A look at corporate, personal and, where relevant, partnership insolvency proceedings in Romania, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Ad hoc mandate/Debt restructuring procedure
- A confidential and mainly out-of-court procedure through which a debtor in financial difficulties may negotiate with its creditors, via an agent (mandatar ad-hoc), in order to reach an agreement to overcome its financial difficulties.
- The agent must be an insolvency practitioner and is appointed by the court. They may advance restructuring proposals to creditors and an agreement must be reached within 90 days.
- The company remains in control of its assets throughout.
- Secured creditors who are not part of the procedure may enforce their security.
- Comprises an agreement between a debtor in financial difficulty and creditors holding at least 75% of accepted and uncontested claims, through which the debtor proposes a restructuring plan.
- The agreement must be approved by the court (syndic judge) which may decide that creditors who did not accept the restructuring plan and therefore did not sign the agreement should reschedule their claims for a maximum period of 18 months without charging interest, penalties or other charges (except for financial contracts, eg forwards, swaps).
The entire procedure is conducted by a composition receiver (administrator concordatar), appointed by the court and selected from a list of insolvency practitioners.
- All enforcement actions commenced by creditors (including secured creditors) are suspended.
- The procedure may last up to 24 months extendable for another 12 months.
- Commenced at the request of either the debtor or any of its creditors. The debtor is presumed to be insolvent if it has not paid its debts for a period of at least 60 days of a debt becoming due and the debt amounts to at least RON40,000 (approx. EUR8,000).
- If the debtor is responsible for initiating the proceedings then the amount the state claims against it must be less than 50% of the value of all the declared claims against that debtor.
- On opening the proceedings, evidence should also be provided proving that the tax authority was informed. Failure to do so will result in the request being rejected.
- Following a court decision to commence the proceedings, the debtor enters an observation period until a reorganisation plan is approved or bankruptcy proceedings are commenced.
- The court may permit the debtor to administer its assets under the control of a court-appointed judicial administrator and under the control of the court (syndic judge) itself. In certain cases, the court may refuse to permit the debtor to administer its own assets, in which case the judicial administrator appointed by the court will have all rights of administration. During this period, creditors are required to file their claims. The debtor is represented by a special administrator appointed by the general meeting of shareholders.
- All enforcement procedures commenced before the opening of the insolvency proceedings are suspended, including those started by the secured creditors.
- Creditors may not rely solely on the insolvency proceedings as grounds for terminating contracts entered into with the debtor.
- Certain decisions within the insolvency proceedings are referred to a creditors’ committee of three or five creditors nominated by the creditors’ meeting from three classes of creditors (secured,≈unsecured and state claims).
- Creditors cannot be appointed as the debtor’s special administrator.
- The judicial administrator/liquidator/president of the creditors’ committee/any creditor holding more than 30% of the total claims may file a claim against those people responsible for the debtor’s state of insolvency.
- Law provides specific conditions for insolvency/bankruptcy of groups of companies, credit institutions and insurance companies and for cross-border insolvency.
Reorganisation proceedings (part of insolvency proceedings)
- If a reorganisation plan is approved as part of insolvency proceedings, the debtor will enter into a reorganisation procedure that may last up to three years.
- A special administrator will conduct the debtor’s business in accordance with the reorganisation plan and subject to the control of a judicial administrator.
- The reorganisation plan may provide, in certain conditions, for extinguishment of state tax claims and their conversion into shares in the insolvent debtor. If the state claims are disputed and the court has not suspended their enforcement, those claims will be registered in the table of claims as contingency claims.
Bankruptcy (liquidation) proceedings (part of insolvency proceedings)
- Bankruptcy proceedings can be commenced as part of insolvency proceedings in the following circumstances: (i) if the debtor has applied for a simplified insolvency procedure; (ii) the debtor/its creditors/judicial administrator have not proposed a reorganisation plan; (iii) the reorganisation plan has not been approved; or (iv) the reorganisation of the debtor has failed.
- Any creditor or the judicial administrator may file for the bankruptcy proceedings. The syndic judge shall decide whether the bankruptcy procedure is open.
- The procedure involves liquidation of all of the debtor’s assets.
- In the case of insurance/reinsurance companies, insurance policies automatically expire and all reinsurance agreements are terminated 90 days after the decision to open the bankruptcy proceedings.
