Law no. 151 on insolvency procedures for individuals (the “Law”) is expected to enter into force on 26 December 2015. The Law was published on 18 June 2015, but its entry into force was deferred by six months in order to allow the establishment of a new public body to manage insolvency claims, as well as the enactment by the Government of the regulations for the implementation of the Law.
In such cases, historically speaking, there is always a threat of further delay due to the lack of second-tier regulation, which the Government sometimes fails to issue on time. However, following our investigations, and given the sensitive political nature of this matter, it seems that in this case the Government does not have any incentive to delay the implementation of the Law – on the contrary.
Going through the public documents that mirror the law-making process, it becomes apparent that the rationale that drove the authors of the Law is to safeguard the interests of individuals who are indebted to financial institutions, such as banks or leasing companies, and who can no longer afford to pay their debts.
Looking into the Law itself, it seems that this was indeed one of the key drivers. However, it is also apparent that, in the final version, the law-makers endeavoured to strike a more reasonable balance between the interests of debtors and those of creditors, following examples from other EU countries, such as the UK and Germany. How well this will play out in practice remains to be seen.
As a last point in our introduction, we note that the Law is not immune from criticism, as several aspects still remain unclearly or insufficiently regulated and their impact is yet to be seen in practice. Unclear areas include the composition of the Insolvency Commissions, which does not include a creditors’ representative, and the conditions for the termination of some of the debtor’s on-going contracts by a judicial receiver.
In this article, we highlight the main provisions of the Law, focusing on important topics such as the conditions that debtors must meet in order to request protection under the Law, as well as the insolvency procedure itself and its implications.
Who does the Law apply to?
The new provisions apply only to individuals whose obligations are not commercial in nature and who:
- have had their domicile or residence in Romania for at least six months before the filing for insolvency;
- are in a state of insolvency, which is presumed if the debtor has not paid his/her debt(s) toward one or more creditors for more than 90 days from the due date(s) and there is no reasonable probability for them to become capable of performing their obligations within a maximum of 12 months while maintaining a reasonable lifestyle (a concept that will be later regulated by the Insolvency Commission) for themselves and the persons under their care; and
- the aggregate amount of their due obligations is equal to at least the total sum of 15 national monthly minimum wage payments (for reference, the gross national monthly minimum wage from July 2015 is RON 1,050 – approx. EUR 250).
Given that the Law aims to protect only debtors acting in good faith, there are certain cases in which the Law does not apply, such as if the debtor has been convicted of tax evasion, forgery or intended misuse of assets; if the debtor has been fired due to his/her fault within the last two years; if the debtor has incurred new debts although he/she was aware or should have been aware of his/her impending insolvency; if the debtor has created or facilitated his/her insolvency by gross negligence or wilful misconduct; or if the debtor has benefitted from a similar procedure that ended with the discharge of his/her residual debts within the last five years.
Who “applies” the Law?
As we mentioned at the start of this article, a new administrative body, the Insolvency Commission, will be established to manage insolvency claims. This new administrative body will be comprised of a central commission as well as territorial commissions, one for each of the 41 counties (including one in Bucharest).
While the Central Insolvency Commission plays a more regulatory role, the Territorial Insolvency Commissions (“TICs”) will play an active role during the insolvency procedures. Thus, the Law aims to give more power to the administrative body while reducing the involvement of the courts. Nonetheless, the latter will still have superseding powers over the decisions of the TICs, subject to those decisions being challenged.
Last but not least, a key role is played by the judicial receiver, who is appointed by the competent TIC or, in some cases, by the court. The main task of the judicial receiver is to guide and supervise the debtor’s actions throughout the insolvency procedure.
What are the available insolvency procedures?
The Law regulates three separate procedures that aim, on one hand, to safeguard debtors from discretionary enforcement procedures and, on the other hand, to maximize the amounts recovered by creditors. These are:
- General insolvency procedure based on a debt recovery plan (Recovery Plan Procedure);
- Insolvency procedure based on liquidation of assets (Liquidation Procedure); and
- Simplified insolvency procedure (Simplified Procedure).
