Restructuring and insolvency law in Romania

1. What is the primary legislation governing restructuring proceedings in your jurisdiction?

Law no. 85/2014 on preventing insolvency and insolvency proceedings (Legea nr. 85/2014 privind procedurile de prevenire a insolvenței și de insolvență) is the primary piece of legislation governing restructuring proceedings. Law no. 85/2014 provides the legal framework for companies that are facing financial difficulties and wish to undergo restructuring in order to avoid bankruptcy or insolvency. It includes provisions related to preventive measures, restructuring plans and other aspects of the insolvency process.

General civil, corporate and labour law also apply to implementing restructuring tools.

2. How are restructuring proceedings initiated?

Restructuring proceedings in Romania are typically initiated through a legal process that involves the following steps:

• financial distress identification: when a company faces financial difficulties or believes it may encounter financial distress in the near future, it should assess its situation and consider whether restructuring is necessary or beneficial
• filing for restructuring: to initiate restructuring proceedings, the debtor (the company facing financial difficulties) or its creditors must file a request for insolvency with the competent court. If the request is granted, the court would appoint a judicial administrator to oversee the proceedings
• judicial review: the court reviews the request and decides whether to admit the insolvency application. If the court accepts the request, it declares the debtor as being in a state of insolvency
• appointment of a special administrator: after the court opens restructuring proceedings, the debtor’s shareholders can appoint the special administrator which would manage the debtor under the supervision of the judicial administrator or simply represent the shareholders’ interests in case the administration rights are fully taken over by the judicial administrator.

3. Which different types of restructuring proceedings exist and what are their characteristics?

Preventive composition (Concordat preventiv)

Preventive composition is a pre-insolvency procedure that aims at preventing a debtor’s insolvency by reaching an agreement with its creditors. The debtor, facing imminent insolvency, can initiate this procedure by submitting a request to the competent court. During the process, the debtor proposes a restructuring plan to the creditors, seeking their approval for debt rescheduling or partial debt forgiveness. If the plan is accepted by a qualified majority of creditors and approved by the court, it becomes binding on all creditors.

Insolvency proceedings (Proceduri de insolvență)

Insolvency proceedings are initiated when a debtor is unable to pay its debts as they fall due. It is a formal process regulated by the Law no. 85/2014 on preventing insolvency and insolvency proceedings. Once insolvency proceedings are opened by the court, a judicial administrator is appointed to supervise or directly manage the debtor’s assets and financial affairs. The primary goal is to pay as much as possible of the accrued debt and maintain the debtor in operation. If the debtor has the potential for recovery, restructuring proceedings may be initiated within the insolvency framework. If not, a court-appointed liquidator will liquidate the debtor’s assets to satisfy the claims of creditors.

Restructuring proceedings within insolvency (Reorganizare judiciară)

Restructuring proceedings within insolvency are aimed at rehabilitating a financially distressed debtor by implementing a restructuring plan. This type of procedure occurs within the context of insolvency proceedings and allows the debtor, the judicial administrator or the creditors to propose a plan to reorganise its business and debts. If the restructuring plan is approved by a qualified majority of creditors and confirmed by the court, the debtor can continue its operations while adhering to the terms of the plan.

4. Are there different types of creditors and what is the significance of the differences between them?

There are different types of creditors, and the differences between them are significant in terms of their rights, priorities and treatment during the process. Creditors in Romanian insolvency proceedings can be categorised into three main groups:

• secured creditors: hold a specific type of security or collateral (such as mortgages, pledges or liens) over the debtor’s assets. In case of insolvency, secured creditors have a priority claim over the specific assets they hold as security. This means that they will be paid from the proceeds of the sale of the secured assets before other types of creditors are compensated. Secured creditors are generally in a more advantageous position compared to unsecured creditors because they have a higher likelihood of recovering their claims
• preferential creditors: have specific statutory priority rights to be paid before other unsecured creditors. In Romanian insolvency law, certain categories of claims are considered preferential, such as claims for unpaid salaries, social security contributions and taxes. These claims must be satisfied before other unsecured debts. However, it’s important to note that in the insolvency process, the available funds are often limited, and even preferential creditors may not receive full payment for their claims
• unsecured creditors: do not hold any specific security or preferential status. They are creditors with general claims against the debtor but they lack any special priority rights in the insolvency distribution. Unsecured creditors are usually at a disadvantage compared to secured and preferential creditors, as they will be paid after secured and preferential creditors have been satisfied. Depending on the available funds and the success of the restructuring or liquidation process, unsecured creditors may receive only a partial payment or, in some cases, no payment at all.

