PROJECT FOR BUSINESS LAW

Insolvency procedures

2012

Table of Contents

Table of Contents ........................................................................................................................................ 2 1.Introduction .......................................................................................................................................... 3 2. Main laws and regulations .................................................................................................................. 4 3. Entities subject to insolvency procedure............................................................................................. 4 4. Mandatory conditions for the commencement of the insolvency procedure ...................................... 5 5. Procedures ........................................................................................................................................... 5 6.Effects of the commencement of the procedure .................................................................................. 8 7. Banking bankruptcy .......................................................................................................................... 10 8.Closing of the procedure .................................................................................................................... 11 9.Insolvency in numbers ....................................................................................................................... 12 10. Conclusions ..................................................................................................................................... 14

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1.Introduction
The financial crisis has caused more and more companies to be unable to pay their current debts. This is due to the lack of necessary amounts. In a situation like this, the only measure that it is able to determine the fate of such an undertaking is the insolvency procedure, which will be completed in the reorganization of the company or in the liquidation of this one and the payments of its debts. Although the accounting of liquidation operations of a company is carried out following the principles of the financial accounting, the operation itself is one that presents a much higher complexity than the operations in the current accounting. The accounting related to the liquidation of a company has many particularities. Only when thinking about the causes that may determine a company to declare bankruptcy and liquidation, can we see the complexity of the phenomenon. The liquidator, as the person who will handle the management of the company in a liquidation procedure, must have extensive knowledge and skills, not only about accounting, but also about law, especially the commercial law. Only a specialist in the field may organize the liquidation operations, so that by carrying it, the rights of the debtor and those of the companys creditors are secured. Through liquidation it is desired to obtain the best solution for the ending of the contractual relations in which a debtor is involved. The main breakthrough in the development of Romanian insolvency law came with the implementation of the Law on Judicial Reorganisation and Bankruptcy Procedure (64/1995), as the previous provisions were partly covered by the Commercial Code and the Civil Code, and some had been in force since the 19th century. After more than 10 years of existence, the main Romanian Law no. 64/1995 in respect of bankruptcy, regarding judicial reorganization and bankruptcy procedure was replaced in full by a modern law, in line with the European legislation regarding insolvency procedures. The new Law regarding the insolvency proceedings, the Insolvency Law no. 85/2006, which improves judicial reorganization and bankruptcy proceedings and implements European insolvency aquis, has been adapted to a period of economic transition that Romania has been crossing during the last decade and sets up certain new mechanisms for shortening the judicial procedures. The purpose of this normative act is either to accelerate the reorganization of the debtors activity or facilitate his dissolution and safeguard creditors rights as much as possible. At present, Romania has modern insolvency regulations that are well adapted to the period of economic transition in which Romania has found itself over the past decade. However, the authorities must

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continue to improve such regulations in order to keep pace with the constant development of the Romanian business environment.

2. Main laws and regulations

Romania's main insolvency legislation and regulations are:

The Law on Insolvency Procedure (85/2006), as further amended and supplemented; The Ordinance on the Bankruptcy Procedure of Credit Institutions (10/2004), approved by Law 278/2004, as further amended and supplemented; The Law on the Financial Recovery and Bankruptcy of Insurance Companies (503/2004); The EU Insolvency Regulation (1346/2000); and The Law on International Private Law Relations Concerning Insolvency (637/2002), as further amended and supplemented.

3. Entities subject to insolvency procedure

3.1. Entities subject to general insolvency procedure 3.1.1. Corporate entities organized and carrying out business in accordance with Company Law no. 31/1990, as further amended and supplemented, including subsidiaries of foreign companies. 3.1.2. Cooperative companies 3.1.3. Cooperative organizations 3.1.4. Agricultural undertakings 3.1.5. Groups of economic interest (as regulated by Law no. 161/2003, as further amended and supplemented). 3.1.6. Any other private legal person that carries out economic activities 3.2. Entities subject to simplified insolvency procedure 3.2.1. Traders, natural persons, who act individually 3.2.2 Family associations 3.2.3. Debtors mentioned at point 3.1. above that comply with one of the following conditions: (i) they have no asset in their patrimony; (ii) their articles of association or accounting documents cannot be found; (iii) the director may not be found; (iv) the headquarters no longer exists or no longer corresponds to the address in the Trade Registry. 3.2.4. Debtors provided at point 3.1. above that did not timely submit with the court certain documents set forth by Law no. 85/2006. 3.2.5. Corporate entities dissolved prior to filling the claim for opening the insolvency procedure. 3.2.6. Debtors that have declared in the claim filed with the courts their intention to undergo bankruptcy or those which are not entitled to undergo judicial reorganization procedure. 4|Page

