a) Introduction

The Romanian Government has enacted Government Emergency Ordinance no. 46/2013 on financial crisis and insolvency procedure of administrative units (counties, municipalities and communes) (“GEO no. 46/2013”), which entered into force on 24 May 2013. Such enactment was an obligation undertaken by Romania towards the International Monetary Fund as part of a Stand-By Arrangement dating from 2012.

Both the financial crisis and insolvency status of administrative units shall be made public on the website of the Ministry of Public Finances.

b) Financial Crisis

An administrative unit may be in financial crisis if it cannot pay:

  • its undisputed outstanding obligations that have been due for more than 90 days, if these obligations exceed 15% of the administrative unit’s budget; or
  • the salaries of its civil servants for more than 90 days, irrespective of the outstanding amounts.

The local public authorities are responsible for determining if the municipality or commune/county is in a financial crisis. If so, the prefect will form an ad hoc committee for financial crisis situations consisting of at least the following key officials:

  • the mayor or the county council president;
  • the chief accountant of the administrative unit;
  • a representative of the local or county council; and
  • a representative of the state financial administration.

The ad hoc committee together with the mayor or the president of the county council must issue a financial recovery plan, which should be voted on and implemented by the local or county council under the supervision of the committee.

The local or county council may decide to end the financial crisis in either one of two situations:

  • if the administrative unit has been without the financial difficulties that triggered the financial crisis for a period of 180 calendar days; or
  • if the insolvency conditions provided by Law no. 273/2006 are met and the insolvency proceedings should be commenced.

c) Insolvency

Insolvency is a more severe financial failure of the administrative unit, and occurs when the administrative unit cannot pay:

  • its undisputed outstanding obligations that have been due for more than 120 days, if such obligations represent more than 50 % of the administrative unit’s budget; or
  • the salaries of its civil servants for more than 120 days, irrespective of the outstanding amounts.

As with companies, the administrative unit’s insolvency procedure is a judiciary procedure.

Such insolvency procedure begins if the administrative unit’s creditors or the mayor or the president of the county council apply to the tribunal to commence the insolvency proceedings. If the tribunal concludes that the administrative unit meets the above mentioned insolvency criteria the proceedings shall be opened and a judicial administrator will be appointed.

The judicial administrator must notify creditors about the opening of insolvency proceedings. Creditors should register their receivables against the administrative unit; otherwise they may only enforce their titles against the administrative unit after the closing of the insolvency proceedings.

The creditors’ general meeting may:

  • examine the financial statements of the administrative unit;
  • appoint a creditors committee;
  • assess creditors committee’s rapports; and/or
  • propose measures to the judicial administrator.

The creditors’ committee may:

  • Assess the financial status of the administrative unit; and/or
  • Propose measures for the recovery plan; and/or
  • Contest the judicial administrator’s rapports.

The judicial administrator together with the mayor or president of the county council must propose a recovery plan which includes a schedule for paying the administrative unit’s debt. This plan has to be approved by financial administration and by the local or county council and confirmed by the judge. The plan must be implemented within 3 years after being approved. The judicial administrator must also draft the table of receivables against the administrative unit.

At the same time, the judicial administrator may:

  • apply for the suspension of the local authorities’ powers, and if this is granted, the judicial administrator will temporarily exercise the powers of the mayor or the president of the county council;
  • propose to the local or county council new temporary taxes to be enacted until the financial difficulties are overcome;
  • propose that the local council unilaterally terminates contracts entered into by the administrative unit if such contracts cannot be performed because of the recovery plan implementation;
  • ask the syndic judge to order part of the administrative unit’s debt to be covered by the administrative unit’s officials who are responsible for administration of assets and who are responsible for its insolvency; and/or
  • annul fraudulent acts entered into by the administrative unit in the 120 days preceding the claim to open insolvency proceedings.

The insolvency proceedings may be closed when the insolvency conditions are no longer met and the syndic judge has ruled upon this. There is no need for all of the debts to have been satisfied, and the remaining debts shall be included in a financial recovery plan.

d) Conclusion

The administrative unit’s creditors are exposed to several risks. For example, all individual claims against the administrative unit as well as penalties, interest, increases or expenses relating to such claims shall be stayed indefinitely until the closing of insolvency proceedings. Another risk is that the judicial administrator may terminate contracts which are incompatible with the recovery plan. Creditors are nevertheless expressly entitled by law to damages for such early termination, as part of companies’ insolvency law.

GEO no. 46/2013 may be beneficial for the administrative unit’s creditors because it details the proceedings and sets up the rights, obligations and expectations of the participants to these proceedings.

However, insolvency proceedings may cause legal uncertainty for the commercial partners of the administrative unit due to the possibility of the administrative unit to unilaterally terminate contracts.

From the administrative unit’s point of view, the legislation may affect its ability to obtain funding from financial institutions due to the risk of not being able to pay back its loans.