The significance of the differences between these creditor types lies in their order of priority for payment during the insolvency proceedings. The separate categories are also used in assessing the votes to place the debtor under restructuring proceedings (Preventive composition and Restructuring proceedings). The priority system ensures that secured creditors and preferential creditors are more likely to recover their claims before unsecured creditors receive any payment. This can have a significant impact on the recovery of debts and the potential losses faced by each group of creditors. It’s crucial for creditors to understand their rights and positions in the hierarchy to make informed decisions and take appropriate actions during the insolvency process.

5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

Obligation

There is an obligation for debtors to initiate restructuring or insolvency proceedings in certain circumstances. This obligation exists to protect the interests of both the debtor and its creditors and to facilitate a fair and orderly resolution of financial distress. The obligation to initiate restructuring or insolvency proceedings typically arises when the debtor is unable to meet its payment obligations and is in a state of insolvency. Insolvency is defined as the debtor’s inability to pay its debts as they fall due.

The obligation to initiate proceedings exists for the following entities:

• companies: legal entities, including joint-stock companies, limited liability companies, partnerships and other legal forms, must initiate insolvency proceedings if they are insolvent
• individual entrepreneurs: individuals operating as sole traders or individual entrepreneurs must initiate insolvency proceedings if they are insolvent
• companies under a special law: certain entities subject to special laws (e.g. banks, insurance companies, investment firms) may have specific provisions governing their insolvency and restructuring procedures.

Consequences

If a debtor fails to initiate insolvency proceedings when it is legally required to do so, there can be several potential consequences:

• personal liability: the company’s directors or the individuals responsible for managing the affairs of the debtor may be held personally liable for any damages resulting from the delay in initiating proceedings in some cases – for example, using the assets or credits of the legal person for their own benefit or that of another person; engaging in production, trade or provision of services for their own benefit, under cover of the legal person; or misappropriating or concealing part of the assets of the legal person or having fictionally increased its liabilities
• criminal liability: in certain situations, intentionally avoiding the initiation of insolvency proceedings when required by law may lead to criminal liability for the responsible individuals
• loss of protections: if the debtor does not take timely action to address insolvency, its creditors may seek remedies and enforcement actions, which could include asset seizures, enforcement of pledges or mortgages and other legal measures.

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

Under Romanian insolvency law, a “special” administrator will be appointed by the shareholders of the debtor soon after proceedings are initiated. In the case that administration rights are lifted, the special administrator only represents the interests of the shareholders in the proceedings, as the judicial administrator manages the debtor. Otherwise the special administrator would manage the debtor under the supervision of the judicial administrator. Although the representative bodies are not involved in insolvency proceedings, they have to provide all the information requested, as well as any other help to the person in charge of the debtor’s activity. The specific duties of the “special” administrator provided by the law stipulate that it:

• participates, as the debtor’s representative, in the proceedings referred to in Articles 117-122 (regarding the cancellation of the debtor’s fraudulent acts and transactions during the suspect period) or those resulting from non-compliance with Article 84 (regarding the cancellation of transactions and payments made by the debtor after the opening of the proceedings)
• formulates objections within the procedure provided by the insolvency law
• proposes a restructuring plan
• administers the debtor’s activity, under the supervision of the insolvency administrator, after confirmation of the plan, only if the debtor’s right of administration has not been withdrawn
• after the bankruptcy has been filed, takes part in making the list of inventory, signing the list, receiving the final report and the closing financial statement, and attending the meeting convened to resolve objections and approve the report
• receives notification of the closure of the proceedings.