4. Mandatory conditions for the commencement of the insolvency procedure

Law no. 85/2006 sets forth two mandatory conditions, which need to be cumulatively met in order for the creditors to be able to commence the insolvency procedure against their debtor: (i) the creditor has a certain, liquid and outstanding receivable against the debtor for more than 90 days; (ii) the receivable must exceed the amount of RON 45,000, or 6 national gross average salaries/per employee, for receivables arisen out of labour relations. The debtor itself is complied to submit a claim for the commencement of the insolvency procedure within 30 days as of the date the state of insolvency has occurred. ln the meaning of Law no. 85/2006, insolvency refers to the insufficiency of the available funds for the payment of certain, liquid and outstanding debts, as follows: (i) the state of insolvency is presumed as obvious when the debtor, after 90 days as of the maturity date, failed to pay its debt towards the creditor; such presumption is relative meaning that a proof to the contrary is admissible; (ii) the state of insolvency is reputed to be imminent if it can be proved that the debtor will not be able to pay its outstanding debts with the available liquidities on the maturity date.

5. Procedures
Romania's insolvency procedure is in line with modern standards and is based on two significant commercial principles that are typical of any free-market economy: (i) the judicial reorganization procedure, aiming to rescue the debtor; (ii) the bankruptcy procedure aimed at liquidating debtor's assets and paying all outstanding debts.

Likewise, Law 85/2006 sets forth another classification of the insolvency procedures as follows:

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(i) the general insolvency procedure applying to the debtors mentioned at point 3.1. above; such entities shall undergo successively, the judicial reorganization procedure and the bankruptcy procedure or, separately, on a case by case basis, only the judicial reorganization procedure or bankruptcy procedure;

(ii) the simplified insolvency procedure applying to debtors mentioned at point 3.2. above; such entities shall directly undergo the bankruptcy procedure.

A general procedure places the debtor under a reorganization procedure, a reorganization procedure followed by bankruptcy; or directly into bankruptcy.

A simplified procedure places the debtor directly into bankruptcy.

The general procedure provided for by the New Law applies to the following categories of debtors who are in a state of insolvency or imminent insolvency: commercial companies; cooperative organizations; agricultural companies; economic interest groups; any other legal structure developing economical activities; such entities shall successively undergo the judicial reorganization procedure and the bankruptcy procedure or, separately, on a case to case basis, only the judicial reorganization procedure or bankruptcy procedure.

The simplified procedure applies to debtors subject to the general procedure, but who meet one of the following conditions: - they have no assets in their patrimony; - they dont have constitutive documents or accountancy documents; - the administrator cannot be found; - the registered office doesnt exist any more or doesnt correspond to the address in the Trade Register, - debtors subject to the general procedure who have not submitted the documents required by law for the debtors petition; 6|Page