Darea in plata a unor bunuri imobile
- An out-of-court procedure where the debtor transfers ownership of all mortgaged (residential) properties to the lender and in return is discharged from the outstanding loan and all accrued costs.
- If the procedure fails, the debtor may apply to court for an order regarding the mortgage discharge.
Insolventa persoanei fizice
- A procedure for individuals whose debts do not arise from professional activities, where there is no reasonable prospect that the debtor will be able to meet their obligations within a maximum 12-month period. It seeks to maintain a reasonable standard of living for the debtor and their dependants.
- The procedure is conducted by an insolvency committee/ administrator/liquidator and by the court, depending on which of the following procedures is followed.
1. Procedura de insolvenţă pe bază de plan de rambursare a datoriilor
1. Insolvency procedure based on a plan for debt repayment
- A natural person’s debt repayment plan is approved if creditors representing at least 55% of the total value of debts and 30% of preferential debts vote in favour of it.
- If the proposed plan is not approved by creditors, the debtor can request the competent court either to confirm the plan or order the opening of an insolvency procedure based on the liquidation of the debtor’s assets.
- Following the approval of the plan, all enforcement procedures initiated against the debtor are suspended, including those commenced by secured creditors.
- Contracts that are ongoing when the insolvency procedure was opened must be maintained and cannot be terminated due to the opening of the insolvency proceedings.
- If the insolvency committee determines that the plan for debt repayment cannot be fulfilled, it will submit the debtor’s/administrator’s request to the competent court.
2. procedura judiciară de insolvenţă prin lichidare de active
2. Insolvency court procedure based on the liquidation of the debtor’s assets
- If the court approves an application to open proceedings based on liquidation of the debtor’s assets, it will appoint a liquidator.
3. procedura simplificată de insolvenţă
3. Simplified insolvency procedure
- A simplified insolvency procedure can be applied to an insolvent debtor where: (i) the total amount of debts is equal to ten times the minimum wage; (ii) the debtor has no realisable assets or income; and (iii) the debtor is past the standard retirement age or retired early as a result of losing at least half of their capacity to work.
Procedura de executare silita
- Enforcement proceedings can be taken in respect of both movable and immovable assets. They can take place out of court or via court proceedings.
- The out-of-court procedure applies to secured claims over movable assets only and subject to certain conditions.
- In all other cases, the procedure is conducted by an enforcement officer selected by the creditor(s) from a list of local enforcement officers. They must give the debtor notice of the proceedings, informing them that they have a certain period of time within which to pay all their debts, including enforcement costs.
EU Directive Implementation
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Implementation in Romania
At the time of this update, the EU Restructuring Directive has not been implemented in Romania yet. The Romanian Ministry of Justice, the authority in charge with drafting the Government bill transposing the Directive into the national legal framework, hired in 2020 a consortium of consultants to assist in the preparation of such draft law. A first draft was released in March 2021 for public consultation, and a second revised draft was made available in early June on the Romanian MOJ’s website.
Even though the national implementing date for the Directive has been set for July 2021, the Romanian Ministry of Justice indicated in the explanatory notes to the national draft law implementing the Directive that Romania has already notified the European Commission about the extension of such transposition term by one year (until July 2022).
In terms of the current legislative process, once the Romanian MOJ decided to assume a final version, a customary course would include the bill’s approval by the Government, its subsequent reading in the two-chamber Romanian Parliament, and its signing into law by the Romanian President. While the
Romanian Government may take a shortcut and pass the bill as an Emergency Ordinance, effective immediately, it is rather unlikely it will proceed as such due to the potential sensitivity of this approach in relation to the business community. Unless exigent circumstances may prolong its course, we anticipate that the draft law will likely be ready for enactment in late 2021 or early 2022.
Recognition of foreign insolvency processes
EU regulation on insolvency proceedings
The EU Regulation on Insolvency Proceedings2 applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.
Recognition of third country insolvency processes
In 2002, Romania was one of the first countries to implement the Uncitral Model Law on Cross- Border Insolvency (1997) (Model Law) into its internal legal framework, by passing Act no. 637/2002 on conflict of laws rules in cross-border insolvency. The relevant rules were further incorporated as a special Title III – Cross-border Insolvency into the new Insolvency Act no. 85/2014 (Romanian Cross- Border Insolvency Law).