7. What are the main duties of shareholders in connection with restructuring proceedings?

The main duties of shareholders depend on the type of restructuring and the specific circumstances of the company’s financial distress. Shareholders have certain responsibilities to the company and other stakeholders during this critical period. Some of the main duties of shareholders in connection with restructuring proceedings include:

• acting in the best interest of the company: shareholders have a fiduciary duty to act in the best interest of the company. During restructuring, this duty requires shareholders to consider the long-term viability of the company and the potential benefits of the restructuring plan for all stakeholders, including creditors, employees and the company itself
• supporting the restructuring process: shareholders are expected to support and cooperate with the restructuring efforts. This may involve providing necessary information and resources to the restructuring practitioner, attending meetings and participating in negotiations related to the restructuring plan
• avoiding actions detrimental to the restructuring: shareholders should refrain from taking actions that could undermine the success of the restructuring process. This may include avoiding unnecessary legal disputes or asset transfers that could jeopardise the company’s financial stability
• cooperating with creditors and other stakeholders: shareholders should work collaboratively with creditors, the restructuring practitioner, and other stakeholders to achieve a mutually acceptable and beneficial outcome for all parties involved
• complying with legal obligations: shareholders must comply with all relevant legal requirements and obligations related to restructuring proceedings in Romania. Failure to comply with the law or acting in bad faith during the restructuring process could lead to legal consequences.

1. What is the primary legislation governing insolvency proceedings in your jurisdiction?

Law no. 85/2014 on preventing insolvency and insolvency proceedings (Legea nr. 85/2014 privind procedurile de prevenire a insolvenței și de insolvență) is the primary piece of legislation governing insolvency proceedings. 

2. How are insolvency proceedings initiated?

The formal legal process for initiating insolvency proceedings, involves:

• debtor’s petition or creditor’s petition: insolvency proceedings can be initiated either by the debtor (the company facing financial difficulties) or by one or more of its creditors. If the debtor believes that it is insolvent or on the verge of insolvency, it can file a petition with the competent court to open insolvency proceedings. Alternatively, one or more creditors owed an amount exceeding a certain threshold (approximately EUR 10,000) may also file a petition with the court requesting the initiation of insolvency proceedings against the debtor
• verification of insolvency: upon receiving the petition, the court will review the evidence provided and assess whether the debtor is indeed insolvent, as defined by Romanian law. Insolvency is generally established if the debtor is unable to pay its debts as they fall due.

It is important to note that the above steps are a general outline of the insolvency process in Romania, and the specific procedures may vary depending on the individual case and the nature of the debtor’s financial difficulties.

3. What are the legal reasons for insolvency in your country?

In Romania, the legal reasons for insolvency are defined by Law no. 85/2014 on preventing insolvency and insolvency proceedings. Consequently, a debtor can be considered insolvent if it fails to pay its debts amounting to RON 50,000 (approximately EUR 10,000).

It’s important to note that insolvency is determined based on objective criteria, and once the insolvency condition is met, the debtor or its creditors can initiate insolvency proceedings.

4. Which different types of insolvency proceedings exist and what are their characteristics?

Reorganisation (Reorganizare judiciară)

Reorganisation is an insolvency procedure aimed at rehabilitating a financially distressed debtor and preserving its business operations. During reorganisation, the debtor proposes a restructuring plan to its creditors, seeking their approval. The plan may involve debt rescheduling, debt forgiveness or other measures to improve the debtor’s financial situation. If the restructuring plan is approved by a qualified majority of creditors and confirmed by the court, the debtor can continue its operations while adhering to the terms of the plan.

Bankruptcy (Faliment)

Bankruptcy is an insolvency procedure in which the debtor’s assets are liquidated to satisfy the claims of its creditors. If the reorganisation is not feasible, or the restructuring plan is not approved, the court may declare the debtor bankrupt. A judicial administrator is appointed to manage the liquidation process, and the proceeds from the sale of assets are distributed among the creditors in accordance with the legal priorities.

Preventive composition (Concordat preventiv)

See Q3 under Restructuring.

5. Are there different types of creditors and what is the significance of the differences between them?

See Q4 under Restructuring.

6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

Yes, it can be, especially when the company is in a financially stable position and has sufficient assets to pay off its debts in full.

Solvent liquidation is also known as voluntary liquidation or voluntary dissolution. It is a legal process initiated by the shareholders or owners of a solvent company when they decide to wind up the company’s affairs and distribute its assets to the shareholders. This process is often chosen when the company has fulfilled its business objectives and there is no intention to continue its operations.

