the ad-hoc mandate and the arrangement with creditors - proved unsuccessful (e.g., less than 100 arrangements with creditors requests in nine years), mainly because of late appeal to such procedures, lack of information/ignorance of the advantages of such procedures, and trust deficit on the part of the creditors. The new framework is expected to facilitate access to preventive procedures at an early stage and increase the efficiency of such procedures, assuring the support of the creditors.

Romania now offers two preventive mechanisms: the newly introduced restructuring agreement,  replacing the ad-hoc mandate, and the arrangement with creditors, substantially revised compared to prior legislation.

State of difficulty

To access the preventive procedures, the debtor must face a state of difficulty. The amended insolvency law provides a definition of the state of difficulty which is a state generated by any circumstance that causes a temporary impairment of the activity, which gives rise to a real and serious threat to the debtor's future ability to pay its debts at due date, if appropriate measures are not taken.

The threat to the debtor’s ability to pay the debts must have a certain gravity and occur within a maximum interval of 24 months from the appearance of the factors that disrupt/impair the activity.

The debtor in a state of difficulty can pay its current debts, which means the state of difficulty precedes insolvency, being the moment when the debtor, sensing the danger of not being able to settle its future debts, should act to save the business.

In accordance with the possibility for Member States to introduce a viability test for accessing preventive procedures, article 6 par. 2 of the new law obliges the debtor to prove the state of difficulty. The debtor proves that he is in difficulty through a report drawn up by the restructuring administrator or creditor arrangement administrator. The report is filed in both preventive procedures.

Early warning systems

Although EU Directive 2019/1023 requires the implementation of early warning systems (EWS), its provisions in this respect are minimal, with no mandatory system imposed to the States. According to the new legislation, early warning consists of notifications indicating circumstances that may lead to financial difficulty or insolvency. These alerts prompt debtors to take swift action and include information on available recovery options at no cost. Romania's EWS comprises several components:

The effectiveness of Tax Authority alerts for insolvency prevention is debatable, as delayed tax payments can already signal an existing insolvency situation. Furthermore, Law 216/2022, which transposed the EU Directive, introduced a notable change to Company Law (Law 31/1990). Article 73 now includes a provision which states that, if the company is in a state of difficulty, the administrators/directors should consider at least the following: (...) b) the need to take reasonable and appropriate measures to avoid insolvency and to minimize losses suffered by creditors, employees, equity holders and other stakeholders.

While not mandatory, this provision encourages periodic self-assessment by company management to proactively address potential insolvency or bankruptcy conditions.

The restructuring agreement

The restructuring agreement is a confidential negotiation-based procedure designed for debtors facing initial financial challenges. Assisted by an insolvency practitioner, the debtor proposes a restructuring agreement containing among others: an explanatory note on the reasons and necessary preconditions of the agreement, measures proposed, budget, cash flow, and payment schedule.

The negotiations between the debtor and its creditors unfold outside of the courtroom, the procedure reaching the court at the end, when the agreement is submitted for confirmation by the syndic judge. The syndic judge scrutinizes the debtor's financial situation (to prevent fraudulent use) and ensures the agreement provides equitable treatment to affected creditors before confirming the plan. Romanian legislation mandates court submission to secure the discharge effect: once confirmed, all creditor rights (including those of budgetary creditors) are adjusted in alignment with the validated agreement, irrespective of their vote. If the agreement fails, the reduced claims are reinstated to their full value on the date the procedure is closed, minus the payments made during the restructuring agreement procedure.

Following confirmation, the restructuring agreement does not generate an ex lege stay of enforcements, meaning the debtor may still be subject of enforcements. While there is no mandatory duration of the agreement, the restructuring administrator monitors its implementation for three years post-confirmation.

The arrangement with creditors

The arrangement with creditors is a more formal procedure due to its pronounced judicial character. It begins before the court that verifies the requirements for opening the procedure. If the request is allowed, the insolvency practitioner appointed by the debtor is named arrangement administrator and drafts or assists the debtor with the drafting of the restructuring plan, which must be finalized within 60 days.

The opening of the procedure also generates an ex lege stay/suspension of all enforcement procedures against the debtor for an interval of 4 months, that can be subsequently prolonged up to 12 months. The negotiations carried out with each creditor or collectively can lead to modification of the Plan. The vote on the Plan must take place within 60 days from the moment the Plan is deposited in court, an interval that can also be prolonged by 30 days.

Until the approval of the restructuring plan, creditors cannot hinder the execution of ongoing essential contracts, they cannot terminate, accelerate, or modify the contracts for claims prior to the stay of enforcement.

The syndic judge is responsible for the homologation of the approved plan, which can be ruled despite the opposition of some of the creditors.