- companies subject to voluntary dissolution, but not yet liquidated; - debtors who have declared their intention of entering into the bankruptcy procedure or who are not entitled to benefit from the reorganization procedure. This procedure allows certain debtors to go bankrupt either simultaneously with the opening of the insolvency proceeding or after a 60 day surveillance period, during which the elements concerning the state and the situation of the patrimony will be analyzed. According to the law, official bodies implementing the insolvency procedure are the court, the syndic judge, the creditors assembly, the special administrator, the receiver (judicial administrator) and the liquidator. All proceedings regarding judicial reorganization and bankruptcy, except for second appeal filed against the decisions of the syndic judge, are under the exclusive competence of the court tribunal having jurisdiction over the central headquarters of the debtor. A syndic judge randomly appointed by the courts computer system conducts the proceedings. The attributions of the syndic judge are limited to the judicial control over the activity of judicial administrator or liquidator of the insolvent company, having no competence on commercial matters. The syndic judge is also competent to assess litigations and judicial requests related to the insolvency proceedings. The main duties and responsibilities of the syndic judge are as follows: to decide upon commencement of the proceedings, to appoint the temporary receiver or liquidator and grant their powers, and, where appropriate, replace them, to confirm the receiver or the liquidator appointed by the creditors assembly, to examine the legal actions filed by the receiver or liquidator and to decide upon the closing of the proceeding. The rulings of the syndic judge are final and enforceable and may be challenged with a Court of Appeal. The creditors assembly is made up of the declared creditors of the debtor and is convened and chaired by the receiver or liquidator (unless the law or the syndic judge requires otherwise). Within their first meeting the creditors assembly may appoint a creditors committee formed of 3 or 5 creditors of the first 20 creditors chosen according to the amount of the debts. The committee thus appointed will replace the committee comprising 3 to 7 creditors previously appointed by the syndic judge.

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The Insolvency Law enhances the attributions of the creditors committee, whose role is to represent and defend the rights of all creditors in relation with the debtor, the judicial administrator or the liquidator and the syndic judge. These include review of the debtors standing; acknowledgement and review of the reports prepared by the liquidator and, where appropriate, drafting complaints; preparing the reports for the creditors meeting on the measures taken by the liquidator. Following the initiation of the procedure, the shareholders general meeting of the debtor, legal entity, will appoint, on its expense, a representative as a special administrator, in order to represent the debtors interests as well as their interests, and to participate in the procedure on behalf of the debtor. The special administrator has the following attributions: communicates the intent of the debtor to submit a reorganization plan; participates, on debtors behalf, to the court assessments on cancellation of detrimental patrimonial transfers performed by the debtor; files complaints under the insolvency proceedings; submits a reorganization plan; manages the debtors activity after the confirmation of the reorganization plan; once the bankruptcy procedure is initiated, he participates in the inventory, receives the final report and the closing balance and participates in the approval procedure of such documents; receives the notification regarding the closing of the proceedings. On the recommendation of the creditors committee, the creditors holding minimum 50% of the value of the claims may decide the election of a receiver (individual or legal entity), authorized practitioner in insolvency, and to fix his remuneration. This official receiver is in charge of fulfilling the actions relating to the insolvency proceedings, until the bankruptcy is ordered. In case the syndic judge decides upon the bankruptcy procedure commencement, a liquidator shall be appointed, who may also be the former receiver.

6.Effects of the commencement of the procedure

After the insolvency procedure has been opened, the receiver or liquidator (forthe simplified procedure) shall proceed to analyse the debtors documents to identify the creditors and send a notification to the debtor, creditors and to the trade registry office or any other registry where the debtor might be registered. All deeds and corespondence of the debtor, of the judicial administrator or the liquidator shall contain the annotation in insolvency in English, French and Romanian. 8|Page

Following the notification from the receiver (or liquidator) the creditors may come up with a claim of liabilities owed. Such claims shall be recorded with a register maintained with the Court. After all claims are verified, the receiver or the liquidator shall establish a preliminary table of liabilities. Such table may be subject to the challenge of creditors, debtor and other interested third parties. On the date of commencement of the procedure, one shall suspend by law all court or extra-court actions for the achievement of the claims over the debtor or the debtors assets. Also, at the same time, any interest or penalty are not accruing any more and the debtors social shares can no longer be sold on the stock exchange market until the confirmation of the reorganization plan. The syndic judge decides upon the blocking of the shares or social parts in the special recording register or the electronic registered accounts. According to article 47 of the Insolvency Law, the opening of the procedure lifts the debtors right to manage his activity and denies access to his assets; the debtors administration right is not lifted provided that he opts to enter into the judicial reorganization procedure. Nevertheless, any creditor or the receiver may ask the syndic judge to waive the right to administer the debtor when there is an indication that losses in the debtors assets have continued to occur or there is no likeliness of a reorganization plan being worked out. When deciding to cancel the administration rights, the syndic judge shall order all banks in which the debtor holds cash not to use such cash without a prior order 3 Art. 45 of Law 85/2006 from the judicial administrator or the liquidator. If the banks disregard the decisions of the syndic judge, they shall be made answerable for the damage incurred. If a reorganization plan was proposed in accordance with the provisions of the law, it may be admitted or rejected by the syndic judge after consulting with the receiver, the creditors committee and the special administrator. The reorganization plan may stipulate besides the reorganization and maintenance of the debtors activity or the resolution of certain assets included in the debtors patrimony, the combination of the two reorganization mechanisms, as well. Voting on the plan shall take place separately for each of the four categories of debts set forth in Law No. 85/2006: - creditors with secured debts, - budgetary creditors, - unsecured suppliers without whom the debtor cannot continue his activity, 9|Page

