A New Wave of Insolvencies? Possible Preventive Restructuring Measures in the Implementation of the European Directive on Preventive Restructuring
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Nestor Nestor Diculescu Kingston Petersen
This legal analysis focuses on the typical case of a company that although it is not directly targeted by the measures established in order to prevent the spreading of the novel coronavirus, it still registers a decrease of demand, of the level of proceeds and of the production of goods and services.
Therefore, we will refer to the main categories of creditors of a company and the fact that the regulations instated sofarin order to prevent the financial impact of the coronavirus pandemic, do not suspend the debtor’s insolvency filing duties.
Budgetary creditors play an extremely important part in deciding the evolution of a company. According to the Law 85/2014 (the “Insolvency Law”), a claim for opening the insolvency procedure may be filed only if the level of the amounts owed to State budget is lower than 50% of the total declared debt of the relevant debtor. Therefore, it is obvious that an insolvency claim is highly dependent on the level of amounts owed to budgetary creditors.
Following the measures recently enacted by the Romanian government, we note that the due date of fiscal obligations has not been postponed. Moreover, the amount thereof has not been diminished – at least, this is the case for those due on March 25th.
The most important fiscal relaxation in place is that no penalties will be calculated with respect to these obligations and no enforcement measures will be ordered. However, the immediate consequence of these measures is that the State will have uncontested and liquid debts against the companies that do not pay.
Whether these receivables are indeed “not due” can generate complex debates, due to the fact that these continue to be, in general, receivables that may be subject to enforcement, given that this derogation is assumed by creditors only temporarily, and may nevertheless be raised by a third party. Additionally, these receivables may be taken into consideration when a company is subject to insolvency claims and financial difficulty verifications set forth by the law, as well as when drafting the consolidated list of creditors in the insolvency procedure.
The recent decision of the Supervision Committee of the National Bank of Romania comprises a series of interpretation elements. Among these, credit institutions and non-banking financial institutions are allowed not to set up provisions in certain conditions for the deferred payment and restructuring of certain loans, as well as not to access the reserves created, in accordance with the European regulations. However, there are many elements and interpretations to be taken into consideration in this respect.
In the same context, the Romanian Government adopted an emergency ordinance intended to ensure the deferred payment of installments related to loan agreements and leasing contracts concluded with credit institutions or non-banking financial institutions. The ordinance addresses to both natural and legal persons that were affected by the measures taken in the context of the pandemic outbreak.
The suspension of the payment of the installments may be obtained, only upon request, for a period ranging from one to nine months, but will, in any case, be granted only until December 31, 2020, at the latest.
For more details in connection with the provisions regulating this measure, please consult the document availablehere.
We should bear in mind that credit institutions and non-banking financial institutions that will conclude bilateral deferred payment agreements will not be protected from the actions of the other creditors that may take measures against the debtor companies.
It is well known that Romania has the lowest level of financial intermediation in the European Union, and, at the same time, an extremely high level of supplier credit. Therefore, preventing banks to take measures against the debtors will not end the supplier credit obstruction and, as a consequence to this obstruction, the process of companies entering insolvency.
Utilities providers, registered office owners
The Government Emergency Ordinance 29/2020 (”GEO 29”) provides certain measures for small and medium-sized companies that (totally or partially) interrupted their activity pursuant to the decisions issued by the relevant authorities and were issued an emergency situation certificate. These companies may be granted a deferred payment facility for utilities suppliers and for the payment of the rent for the real estate property used as registered or secondary office. Nevertheless, these facilities are granted onlyfor the period of the state of emergency.Consequently, when this is over, the utilities suppliers will continue to calculate penalties and may instate enforcement measures or file requests to initiate the insolvency procedure. Furthermore, even when a cause to be exempt from liability (such as force majeure) is invoked, this cannot prevent the instatement of precautionary measures (attachments), which may cause a chain reaction.
Other unsecured creditors, including affiliates
Other creditors, such as suppliers and affiliates are not subject to any measure. Therefore, they are still entitled to resort to all the available contractual and legal measures (collection of interest, enforcement).