Romanian Cross-Border Insolvency Law expressly acknowledges its international origin and the need for promoting the uniformity in its application. Thus, while not formally transposed into the internal legal framework, the UNCITRAL Guide to Enactment and Interpretation (2013), and the Practice Guide on Cross-Border Insolvency Cooperation (2009), respectively. represent useful tools for the interpretation and application of the Model Law.
The relevant provisions are aimed to apply in relation to recognition of foreign insolvency cases commenced in jurisdictions outside European Union for which either (a) Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (New EU Insolvency Regulation) is not applicable; or (b) Romania and the relevant foreign jurisdiction have not concluded a relevant international assistance treaty.
Recognition of foreign insolvency proceedings
Representatives of foreign insolvency proceedings are authorized to file a request for the recognition of such foreign insolvency proceedings directly with the Romanian court of competent jurisdiction (specific jurisdiction clauses are included for that purpose in the Romanian Cross-Border Insolvency Law).
Romanian Cross-Border Insolvency Law institutes certain conditions for the recognition of foreign insolvency proceedings, either as main or secondary, of which some are substantive, while others are formal.
The substantive conditions include:
- Determination that the foreign proceedings requested to be recognised, and the foreign representative requesting such recognition, constitute "foreign proceedings" and a "foreign representative", respectively, as defined by the Romanian law;
- Absence of fraud in the rendering of the foreign jurisdiction court decision (fraud must be both pleaded and proved);
- Absence of violation by the relevant foreign proceedings and the associated foreign court decisions of Romanian public policy related to its private international law rules (although not yet settled as a rule, violation must be both pleaded and proved);
Reciprocity between Romania and the foreign jurisdiction insofar as there is mutual recognition of the court decisions rendered in these two jurisdictions (although not stated in the law, reciprocity must be proved via an official letter issued by the Romanian Ministry of Justice).
The formal conditions envisage the satisfactory delivery, along with the request for recognition of foreign insolvency proceedings, of a list of documents that must support the request, as follows:
- Certified copy of the foreign court decision(s) commencing the insolvency proceedings and appointing the foreign representative;
- An affidavit letter issued by the relevant foreign court certifying the commencement of the foreign insolvency proceedings and the appointment of the foreign representative;
- If the documents under a) and b) above are missing or cannot be produced, any other documentary evidence attesting the commencement of the foreign insolvency proceedings and the appointment of the foreign representative, certified under either (i) the Hague Apostille Convention or (ii) any applicable bi or multilateral international assistance treaty;
- An affidavit of the foreign representative indicating all the foreign insolvency proceedings the representative is aware of.
- Although left to the discretion of the Romanian court, in practice all documents listed under a) – d) above shall be accompanied by official Romanian translations. Also, even though the law permits the Romanian court to accept plain copies of the supporting documents and accept them as accurate, in practice the Romanian courts will most likely require certified and apostilled/ legalized documents.
A court decision rendered in a foreign insolvency proceedings recognition context is appealable and it is only carrying partial res judicata; a third party in interest may petition the court to vary or vacate the decision to the extent the relevant applicable grounds and conditions were not met at the time of its rendering, or they ceased to exist.
The recognition of foreign insolvency proceedings, either as main or secondary, will bring about certain consequences, depending upon the nature of such foreign insolvency proceedings, regarding the following:
- Staying the actions or enforcements against the debtor’s rights, assets and obligations and its impact on the associated statute of limitations period;
- The disposal of the debtor’s property;
- The commencement of local insolvency proceedings and proof of claims within such proceedings;
- Provisional measures;
- Temporary custody and management of debtor’s property situated in Romania;
- Avoidance actions;
- Standing of the foreign representative to intervene in actions and proceedings in which the debtor is a party;
- Commencement of a local insolvency case against the debtor
Insolvency changes in response to COVID-19
For more information on changes to insolvency law in Romania as a result of the Covid-19 pandemic please see our Guide to changes in insolvency law in response to COVID-19
On 14 May 2020, the Romanian Government issued the Government Emergency Ordinance (GEO) no. 70/2020 addressing several aspects related to the COVID-19 situation and amending several laws in conjunction with the transition from the state of emergency (instituted on 15 March 2020) to the state of alert, which was declared on 15 May 2020 for a 30-day period and subsequently extended for similar consecutive periods (still effective as at the time of this update). On the other hand, on 18 May 2020, a bill passed by Romanian Parliament entered into force as Act No.55/2020 on certain measures for preventing and combating the effects of the COVID-19 pandemic (the COVID-19 Response Act). Act No. 55 reiterates tale quale the measures instituted in GEO 70/2020, and adds several others. COVID-19 Response Act made more temporary adjustments to the ordinary legal insolvency treatment that are aimed at being applicable during the state of emergency and the state of alert.