How do the insolvency procedures start and what do they entail?
Currently, there is only one way to start the insolvency procedure: through the debtor’s own voluntary filing for insolvency. The debtor, subject to fulfilling certain conditions (as mentioned above and further detailed below), can file for one of the three insolvency procedures.
The rationale of the Law implies that the debtor should first file a request for the Recovery Plan Procedure, as this seems to be the “default” type of insolvency procedure. The Liquidation Procedure, which seems to be the second alternative, can start either directly, subject to a very poor financial situation of the debtor, or after the failure of the Recovery Plan Procedure. Finally, the Simplified Procedure applies only in limited cases and will probably be the least used in practice.
As a final and important point, we note that (i) the start of any insolvency procedures results in a stay of any enforcement procedures against the debtor as well as a stay of the accrual of any liabilities or interest (with the exception of secured receivables) and (ii) the successful closing of any of the insolvency procedures allows debtors to request that the court discharge their residual debts (namely, the debts that are not covered during the insolvency procedures).
Let’s take a closer look at each of the insolvency procedures and their implications as well as the specific sanctions put in place by the Law to prevent debtors from acting in bad faith.
Overview of the insolvency procedures
- Recovery Plan Procedure
The Recovery Plan Procedure is mostly an administrative one, governed by the TICs while court involvement is kept to a minimum. Nevertheless, almost any of the decisions taken by the TICs can be challenged in court.
This procedure is generally applicable to insolvent individuals who satisfy the conditions described at the beginning at this article and whose financial status is not irremediably compromised (a wording which, given that is not defined by the Law, will probably raise debates in practice).
Before filling for the Recovery Plan Procedure, the debtor must notify all his/her known creditors with respect to his/her intention to file for personal insolvency, at least 30 days in advance. If the debtor fails to do so, he/she will likely not be allowed to file for insolvency, and the request for insolvency will be rejected as premature.
The main steps of the Recovery Plan Procedure are as follows:
- filing the request for insolvency – this follows a standardised form (to be approved by the Central Insolvency Commission, after it has been set up). Certain documents must be attached to the form, such as evidence of the debtor’s revenues, fiscal declarations for the previous three years and an initial proposal for a debt repayment plan;
- approval in principle by the relevant TIC of the procedure based on a debt recovery plan – the main consequence of this step is the temporary stay of all enforcement actions initiated against the debtor’s assets;
- disclosure by creditors of their receivables and related security, following the notification served by the judicial receiver in this respect;
- drawing up, by the judicial receiver, of the preliminary receivables table – this becomes final if it is not contested or, in case that it is, following the court decision. Secured receivables are registered up to the market value of the secured assets;
- drawing up, by the debtor and the judicial receiver, of the debt recovery plan. We note that the receivables recovery rate proposed in the plan must be greater than the recovery rate obtainable by creditors under the Liquidation Procedure. The duration of the debt recovery plan is a maximum of five (5) years, extendable by one (1) additional year;
- approval of the plan – the plan can be approved with a majority representing creditors owning a minimum of 55% of the aggregate value of receivables and by creditors owning a minimum of 30% of the value of secured receivables; and
- confirmation of the plan – if the plan is not approved by the creditors, as detailed above, the competent court is entitled to confirm the plan if certain conditions are met, such as the favourable vote of creditors representing at least 50% of the total receivables value and a greater recovery rate than under the Liquidation Procedure.
Implementation of an approved recovery plan
In respect of creditors, the effects of the approval of the plan are as follows:
- automatic stay of all enforcement procedures against the debtor’s assets and suspension of the creditors’ right to start enforcement procedures against the debtor;
- no interest, penalty or other costs related to existing receivables will accrue, except for secured receivables; and
- ineffectiveness of contractual clauses involving the termination or acceleration of on-going contracts due to the opening of insolvency procedures.
