The Romanian High Court of Cassation and Justice has ruled on April 4th, 2019 the decision no. 12 (Decision in the interest of the law) that put an end to the controversy over the legal regime of the expenses representing local taxes owed by the debtor for the immovable assets sold within the insolvency procedure.
This controversy has revolved around the question whether these taxes might be qualified either as budgetary receivables or expenses for the preservation of assets.
Including the local taxes in one of the two categories of receivables mentioned above is important considering the distribution order provided both by Law no. 85/2014 (new version of the insolvency law) and Law no. 85/2006 (old version of the insolvency law, both referred hereinafter as the “Insolvency Law”). As per the provisions of the Insolvency Law, the expenses for preservation or for the property management of the debtor’s assets should be distributed, in case of liquidation, prior to the budgetary receivables.
In practice, this legal issue has frequently been brought before the Romanian courts of law by means of contesting the distribution report and plan. There have been many situations in which creditors have filed contestations whereby they have argued that the distribution of the resulted funds has been made with the breach of the distribution order regulated by the Insolvency Law, due to an erroneous qualification of the receivables described above.
Although the legal issues brought before the Romanian courts were identical in many of the situations, the decisions rendered by the judges in relation to the nature of the receivables described have not always been consistent.
It may be concluded that two opposing opinions have emerged, respectively:
- the local taxes owed for assets sold within the insolvency procedure are merely budgetary claims which must be paid in the order set by the Insolvency Law, respectively after the payment of the expenses for preservation of the assets;
- the local taxes owed for immovable assets sold within the insolvency procedure represent expenses for preservation of the debtor’s assets which must be paid with priority.
Are local taxes budgetary debts?
Several Romanian courts have argued that the said taxes are merely budgetary receivables which cannot be qualified as expenses related to the sale of the asset or for preservation thereof, and, consequently, these do not have priority when distributing the funds obtained from the asset’s sale.
In support of this opinion, the following arguments have been brought:
- The Romanian fiscal law does not state, nor it can be interpreted in the sense that the local taxes due for the asset’s sale are expenses related to such sale or that the said taxes shall be paid out of the purchase price;
- Although the Romanian law provides the obligation to obtain a certificate prior to selling an asset (to prove that the no taxes are due in relation to such asset), in case of a sale within the insolvency procedure such an obligation is not provided considering also that the asset in discussion is subject to a forced sale;
- In fact, if the said local taxes are not paid prior to the conclusion of the sale purchase agreement, they cannot be qualified as an expense in relation to the asset, but only as a budgetary receivable.
- The local taxes related to the debtor’s assets which are due after commencing the insolvency procedure cannot fall within the category of expenses for preservation or for conservation of the assets considering that the failure to pay the said taxes does not have as a consequence the imminence of losing the property, the assets continuing to exist in their material form;
- There is no legal basis to justify the distinction between the local taxes due prior to commencing the insolvency procedure which are qualified as budgetary claims and paid in the order set forth by the Insolvency Law and the local taxes due after the insolvency procedure is opened.
- According to the provisions of the Insolvency Law, the local taxes due prior to the commencement of the bankruptcy procedure must be registered in the additional record of receivables and, subsequently, in the consolidated final table of debts.
Are local taxes expenses for the assets preservation
Other courts argued that these local taxes which become due after commencing the insolvency procedure are, in fact, expenses for the preservation of the asset, and, consequently, they benefit of priority when distributing the funds in the liquidation procedure. However, it must be mentioned that this opinion has been slightly altered in the sense that only expenses representing local taxes which are due after commencing the bankruptcy procedure have priority in distribution.
In support of this opinion, the following arguments have been brought by he courts:
- The Insolvency Law does not define the conservation or preservation acts and a part of the Romanian courts have considered that the common law related thereof is applicable and that the legal opinions expressed in the scholarly literature can be taken into account. In this respect, the doctrine not only defines preservation acts as the ones necessary for a normal exploitation and capitalization of the property, but also gives several examples of such acts, the payment of local taxes being among the given examples;
- Pursuant to the Romanian fiscal code, any person, natural or legal, who owns an immovable asset, has the obligation to pay the local taxes related to the its property. In the bankruptcy procedure, considering that the judicial administrators are required to undertake the necessary conservation and preservation acts for the debtor’s assets, the legal obligation to pay the related local taxes are incumbent to them during the bankruptcy procedure.
- In order to determine whether these local taxes are expenses needed for the preservation of the asset it is essential to analyse the connection between the funds used to pay such local taxes and the asset for which these are owed. More precisely, if the funds are obtained from the sale of the asset for which the local taxes are owed, such taxes shall represent expenses needed for the preservation of the asset. However, if the funds are obtained from other sources (i.e. recovery of debts etc.), the local taxes related to an asset will not have priority at the moment of distribution.
- The registration of the amounts representing local taxes within the additional table of creditors does not represent an impediment for these amounts to be paid with priority at the moment of distribution.
The mandatory decision of the Romanian High Court of Cassation and Justice
In the context described above, on April 4th, 2019, the Romanian High Court of Cassation and Justice, has rendered the Decision no. 12/2019 in the interest of the law whereby it has decided as follows:
“The amounts representing local taxes owed for assets sold within the insolvency procedure which are burdened by a cause of preference in favour of a creditor (or by mortgages, pledges or other real guarantees or possessory liens of any kind) due after the date of commencing the bankruptcy procedure do not benefit of the priority to payment order set forth by article 121 paragraph 1 point 1 of Law no. 85/2006 on the insolvency procedure with the subsequent amendments, respectively, article 159 paragraph 1 point 1 of Law no. 85/2014 on the procedures for preventing insolvency and for insolvency with the subsequent amendments.”
Thus, by the abovementioned decision, which is binding after it will be published in the Romanian Official Gazette, the Romanian High Court of Cassation and Justice has put an end to the debate among the scholars regarding the legal qualification of the local taxes due for the assets described. The local taxes owed for assets sold within the insolvency procedure are merely budgetary claims which must be paid in the order set by the Insolvency Law, respectively after the payment of the expenses for preservation of the assets.
The Decision no. 12/2019 has not been published yet, its grounds being unknown so far.