- other unsecured creditors. A plan is deemed as accepted by a class of claims once it is voted with an absolute majority by the creditors holding claims in such class and it is confirmed by the syndic judge if three out of the four classes previously mentioned have accepted the plan, provided that at least one disfavored class votes for reorganization. After the plan has been confirmed, the debtors activity shall be organized in accordance with the plan, under the supervision of the receiver. During the reorganization, the management of the debtor is assured by the special administrator.

7. Banking bankruptcy
Credit institutions duly incorporated in Romania, their subsidiaries abroad and the credit cooperatives (called hereinafter credit institutions"), undergoing an insolvency state, are subject to special bankruptcy proceedings instituted under GO no. 10/2004.

Credit institutions are deemed insolvent if in one of the following situations: (i) (ii) in case of manifest incapacity of paying its outstanding debts with the available liquidities; the solvency indicator (calculated based upon the relevant regulations issued by the National Bank of Romania) drops under 2%; (iii) in case of withdrawal of the operating license, due to the impossibility of being financially restored. lf insolvent, credit institutions have the obligation to request the relevant court, within 30 days, to commence the bankruptcy procedure. Prior to such request, the credit institutions have to file a request within 10 days as of the insolvency interfered with the National Bank of Romania in order to obtain the approval on the commencement of the bankruptcy procedure. Creditors of the insolvent credit institution may also file a bankruptcy request in the following cases: (i) the central houses of credit cooperatives, including the credit cooperatives affiliated thereto, have not fully paid their certain, liquid and outstanding debts within at least 30 days as of maturity date;

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(ii)

other credit institutions (including banks) have not fully paid their certain, liquid and outstanding debts within at least 7 days as of maturity date.

The file of the bankruptcy request in both cases provided above has to be preceded by the prior approval of the National Bank of Romania. The bankruptcy procedure starts following an application filed by the debtor, by its creditors or the National Bank of Romania.

All main procedures provided by GO no. 10/2004, except for second appeals which are settled by the court of appeal, are under the exclusive com petence of the tribunal, which has jurisdiction within the county where the debtor's headquarters are located. The syndic judge shall be randomly selected through the computerized system amongst the specialized judges within the respective tribunal. The court will notify the National Bank of Romania on its decision to start the bankruptcy procedure for each relevant credit institution. The National Bank of Romania will immediately close the accounts of the relevant credit institution opened with the National Bank of Romania and transfer the available funds into the accounts of "credit institution in bankrupt opened by the liquidator with a commercial bank where all other available funds of the debtor shall be transferred as well. Subsequently, the financial operations of the bankrupt credit institution shall be undertaken through this account exclusively. Subject to approval of the final report by the syndic judge, the distribution of all funds or assets of the bankrupt credit institution and depositing of all unclaimed funds with the Romanian Treasury and the submission of the statement of accounts with the syndic judge, the insolvency procedure shall be closed. The decision to close the bankruptcy procedure is notified, in writing or through the media, to all involved parties.

8.Closing of the procedure

In case the full liquidation of the debtors assets is found, even if the receivables were paid only partially or if ascertained that there are not enough assets in order to cover all administrative costs and no creditor makes advance payments for this purpose, the syndic judge shall order the closing of the proceedings followed by the writing-off of the debtor from the registry where he is registered. The reorganization procedure is closed through a decision, once all payment obligations assumed in the confirmed schedule have been fulfilled.