In case of debtors, there are certain obligations set forth by the Law. For example, the debtor cannot enter into new loan agreements unless with the prior approval of the TIC and only for the purpose of resolving urgent and severe matters endangering his/her life or health or that of the persons in his/her care. In addition, on the occasion of any transfer of an immovable asset, the debtor must inform the public notary of his/her insolvency and provide the public notary with proof of the judicial receiver’s approval regarding the transfer.
Once the plan has been fully implemented, the Insolvency Commission ascertains the fulfilment of the debt recovery plan and closes the procedure. Subsequently, the debtor can request that the court discharge residual debts.
If the debt recovery plan cannot be fulfilled, the debtor, the judicial receiver or the creditors may request the court to open the Liquidation Procedure, as we will see below
- Liquidation Procedure
The opening of the Liquidation Procedure may be requested by a debtor before the courts of law if:
- the debtor’s request for opening the Recovery Plan Procedure is rejected;
- no debt recovery plan is approved/confirmed;
- the recovery plan may no longer be implemented for reasons not attributable to the debtor; or
- if the debtor’s financial status is irremediably compromised.
Creditors are also awarded the right to request the opening of the Liquidation Procedure, but only in the event that the debt recovery plan cannot be implemented. However, there are two scenarios:
- if the failure of the debt recovery plan is not due to the fault of the debtor, then any of the creditors can request the opening of the Liquidation Procedure; or
- if the failure of the debt recovery plan is due to the fault of the debtor, then all creditors must agree in order for the request for the opening of the Liquidation Procedure to be admissible.
The effects of opening the Liquidation Procedure are similar to those pertaining to the Recovery Plan Procedure, namely the automatic stay of all enforcement procedures, suspension of creditors’ right to start enforcement procedures against the debtor, suspension of interest and penalty accrual, etc. Additionally, the debtor is unable to dispose of his/her assets and income, which will be used for the liquidation process.
The main steps of the Liquidation Procedure are as follows:
- notification of creditors so that they may communicate, within 30 days, details of their receivables and related security;
- drawing up, within 15 days from receipt of the above details, of the preliminary receivables table by the judicial receiver, which becomes final if it is not contested or following the definitive decision of the court ruling on any challenges to the table. As in the case of the Recovery Plan Procedure, secured receivables are registered up to the market value of the secured assets;
- carrying out an inventory of the assets and receivables of the debtor, within 30 days from the opening of the Liquidation Procedure or within a longer term awarded by a court of law;
- realisation of the debtor’s assets, according to the common rules of the Civil Procedure Code. The assets sold as part of the realisation procedure are acquired free of any encumbrance; and
- distribution of the funds obtained as a consequence of the realisation.
Following the sale of the debtor’s assets, the liquidator drafts a final report and, subsequently, requests the court to close the Liquidation procedure.
Additionally, during the Liquidation Procedure, any creditor has the right to request in court the closing of the procedure if it can prove that the debtor has concluded acts or has acted in such a way that it has damaged the creditors’ interests. However, in the event that all creditors agree, the court may allow the Liquidation Procedure to continue, but the debtor loses the benefit of the discharge of residual debt.
Cancellation of fraudulent acts or operations
Similar to the general insolvency principles, the liquidator or any creditor may request the competent court to cancel acts concluded by the debtor before the opening of the Liquidation Procedure that may damage the interests of the creditors, such as:
- acts conducted within the last six months in which the benefit received by the debtor as a consequence of the operation is obviously smaller than the value of its specific performance;
- acts concluded within the last two years to the detriment of a creditor’s interests;
- acts or operations concluded with a related creditor within the last two years;
- property transfer acts concluded with a creditor, for or on the account of a past debt, within the last six months, provided the value of the receivable that the creditor may obtain as a result of the insolvency procedure is smaller than the price under the transfer act; or
- the creation of a security for a receivable that was initially unsecured or prepayments of debts normally payable subsequent to the opening of the procedure, if they are made within the last six months.