Obligations related to the initiation of the insolvency procedure
The Insolvency Law has not been amended so far, following the instatement of the state of emergency. Hence, a debtor which becomes insolvent still has the obligation to file in court a request to initiate the insolvency procedure, within a term of 30 days from the occurrence of this state. Nevertheless, if the debtor participates in good faith in out-of-court negotiations having as subject matter the restructuring of its debts, the company only has the obligation to file the relevant request in court within 5 days after the negotiations have failed. Furthermore, we note that the law somehow intends to ensure a safeguard for the debtor by prohibiting the initiation of the insolvency procedure after the approval of the arrangement with the creditors (in Romanian “omologarea concordatului preventive”).
Failure to comply with the legal terms established for filing the request to initiate insolvency triggers criminal liability, in accordance with Art. 240 of the Romanian Criminal Code. Thus, for companies that met the requirements for declaring the state of insolvency the situation is slightly clearer, given that it is not specifically set forth otherwise. However, the legislative framework completely lefts out companies whose financial situation deteriorates during this state of emergency.
Considering the above and the fact that all the available instruments were maintained at legislative level, there is a clear possibility that the number of requests to initiate the insolvency procedures will increase. Furthermore, in accordance with Decision 417/2020 of the Superior Council of Magistracy, requests filed pursuant to Art. 66 para. (11) of the Insolvency Law are considered as urgent requests, and debtors and creditors that met the legal requirements at the date when the decree instating the state of insolvency was published on March 16, may file requests to initiate the insolvency procedure and obtain, until these are resolved, the temporary suspension of the enforcement procedures.
Claims with respect to the arrangements with the creditors (in Romanian “cererile de concordat preventiv”) – the only currently available preventive restructuring instrument – due to financial difficulty reasons, have become even more difficult to exercise. That is due to the fact that the temporary stay of enforcement proceedings initiated before the approval of the arrangement with the creditors, and the approval procedure itself requires the intervention of a court of law. Given that the decision of the Superior Council of Magistracy did not deem these causes urgent, in the current context, debtors in financial difficulty cannot invoke the relevant legal provisions.
Consequently, there are no adequate means of restructuring and insolvency prevention that may be resorted to by debtors in financial difficulty, as a result of the crisis caused by the novel coronavirus pandemic outbreak. On the contrary, based on the actual measures instated, the only option is to declare insolvency.
At the same time, fiscal and banking creditors are exposed to possible adverse actions initiated by the unsecured creditors, which does not seem to have been intended when the current measures were instated.
Anticipating the potential wave of insolvencies, Germany considered that it is necessary to suspend the insolvency fillings until 30 September 2020. Consequently, Romania should adopt as well more specific regulatory measures in this field, especially during the state of emergency.
In the context in which Romania is in the process of implementing the Directive on Preventive Restructuring and considering the absence of legal provisions favoring the restructuring of debtors in difficulty, we consider it is recommended to consider the following measures:
These may significantly affect a company, as they may determine the capacity of a debtor to meet its current or future obligations, while avoiding a serious materialization of the situation in the following months.
As a matter of fact, this aspect should constitute a priority of the fiscal creditor that would have multiple benefits resulting from the prevention of bankruptcy and the maximization of long-term State budget income ensured by the fact that companies are maintained in operation.
In the current context, we notice a natural preoccupation for prioritizing sanitary measures and those having an immediate impact over the activity of the companies affected by the imposed restrictions.
However, we reiterate that it is essential to pay immediate attention as well to the economic measures intended to ensure the viability of small and large companies involved in a complex series of contractual relations. Such measures would also ensure to maintain the workplaces offered by the relevant companies.
Accelerating, at this early stage, the issuance of legislation that would create an efficient restructuring framework is one of the measures that might prevent the occurrence in many companies of a serious state of degradation, which may cause the closing or bankruptcy thereof.
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Nestor Nestor Diculescu Kingston Petersen
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