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A bankruptcy procedure is closed by the syndic judge upon approval of the final report made by the liquidator, provided that all the available fund and assets have been distributed to the creditors and the unclaimed fund has been deposited in a bank account. Liability of the debtors management may be engaged in case the debtors directors or auditors or other persons fraudulently determined the debtors insolvency. In this regard, upon request of the judicial administrator or liquidator, who shall analyse the debtors documents and draw up a report about the provisions there of that have led to insolvency, as well as about the persons involved, the syndic judge may decide that the supervising or the managing bodies of the company may be held liable for a part of a debtors liabilities. At the same time, the judicial administrator or the liquidator may ask the syndic judge to place liens on the answerable person in order to prevent their fleeing from their creditors pursuits. A novelty introduced by the legislation refers to the bilateral compensation (the netting agreements). They refer to contracts usually concluded with a bank aimed at operations with derivative financial instruments. The Insolvency Law expressly recognizes any transfer, settlement of a liability,exertion of a right, act or deed carried out under certain qualified financial contracts, as well as any bilateral netting to an insolvent co-contractor or to an insolvent guarantor of a co-contractor, being recognized as a basis for registration of the claim under the procedure. The only obligation derived from a netting agreement recognized by the law is the commitment to perform the net obligation derived under the netting agreement to the other contractual party, and its corresponding right.

9.Insolvency in numbers
The number of bankruptcies achieved in 2010 in Romania had an 18% increase, compared to 2009. According to Coface Romania, at the ending of 2010, 10 377 firms were in general insolvency procedure and 5 104 firms and 702 companies were insolvent. Moreover, 5.482 companies were in bankruptcy, and 27 in judicial reorganization, leading to a total of 21.692 companies in various stages of insolvency proceedings.

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However, this numbers reflect better the position of Romania, if we were to compare them to other countries. In this sense, we developed a comparison with the eastern European countries. Data for the countries from Easter Europe included in this study was provided by Coface Central Europe Holding AG. Just by looking at the number of insolvent companies in Eastern Europe we can see that Romania is not in a good position. And with the numbers from 2010 this situation has not changed. Since 2008, Romania is the country with the highest number of companies that are in a state of insolvency. This aspect would not be a negative one if it would be in correspondence with a low insolvency rate as it is in France.

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As we can see from Figure 2, the insolvency rate has high values (over 2,5% in the last three years). In 2008 Romania had the highest insolvency rate from the compared countries.

Romanian insolvency rates are usually lower that the ones for Hungary, but we can expect worst future situations for Romanian companies. This is because the evolution of the number of insolvent companies and the evolution of insolvency rate show a higher total variation for the period 2004-2010. This would be translated into higher percentages of variation in the next few years.

10. Conclusions
During the transition period, insolvency was related to restructuring and privatization. The two processes, made state enterprises enter into competition with the market ones, calling for responsibility of management to make decisions that maximized the benefits. Currently there is a tendency to favour liquidation, on the expense of judicial reorganization. This situation may change if the legal system would become more efficient, and administrators and syndic judges would have more powers. These premises would provide greater confidence in the judicial reorganization. However, the reorganization

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should not be applied to companies that are not likely to become viable. An effective insolvency process provides an effective exit mechanism for non-viable businesses and a solution to recover the viable ones.
Even with the new regulations, in Romania, there are still gaps in their implementation process. An unconsolidated legal system, a commercial legislation often ambiguous, an involvement of the State which excluded the public sector from the bankruptcy proceedings and increasing state aid favors a difficult bankruptcy procedure. State aid should be directed to encouraging neglected areas, namely research and development or training. Therefore, as important as the definition of insolvency legislation is, a greater importance has the need to improve the implementation of the legal system.

REFERENCES
Couwenberg, O. (2001) Survival Rates in Bankruptcy Systems: Overlooking the Evidence, European Journal of Law and Economics, no. 12, pp. 253-273. Onofrei, M. (2007) Managenent financiar, Second Edition, Bucureti, Romania: C.H. Beck. Stiglitz, J. (2009) Regulation and Failure, in Moss, D., Cisternino, J. (eds.) New Perspectives on Regulation, pp. 11-23, Cambridge: The Tobin Project

Monica Deteseanu Overview of major aspects of the Romanian Insolvency Law www.musat.ro/pdf/.../05-Insolvency.pdf

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