Following a lengthy process which started in 2012 aiming to reform the Romanian insolvency framework as part of a wider judicial reformation program, the New Insolvency Law (Law no. 85/2014 regarding the prevention of insolvency and the insolvency proceedings) entered into force on 28 July 2014. As part of a project coordinated under the aegis of the World Bank and the International Monetary Fund, the New Insolvency Law adopts an integrating vision and illustrates a new approach of saving the business and giving a second chance to the honest and viable debtor, while also ensuring fair treatment of creditors.
The New Insolvency Law consolidates all pre-insolvency, and the vast majority of the insolvency, provisions under Romanian legislation in relation to companies, groups of companies, credit institutions, insurance and reinsurance companies, as well as cross-border insolvency proceedings. Its applicability is restricted to insolvency proceedings commenced after it entered into force; any ongoing proceedings are regulated by the former insolvency law.
For the first time in Romanian legislation, the New Insolvency Law introduces 13 principles, inspired by the Principles of European Insolvency Law and the UNCITRAL Legislative Guide on Insolvency Law. They shape the ratio legis of the new regulation and give insight into the purpose of the changes and innovations.
The New Law presents numerous amendments to the insolvency regulation, both procedural and substantial, that will significantly affect the way in which insolvency is regarded by the business environment.
IMPORTANT PROCEDURAL CHANGES
Aiming to avoid fraudulent recourse to insolvency proceedings, the New Insolvency Law provides clearer instructions and modifies certain important aspects of its execution, such as:
- The threshold represented by the value of the outstanding debt required for the opening of the insolvency proceeding is reduced from RON 45,000 to RON 40,000 (€9,000). It is now applicable whether the filing to open the insolvency proceeding is made by the debtor, any of its creditors or the liquidator appointed according to the Company Law. Formerly, the threshold only applied to creditors. Moreover, the maturity of the outstanding debt is also reduced from 90 days to 60 days.
- The observation period – this is the first stage following the opening of the insolvency proceedings aimed at assessing whether the debtor`s business is still viable and should be reorganized: it is now expressly limited to 12 months.
Apart from modifying existing provisions in order to mirror the solutions already developed by scholars and case law, the New Insolvency Law also introduces new concepts and solutions:
- A framework for coordinating insolvency proceedings for companies in the same group whether they are connected by control and/or qualified participations (e.g. the appointment of the same special administrator for all the insolvent group companies, the possibility of the judicial administrator appointed with respect to any of the insolvent companies to propose a reorganization plan for any of the other insolvent companies in the group, the duty to cooperate of the judicial administrators of the group companies);
- An express provision enabling creditors or the debtor to file for interim measures to safeguard the debtor’s assets before the hearing of the application to open insolvency proceedings;
- A new provision introducing a private investor test. This was inspired by European Court of Justice case law, where the approval of a reorganisation plan involving a haircut of public debt was not considered per se to amount to unlawful state aid. Public sector creditors are encouraged to negotiate the proposed terms for the recovery of their debt in the same way as private sector creditors, thus supporting the reorganisation of the debtor to avoid its bankruptcy.
- Clear provisions for the protection of creditors that finance an insolvent company during the observation and reorganisation periods. Such creditors are now provided with properly regulated securities for the recovery of their loans;
- The duty to notify the competent tax authority prior to filing the claim for the opening of the insolvency proceeding; and
- A dedicated chapter containing all substantial and procedural rules regarding cross-border insolvency proceedings which do not fall under the scope of Council Regulation (EC) no. 1346/2000 on insolvency proceedings.
The New Insolvency Law introduces considerable improvements to Romania. But it is still too early to predict its net effect on the daily difficulties that businesses and practitioners may encounter in the context of insolvency as they will depend on the manner in which the law will actually be applied by the courts.
Nevertheless, the new law is an important step forwards and should at least have the effect of speeding up insolvency procedures and preventing abuse.