The last two situations are not applicable to acts concluded in good faith within the context of the performance of a moratorium or similar agreement previously concluded by the debtor with its creditors.
The secured receivables or the amounts obtained through the sale of secured assets will be distributed to secured creditors once the procedural costs and, if necessary, the enforcement expenses advanced by creditors are paid.
Other receivables registered in the receivables table are paid in the following order:
- taxes, stamp duties and other procedural costs;
- receivables owed by the debtor to third parties pursuing to alimonies, support obligations etc.;
- receivables born during the insolvency procedure;
- state/budgetary receivables;
- unsecured receivables; and
- subordinated receivables (firstly, the unsecured receivables of the debtor’s related party and, secondly, receivables deriving from acts without consideration, such as donations etc.)
- Simplified Procedure
The Simplified Procedure is applicable only in case a rather restrictive set of conditions are met. The request for opening this procedure is analysed by the TIC and resolved by the court. The conditions are:
- the aggregate debt amount is equivalent to a maximum of the total sum of 10 national monthly minimum wage payments;
- the debtor has no income or assets that may be pursued; and
- the debtor is over the standard pensioning age or has lost at least half of his/her work capacity.
The effects of the simplified procedure are basically the same as those pertaining to the usual procedure, e.g.,the stay of all legal pursuits against the debtor, suspension of interest accrual etc.
Additionally, the debtor has certain obligations during a period of three years, such as to pay outstanding debts as they become due, not to undertake any new loans, to periodically inform the TIC with respect to any new income exceeding half of the national monthly minimum wage, or to disclose any inheritance or received donation of assets exceeding the value of the national monthly minimum wage.
Upon the expiry of the three-year term, the TIC shall issue a decision that ascertains the fulfilment by the debtor of all his/her above obligations. If the debtor fails to comply with its obligations, any creditor can request the TIC to close the procedure
- Residual debts discharge
Under the Recovery Plan Procedure or Simplified Procedure, the debtor may request the court to discharge residual debts representing the value of receivables exceeding the recovery rate agreed in the recovery plan. The filing must be made within 60 days from the decision closing the procedure.
In the case of the Liquidation Procedure, the debtor may request to the court to write-off residual debt under the following conditions:
- if within one year from the date the procedure is closed, at least 50% of the aggregate value of receivables were satisfied;
- if within three years from the date the procedure is closed, at least 40% of the aggregate value of receivables were satisfied; or
- no earlier than five years from the date the procedure is closed, if the above thresholds were not met.
The residual debts discharge may be revoked by the court if, within three years from the date the decision approving the write-off is passed, it is ascertained that the debtor concluded fraudulent acts affecting its creditors (either before or after the opening of the procedure). A debtor in this situation is prohibited to file for a new insolvency procedure within five years from the date the revocation decision was issued.
In order to better protect the interests of the debtor, the Law has includes several specific sanctions against debtors who act in bad-faith (with the aim to reduce the amounts paid to their creditors).
For example, upon request of any interested person or ex officio, a competent court may decide to prohibit a debtor who acted in bad-faith from being appointed as a director/manager or similar office in a company or as credit accountant, for a period of five years.
Also, the alienation, hiding, deterioration or destruction, in whole or in part, by the debtor of values or assets from its patrimony, any reference to fictitious acts or debts or the forging of documents with the purpose of defrauding creditors represents a criminal offence and is sanctioned with prison from six months to three years or with a criminal fine.
A final word
We started with the question – does the new regulation pose a threat to lenders? It is difficult, and would be presumptuous, to give a definitive answer as of the date of this article. However, we note that, although the Law aims to protect the debtor, it also clarifies the receivables recovery process, while making it more transparent and predictable for creditors.
This, at least in theory, should allow all creditors (even less pro-active ones) to recover more of their receivables, within a hopefully more reasonable timeframe. Thus, although there is still much work to be done and practice will have the final word, it seems that, at this stage, the insolvency procedure should award creditors a higher chance to, collectively, recover more of their receivables.