The Romanian legal framework on insolvency procedure has been consistently improved following the enactment of Insolvency Law no. 85 (Law 85), which entered into force on 21 July 2006.

Background

Law 85 replaced the former Bankruptcy Law no. 64/1995, establishing new mechanisms for shortening the judicial procedures in order to accelerate the reorganisation of companies undergoing financial difficulties or to put an end to their existence and preserve as many of the creditors’ rights towards the bankrupt companies as possible (through the bankruptcy procedure).

The constant amendments to Law 85 have been mainly influenced by the conditions provided by the Romanian insolvency practice. Before the enactment of Law 85, approximately 71% of insolvency cases led to bankruptcy proceedings, while only a small per-centage of insolvent companies managed to undergo a successful reorganisation. New mechanisms for shortening the procedures, and accelerating the reorganisation proceed-ings were thus necessary. Further, alignment with European Insolvency Acquis Communautaire was mandatory.

During the years of economic growth of the country, Law 85 underwent only minor amendments. However, since the beginning of the economic downturn, the number of amendments has increased (once in 2009 and twice in 2010).

Because of the crisis, more companies have been facing financial difficulties. A lack of li-quidities on the market has led to a significant increase in the number of debt recovery proceedings and insolvency cases. In practice, creditors were using insolvency proceedings as a means of debt recovery. Filing for insolvency against their debtors has mainly been done to pressure debtors to settle receivables in order to avoid entering into insol-vency.

In order to stop this phenomenon and to ensure that companies facing insolvency have a fair chance to undergo a reorganisation proceeding, Law 85 has been amended. Due to such amendments insolvency has started to be perceived also as a proceeding by way of which the debtor could seek judicial protection from its creditors and companies could actually undergo a successful reorganisation. During 2010 the number of companies filing for insolvency and trying to undergo reorganisation proceedings has significantly increased.

Some of the most important amendments to Law 85 are discussed below.

  Shortening the procedure and reducing the number of the insolvency requests

Beginning in 2009 the concept of special insolvency departments (within county courts) has been introduced. These departments are only competent to hear insolvency proceed-ings under Law no. 85 and the EC Regulation on insolvency proceedings. The establishment of the insolvency departments is an ongoing process, whereas most Romanian county courts have already established such departments.

Prior to the 2009 amendments, the mandate given to statutory management bodies was only suspended following the withdrawal of the debtor’s right to manage their estate. Now, however, the mandate of the statutory management is considered terminated upon withdrawal of the debtor’s right to manage their estate or upon appointment of the special trustee.

The provisions regarding the appointment of a special trustee by the general assembly of the debtors' shareholders have also been amended in order to speed up the proceedings. Following such amendments, failure by the general assembly to appoint a special trustee automatically triggers the withdrawal of the debtor's right to manage its estate and man-agement is taken over by an appointed judicial administrator. Further, in urgent cases, the judicial administrator was given the right to perform transactions without the prior approval of the creditors' meeting.

Reorganisation before bankruptcy

In order to ensure the companies facing financial difficulties a fair chance at undergoing insolvency proceedings (and also to encourage the reorganisation of the companies and decrease the number of insolvent companies entering directly into bankruptcy), Law 85 introduced the below amendments.

Article 86, introduced in 2009, provides that contracts which are ongoing at the date of opening of the proceedings shall be deemed to continue. Any contractual clauses stating that ongoing contracts are terminated due to the opening of insolvency proceedings shall be null and void. Prior to this amendment, many ongoing contracts of the debtor company were terminated solely on this ground, preventing the debtor from continuing its business and preventing any real chance of reorganisation.

Also, during the observation period, the judicial administrator now has the right to amend the clauses of facility agreements with a view to establish comparability of future performance, provided there is consent from the other contracting parties. Former provisions establishing the obligation to subject such amendment to verification by and approval of the creditors’ committee have been excluded from the wording brought by the 2009 amendments.

Further, by derogation from the provisions of the Labour Code, following the opening of insolvency proceedings, the judicial administrator/receiver (lichidator judiciar) has the right to terminate the individual labour agreements of the debtor’s personnel without un-dergoing the collective dismissal procedure. The judicial administrator/receiver is nevertheless obliged to grant the dismissed person a 15 working day prior notice. Previously, the judicial administrator/receiver was only entitled to terminate individual labour agreements on the above terms if the debtor was in bankruptcy proceedings.

Finally, following the most recent amendments, the reorganisation plan may be amended at any time during the proceedings as long as the voting and confirmation procedures are observed. Previously, failure to strictly observe the voted and confirmed reorganisation plan resulted in commencement of bankruptcy proceedings.

Unification of the case law

Law 85 also undertook some amendments in view of unifying the Romanian case law on various issues related to the insolvency proceedings. For instance, article 76 of Law 85 currently provides that failure to register a statement of claims with the file/judicial administrator within the term set by the court results in that creditor not being registered in the creditors' table and not having the right to participate in such capacity within the proceedings. Prior to the amendment the Romanian case law was not unified on this matter.

The Romanian legislator has constantly tried to improve Law 85 and respond to the con-ditions of the Romanian market. Due to such amendments, Law 85 currently provides sufficient mechanisms enabling companies facing financial difficulties to seek protection from creditors and attempt a successful reorganisation.

This article was originally published in the schoenherr roadmap`11 - if you would like to receive a complimentary copy of this publication, please visit: www.schoenherr.eu/roadmap