The plan’s maximum duration is 48 months from homologation, extendable by an additional 12 months. During the first year, the debtor must allocate a minimum of 10% toward affected receivables. Once homologated, the plan alters all impacted receivables concerning their value and due dates.  The arrangement administrator compiles quarterly reports assessing plan compliance, including the debtor's business viability.

Compliance with the provisions of the Plan may lead to debt discharge by decision of syndic judge, subject to certain conditions and with the observance of fair treatment. As in the case of the restricting agreement, if the plan fails the reduced claims are reinstated to their full value on the date the procedure is closed.

Key features/advantages of preventive instruments

Preventive procedures offer distinct advantages crucial for businesses navigating financial challenges:

Debtor-centered initiation:

One of the main features of the preventive procedures is that they can be opened exclusively at the initiative of the debtor in difficulty or with its consent. Also, the debtor cannot be held liable for refusing to resort to a preventive procedure (as they are optional). The reason resides in the fact that a debtor in difficulty does not pose an imminent threat to its stakeholders and the business environment, but only a potential threat.

Mandatory insolvency initiation:

In contrast, insolvency proceedings become mandatory when specific conditions are met and can be initiated by creditors, regardless of the debtor's stance.  Moreover, failure to open the insolvency procedure or late filing for insolvency may even lead to criminal liability.

Debtor in possession rule

An important advantage of the preventive procedures resides in the application of debtor in possession rule, which means that throughout such procedures the debtor retains control over its assets and current business activity under the conditions of common law. However, this rule does not exclude oversight by the insolvency practitioner in certain circumstances.

Special administrator in insolvency

In case of insolvency the shareholders are obliged to meet and appoint a special administrator that will manage the company under the supervision of the judicial administrator. After this appointment, the activity of the General Shareholders Assembly is suspended and will be summoned only at the request of the judicial administrator. In case the right of administration is revoked by the judge, the company will be managed by the judicial administrator.

Enforcement stay

Preventive procedures introduce a balanced regulation, including an ex lege stay (applicable to creditor arrangements) while allowing exceptions for specific cases, such as employee receivables, enforcements that don't jeopardize restructuring and mechanisms that prevent debtors from abusing the proceedings to delay creditor action. The syndic judge handles requests to extend or lift the stay. The stay also suspends the statute of limitation and the flow of interest/penalties until the Plan is homologated.

Preference for certain creditors

In both preventive procedures debtors can exercise the right to establish a preferential regime for specific creditors by not affecting their claim, offering flexibility in managing economic and legal aspects compared to the essentially collective nature of insolvency proceedings. The debtor is obliged to fundament the decision. Creditors that may be given the unaffected status are key creditors for the business, hostile/dissenting creditors etc.

Special safeguards

Preventive procedures feature remedies to safeguard businesses, including the ability to impose the plan on dissenting creditors (cross-class cram-down) and judicial possibility to uphold the confirmation in appeals. The cross-class cram-down is a rule (implemented for both the vote on the restructuring agreement and restructuring plan) that allows a plan to be adopted even if the plan did not gain majority support in one or several classes of creditors.  It is subject to the fulfillment of certain conditions related to the treatment of receivables and the percentage of those who voted in favor which cannot be less than 30% of the total affected receivables.

Judicial confirmation appeal

The new insolvency law (Articles 1510 and 291) provides that, if subsequent to approval/homologation of the plan by final decision, forgery, fraud, essential error or a decisive title are uncovered which have led to the registration of an inexistent/fake receivable or of a receivable of different amount or priority, the judge can allow the appeal and not only annul the decision, set aside the agreement/plan, and return the payments, but also uphold the confirmation/homologation decision, amend the list of receivables and, with the consent of the debtor, amend the agreement/plan.

Debt discharge

Both preventive procedures and insolvency proceedings offer debt discharge upon successful completion. If the agreement stipulates debt reductions and the plan is fulfilled, these reductions become permanent from the date the syndic judge concludes the procedure.

Short term effects

The recently introduced preventive framework in Romania carries a debtor-friendly disposition when compared to its predecessor. Although not all the mechanisms provided by the law have been implemented, such as the early warning systems, noteworthy progress is being made, primarily attributed to the active engagement of legal professionals (including lawyers, insolvency practitioners, and scholars) in promoting awareness and the adoption of these procedures.

During the first half of 2023, an encouraging surge emerged with 30 companies opting for the arrangement with creditors procedure, marking a threefold increase from the previous year. Concurrently, this period witnessed a decrease in the initiation of new insolvency cases, although direct attribution to the new preventive regulations remains inconclusive. The full implementation of the legal mechanisms is anticipated to yield more substantial benefits for addressing insolvency in Romania.

Given the innovative nature of these procedures and the limited jurisprudence available, seeking specialized legal counsel is deemed imperative for both debtors and creditors when navigating the realm of preventive measures.