Romania to roll out New Insolvency Code

Newsroom 30/09/2013 | 08:27

With the government poised to approve a new code this week in a bid to combat tax evasion and close legal loopholes, experts told BR the new bill will increase the level of recovered receivables, while limiting companies’ access to insolvency procedures.

By Ovidiu Posirca

Simona Maria Milos, president of the INPPI (the National Institute for the Training of Insolvency Practitioners), says the bill will be on the government’s table this week and will next be debated in an emergency procedure by Parliament. It is likely to be rolled out faster than the initial deadline of March 2014. The new code has been written based on the recommendations of the World Bank, which financed the project.

The writing of the insolvency code is part of a wider project aiming to reform the local legal system and is financed through a World Bank loan worth over RON 1.5 million (EUR 336,000) . “It’s about repairing the economy, helping fight tax evasion under the cover of insolvency and defending the interests of private companies. There are a lot of private companies, which when they have receivables to collect, see the beneficiary file for insolvency and so incur losses,” said the PM.

The new code comes against the backdrop of a falling number of insolvencies. Insolvency experts told BR that the number of companies going into administration strictly to avoid paying taxes is limited out of the total number of opened procedures.

According to Coface, the credit insurer, there were 12,739 new insolvencies in the first semester of 2013, a 10 percent decrease on the same period of last year. Most of the new insolvency proceedings were opened by companies active in construction, hotels and restaurants and in the transport sector. A large share of the distressed companies had a turnover above EUR 1 million.

Dorin Petcu, head of restructuring and insolvency services at TZA Insolventa, the insolvency arm of law firm Tuca Zbarcea & Asociatii, says the main purpose of the New Insolvency Code was to gather in one document the applicable laws on insolvency and alternative measures, i.e. the ad-hoc mandate and arrangements with creditors. He added that the code has achieved its purpose to a great extent from this perspective, but issues stemming from the insolvency of some state-owned entities (regies autonomes) still need to be solved.

“The draft bill of the new insolvency law aims to correct certain discrepancies that led to abusive conduct, to ensure the balance of interests between creditors and debtors, and to speed up procedures and increase the level of recovered receivables,” Stan Tirnoveanu, senior partner at law firm Zamfirescu Racoti & Partners (ZRP), told BR.

According to Simona Milos, who was part of the team working on the new bill, the new code aims to give a chance to the honest debtor, following the recommendations of the European Commission. The building blocks of the code are the World Bank norms, European insolvency principles and the first and second parts of the United Nations Commission on International Trade Law (UNCITRAL), a cross-border insolvency regulation for non-EU members. Milos said the new bill also reflects the proposals to change regulation CE 1346/2000, which governs insolvency procedures in the EU.

Raft of changes

Although experts pin the growing number of insolvencies of the past few years on the poor economy and entrepreneurs’ failure to adapt, the current legal framework had given some of them a way out. Milos of the INPPI says 13 new principles have been introduced in the code, which allow the debtor to effectively turn around its business and penalize debtors whose appeals have been rejected. She says the new bill ensures an “equitable treatment” of creditors and allows access to finance for companies that are in insolvency or the pre-insolvent stage. “However, the most important regulation is also new at the level of EU members regarding the insolvency of a group of companies,” Milos told BR.

The new code was drawn up by a consortium comprising the professional services firm PwC Romania, law firms Stanescu, Milos, Dumitru & Asociatii (SMDA) and D&B David & Baias and the West University in Timisoara. They were assisted by Arin Octav Stanescu, president of the UNPIR (the National Union of Insolvency Practitioners in Romania) as key experts and by Ana-Irina Sarcane, partner at the insolvency company Five SPRL, as project leader.

Stanescu claimed earlier this year that Romania would be the first EU member to adopt an insolvency code.

The short time between the filing of the request to open insolvency proceedings by the debtor and the relevant court hearing, and the capacity of debtors to appoint, at an early stage, the insolvency practitioner, have been some of the legal loopholes driving up the number of insolvencies, suggests Andrada Bulgaru, associate at law firm Bulboaca & Asociatii. One of the most significant amendments in the new bill is the introduction of a RON 40,000 (EUR 8,900) threshold value for the receivable(s) based on which the debtor may open proceedings, according to Petcu of TZA Insolventa.

Petcu explains that in concurrent claims, when the first claim is filed by a creditor, the debtor’s claims will be joined thereto and solved within ten days; under the current legal framework, the creditor’s claim has to be joined to the debtor’s. In addition, the draft code states that the effects of the reorganization plan approval extend to the guarantors as well. The authorities plan to increase the term within which the debtor’s statements of claims are solved from five to ten days.  Petcu adds that another significant amendment is the sale of assets by public tender in accordance with the Civil Procedure Code, unlike the current framework where the creditors may derogate from the code under the sale regulations.

Tirnoveanu says the bill introduces additional measures to prevent abusive practices within the proceedings, describing how some debtors request the opening of insolvency proceedings, the appointment of a provisional insolvency procedure and then try to thwart the appointment of the practitioner elected by the creditors.

He says that the bill introduces the double qualification system for voting, meaning that a reorganization program will have to be voted for both by the majority of the classes of creditors, and by the majority of the receivables. At present, classes of creditors with small percentages in the share of receivables can vote for a reorganization plan.

Petcu adds that the reorganization plan has to be confirmed by at least 30 percent of the total value of the table of receivables, if it passes in the majority of categories.

“It will also stop the practice of reorganization plans intended initially to be approved and confirmed, subsequently failing. If the reorganization plan fails, the court will send the matter back to the final table prior to the approval and confirmation of the plan,” explains Tirnoveanu. He adds that this means companies can no longer benefit from taking a haircut in receivables if the plan fails. The ZRP senior partner said the bill contains new provisions that aim to standardize the practitioners’ activity to enhance the supervision of the debtor’s activity. These are some of the measures that could “drastically limit” abusive practices and fraud, he suggests.

Limits of the new code

According to UNPIR data, around 2 percent of total insolvency proceedings provide for or seek the implementation of a reorganization plan, while the rest are bankruptcies.

Experts say the new code will not help stave off insolvencies, with companies teetering on the brink of bankruptcy partly due to the weak economy. Some of them could turn their business around, but timing is crucial in such cases. “I believe that, on the contrary, firms that become insolvent file claims for the opening of proceedings rather late, when it is difficult to find a solution to salvage the debtor’s activity, and rarely resort to pre-insolvency procedures outside the court of law (creditors’ voluntary agreements, ad-hoc mandates),” says Tirnoveanu.

Petcu of TZA Insolventa argues the new insolvency code should not seek to reduce proceedings by putting up obstacles. “Limiting access to proceedings can only increase the damage suffered by creditors and debtors, depriving both of them, without compensation, of an essential and natural instrument in a market economy,” said Petcu.

ovidiu.posirca@business-review.ro

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