Romania plans to shake up insolvency law

With more than 23,000 companies having gone under in 2012, the government unveiled plans in April to overhaul to insolvency law in a bid to streamline procedures and track down firms that are going insolvent in a bid to avoid paying their creditors. Specialists briefed BR on the shortcomings of the current insolvency law.

By Ovidiu Posirca

Romanian PM Victor Ponta said in April that the law needs to be changed in order to support companies that operate in good faith. “We need to change the insolvency law to help those that genuinely enter insolvency for a brief period to avoid bankruptcy, and to punish with bankruptcy those that fraudulently enter insolvency in order not to pay their taxes,” said the PM, quoted by Agerpres newswire. He added that the budget revenues generated by profit tax have dropped significantly as more companies battered by the crisis have chosen to file for insolvency.

According to government officials, a law draft has been completed and should be up for debate this quarter.

Last year, some 23,665 insolvency procedures were started, 10 percent up on the previous year, according to Coface, the credit insurer. Retail and construction were the most distressed sectors.

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Ana Maria Placintescu, partner at law firm Musat & Asociatii, commented that more companies have filed for insolvency recently, but an “extremely low” number went on to undergo successful reorganization. Most proceedings end with bankruptcy and the liquidation of the debtor firm.

As the number of insolvencies kept growing, profit taxes fell EUR 75 million in the first quarter, a 10 percent drop on the same period of 2012, according to the fiscal administration agency, ANAF.

Dorin Petcu, head of restructuring and insolvency services at TZA Insolventa SPRL, the insolvency arm of law firm Tuca Zbarcea & Asociatii, says the failure to pay taxes is a consequence once insolvency procedures are initiated, but this relates strictly to the taxes owed upon the initiation of proceedings.

“Reorganization under the shield of the insolvency law does not mean that current taxes owed after the initiation of insolvency proceedings are no longer payable,” Petcu told BR. He added that the state budget takes precedence by law over other creditors in certain areas.

Insolvency flaws

Certain legal provisions allow the fraudulent use of the insolvency law, says Stan Tirnoveanu, senior partner at law firm Zamfirescu Racoti & Partners (ZRP).

He described the case of a “sated” creditor, which has no more receivables, voting at the creditors’ meeting and influencing measures that relate to the rights of other creditors.

“Through the fraudulent usage of the vote within the class reorganization plan, we might end up seeing the reorganization plan agreed with the vote of a certain (small) percentage, because of the class vote,” Tirnoveanu told BR.

Petcu of TZA added that the UK, Luxembourg and France have stricter conditions, so the reorganization plan can get through only with the vote of the majority of creditors that account for three quarters of the total value of receivables. In Italy, the approval of creditors accounting for at least 60 percent of the total value of receivables is required.

Tirnoveanu explained there is no regulation on the bankruptcy of a group of companies, and the coordination of procedures started against a debtor of the group members is almost impossible.

Peter Dorner, senior partner at Casa de Insolventa Transilvania (CITR), brought up the lack of legislation setting out the oversight of the insolvency administrator, when the administration rights of the company under this procedure have not been lifted.

“We think that a better regulation of the duties of the insolvency administrator in this stage of the procedure would be beneficial,” Dorner told BR.

Petcu, of TZA Insolventa, pointed out that from the creditor’s perspective, the most important elements are the term of the procedure and the method of collection of the receivables during this term.

He commented that the debtor supervision stage could last up to several years, due to the many challenges to the preliminary table of creditors or in other stages of the procedure. Without a final table of creditors, the reorganization plan cannot be submitted, and the bankruptcy proceedings cannot be started.

 “We believe that a revised draft of the law should firstly focus on encouraging the reorganization of companies going through insolvency procedures,” Placintescu told BR.

Insolvencies are often considered a traumatic experience for business owners, because the operations are overseen by an official receiver. Moreover, critical decisions regarding the future of a company will be made by the creditor, whose vision may contrast with that of the debtor, says Petcu.

Going insolvent to save money

The Musat & Asociatii partner says that Romania is not currently seeing an increase in companies going insolvent for tax avoidance purposes.

“There are cases when companies attempt to abuse the purpose of the insolvency and use it to avoid paying their debts. We can’t say there is a trend, but it seems these cases have started to multiply,” said Placintescu.

Tirnoveanu of ZRP notes that more firms are seeking to begin proceedings when the debtor is in an advanced stage of insolvency, when it has maturing obligations, including fiscal ones. He added that the late start to the procedure is seen in the slim proportion of successful reorganizations.

The ZRP senior partner has not yet encountered a situation in which a debtor has fraudulently sought to enter insolvency, and the creditor had to prove this was a bogus measure that allowed the beleaguered firm to avoid paying its creditors.

“Unfortunately, some debtors are attempting to hide fraudulent transfers prior to the commencement of the insolvency procedure, both in cases when the major creditors are the state and where they are private companies,” said Tirnoveanu.

Dorner of CITR commented that budgetary receivables have some priority against other types of creditors. ”As a result, a request to start insolvency proceedings cannot have as its purpose the nonpayment of state taxes or other budgetary debts,” said Dorner.

While Romania has two large state-owned companies in insolvency, with other companies treading the same path, experts say that no special regulation should be enforced for these firms to help them exit insolvency.

“A special new law would engender a different treatment between the shareholders or directors of a private company and those of a fully or partially state-owned company,” said Petcu of TZA Insolventa. Although some EU legislation has included special provisions for state-owned companies, the current legislation in Romania ensures the recovery of companies, even of those in state hands, added the CITR senior partner.

ovidiu.posirca@business-review.ro