The Romanian Government recently adopted a Government Emergency Ordinance regulating the insolvency of the countrys territorial administrative units (the 'Ordinance').1 The measure, which was supposed to have been enacted in 2006, as contemplated under the local public administration law, was prompted mainly by the staggering amount of debt amassed by many territorial administrative units, as well as Romanias commitments to its international creditors, including the International Monetary Fund.

The Ordinance sets out the general framework for the economic and financial recovery of territorial administrative units in a situation of financial crisis or insolvency, and defines the rights and obligations of creditors, as well as those of territorial administrative units and local authorities.

Financial crisis

Financial crisis is defined as the state of a territorial administrative unit characterised by the existence of financial difficulties, lack of cash, leading to non-payment of obligations due over a certain period of time. There is a presumption of financial crisis in the following circumstances:

  • Non-payment of outstanding liabilities older than 90 days and exceeding 15% of the general budget of the territorial administrative unit;
  • Failure to pay wages specified in the local budgets of public institutions for a period exceeding 90 days from the date of maturity.

The Ordinance institutes a mechanism for reporting a financial crisis and its registration in the Register of Financial Crisis, but leaves its particulars to be defined by the Minister of Public Finance and the Minister of Regional Development and Public Administration.

A state of financial crisis must be declared by the court, further to a territorial administrative units request. Within 30 days of such declaration, the representative of the territorial administrative unit, along with members of the financial crisis committee established by Prefects order, must elaborate a financial recovery plan.

Insolvency

The new legislation defines insolvency as the state of a territorial administrative unit characterized by the existence of financial difficulties, a severe shortage of cash, leading to the non-payment of obligations over a certain period of time. A state of insolvency is presumed in the following cases:

  • Non-payment of obligations, liquid and due, older than 120 days and exceeding 50% of the territorial administrative units local annual budget;
  • Non-payment of budgeted salary rights for a period exceeding 120 days from their due date.

Insolvency proceedings are initiated by the court, either at the request of the territorial administrative unit or of its creditors. The court appoints the official receiver (judicial administrator).

Once insolvency proceedings have begun, all judicial or extra-judicial actions against the territorial administrative unit are suspended. Further, no interest, expenses or penalties of any kind may be added to claims, whether arising before or after the commencement of proceedings.

To increase the value of a territorial administrative units assets, the judicial administrator may propose the termination of any contract, lease or other long-term agreement if the underlying obligations cannot be executed under a recovery plan.

Also, the judicial administrator or the creditors' committee may file actions for annulment of fraudulent agreements concluded within a 120-day period prior to the filing of the petition for insolvency. This period is significantly shorter than the period set out in the insolvency law applicable to companies, pursuant to which the judicial administrator may request the annulment of fraudulent acts concluded by the debtor within a period of three years preceding the opening of proceedings.

Recovery plan

The judicial administrator, together with representatives of the territorial administrative unit, is tasked with the elaboration of a recovery plan, which must be submitted to the relevant countys General Directorate of Public Finance and territorial chamber of accounts for approval.

The judicial administrator negotiates the debt payment plan with creditors. The recovery plan may disadvantage some claims, for example by extending maturity dates or changing interest rates, penalties or other contractual terms of agreements. The recovery plan also provides how privately owned assets of a territorial administrative unit are valorised, with a view to maximizing the recovery rate for creditors. The recovery plan must be approved by the assembly of creditors and confirmed by the judge overseeing the insolvency proceedings. It should be implemented within three years of its approval.

Creditors shall preserve their right of action for the full amount of their claims against co-debtors and guarantors of the territorial administrative unit, even if they voted in favour of the plan.

The law prevents electricity, gas, water, telecommunications and other similar service providers from changing, refusing or temporarily discontinuing such services to the territorial administrative unit during the course of the insolvency proceedings.

It remains to be seen whether financiers will show reluctance to lend to Romanian territorial administrative units, and whether creditors will exercise more caution in relation to existing or new contracts in light of potential greater termination risks.

There are hopes that the new legislation will contribute to improving the economic and financial position of territorial administrative units, by ensuring they diligently meet their financial obligations without compromising essential services, while promoting the necessary financial, accounting, budgetary and taxation practices for their recovery. But there is little doubt that this will be a lengthy process, requiring patient and careful monitoring of new insolvency cases.2