For the first time since the institutionalised response to the COVID-19 outbreak, GEO 70/2020 and Act 55/2020 introduced several temporary relief measures for debtors facing insolvency, which are aimed at encouraging, during the state of alert, out-of-insolvency restructuring negotiations and workout agreements between distressed debtors and their creditors.
Those debtors that are or become insolvent during the state of alert are left the option of filing for insolvency, if they choose to do so, but they are expressly excused from the statutory duty of filing which Act no. 85/2014 (the general insolvency law) imposes on insolvent debtors. Thus, the 30-day period during which – under ordinary circumstances – Act no. 85/2014 imposes a duty to file on debtors becoming insolvent, only starts to run after the end of the state of alert.
Similarly, if there are debtors negotiating a debt workout with their creditors, either as an informal out-of-court arrangement or as a court-supervised ad-hoc mandate (mandat ad hoc) or preventive composition (concordat preventiv), and such negotiations collapse during the relevant state of alert, the five-day period within which the debtors are ordinarily obliged to file for insolvency following the failure of such negotiations only starts to run from the end of the state of alert.
The additional changes introduced by the COVID-19_Response Act were designed to encourage financial restructuring for those debtors who are insolvent or who are facing insolvency, and the business of which has been stayed, either entirely or partially, due to the measures imposed by the authorities in response to COVID-19, as follows:
- The minimum aggregate value claim threshold for an eligible insolvency case is increased from RON 40,000 to RON 50,000 (around EUR 10,000) in case of debtors forced to suspend, entirely or partially, their business during the state of emergency and state of alert due to the intervention of public authorities.
- The additional prerequisite that tax due should represent less than half of the total value of claims at the time of the insolvency petition is put on hold during the state of alert.
- The creditors of debtors forced to suspend, entirely or partially, their business during the state of emergency and state of alert due to the intervention of public authorities are allowed to file during the state of alert involuntary insolvency petitions against such debtors only if the creditors have first tried reasonably to reach a debt repayment arrangement with the relevant debtors.
- In respect of negotiations between debtors and their creditors for preparing or reaching an agreement on a preventive concordat that were ongoing at the time COVID-19 Response Act was enacted, the duration of the negotiation period was extended for a further 60 days, and the implementation phase of such an arrangement was similarly extended for another two months.
Further time extensions were granted in case of insolvency cases that were active at the time of the COVID-19 Response Act, as follows:
- the supervision period (perioada de observatie) within an insolvency case for an additional three months;
- the period available to propose a reorganisation plan, or an amended reorganisation plan, for an additional three months;
- the maximum original implementation periods and variation of restructuring plans for one additional year up to four years, with the possibility of a further maximum one-year extension for debtors that have entirely or partially suspended their business due to the intervention of public authorities;
- the implementation of reorganisation plans for an additional two months;
- the interruption, on the relevant debtors’ request, of implementation of reorganisation plans for those debtors undergoing court-supervised reorganisations that have entirely suspended their business due to the intervention of public authorities for an additional two-month period; and
- the extension up to five years of the implementation term of reorganisation plans, possibly in conjunction with other amendments of the reorganisation plans for those debtors undergoing court-supervised reorganisations that have entirely or partially suspended their business due to the intervention of public authorities.
Permanent changes to Romanian insolvency law
On 11 July 2020, the Parliament passed Act No. 113/2020 approving the Government Emergency Ordinance no. 88/2018 regarding several amendments to some insolvency and other laws. None of the changes to GEO 88/2018 seem to be driven by the COVID-19 effects, however, the Romanian legislator seemed to consider that it should permanently increase the minimum aggregate value claim threshold for an eligible insolvency case from RON 40,000 to RON 50,000 (around EUR10,000) – as it previously did, albeit on a temporary basis only, through Act no. 55/2020.
Law stated as at 7 June 2021.
Contact: Marian Dinu and Ioan Chiper
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.
2 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).