Solvent liquidation is typically a more straightforward and less time-consuming process compared to regular insolvency proceedings. In regular insolvency proceedings, the company is unable to pay its debts as they fall due, and the process involves dealing with creditors and judicial administration to distribute the company’s assets and address its financial difficulties. On the other hand, in a solvent liquidation, the company has sufficient resources to meet its obligations, and the process is more focused on an orderly winding-up and distribution of assets. 

1. If a lender wants to monitor its borrower very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

Lenders who want to monitor their borrowers more closely than the usual information covenants in the credit agreement require have several options available to them. These options are generally governed by the terms of the credit agreement and the legal framework regulating financial transactions.

Some potential options:

• enhanced information covenants: lenders can negotiate with borrowers to include enhanced or more frequent information covenants in the credit agreement. These covenants could require the borrower to provide additional financial reports, updates on the business’s performance and other relevant information at shorter intervals
• access to books and records: lenders can negotiate for the right to access the borrower’s books, records and financial statements on a regular basis. This provision can give lenders a better insight into the borrower’s financial health and performance
• site visits and inspections: lenders may include provisions in the credit agreement that allow them to conduct site visits and inspections of the borrower’s business premises. This can help lenders verify the accuracy of the information provided and assess the borrower’s overall operations
• reporting requirements: lenders can require borrowers to provide specific reports or notifications in case of material events or significant changes in the borrower’s financial condition. This can help lenders stay informed about any relevant developments in real-time
• escrow accounts: lenders may request the establishment of escrow accounts where specific funds are held in trust to meet certain obligations or provide additional security for the loan
• third-party audits: lenders can contract third-party auditors or consultants to conduct periodic audits or assessments of the borrower’s financial statements, operations and compliance with the credit agreement
• negative pledge and affirmative covenants: the credit agreement can include additional negative pledge and affirmative covenants that require the borrower to seek approval from the lender for certain actions or business decisions.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?

Some of the key issues to consider are as follows:

• preference and clawback: if a creditor provides additional credit facilities or takes security from a company shortly before the company enters insolvency proceedings, there is a risk that such transactions may be challenged as preferences or be susceptible to clawback. In Romania, transactions carried out with the intention to favour certain creditors before insolvency proceedings can be declared void or reversed to ensure equitable treatment of all creditors
• legal priority/ranking: when a company is in financial distress, multiple creditors may seek to secure their claims by taking asset security. The priority/ranking of the security interests can affect the creditor’s recovery in case of insolvency or liquidation. The timing and perfection of the security interest can impact its ranking in the order of payment
• financial assistance restrictions: Romanian law prohibits companies from providing financial assistance for the purchase of their own shares or shares of their holding companies. Creditors need to ensure that their support or extension of credit facilities does not run afoul of these restrictions
• feasibility of recovery: extending credit facilities or taking additional security may not guarantee the recovery of the debt if the company’s financial difficulties are severe and insurmountable. Creditors should carefully evaluate the company’s prospects for recovery before providing further support
• compliance with Insolvency Laws: lenders should ensure that their actions comply with Romanian insolvency laws and regulations.

1. How does a lender sell a loan?

Loans are typically sold through an assignment of contract or receivable, in both cases the securities attached to the loan being typically transferred to the assignee. The assignment of receivable needs only be notified to the debtor on order to avoid payments being made to the assignor. In case of assignment of contract, the assigned debtor must agree to the assignment, assuming no prior assignment agreement is contained in the loan. If the loan is secured by a real estate mortgage, there will also be a need for a notarial statement.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

Under Romanian law, the transfer of economic risk and/or benefit in a loan through sub-participation agreements is generally not a common practice due to legal and regulatory restrictions.

If the underlying credit agreement prohibits transfer or assignment without the borrower’s consent, it means that the lender cannot transfer its rights and obligations under the loan to another party, including through sub-participation arrangements.

In the absence of express provisions allowing sub-participation or transfer, lenders in Romania may not be able to share the economic risk and benefit of the loan directly with a third party without the borrower’s consent.

Some credit agreements may include exceptions or carve-outs that permit certain types of transfers or assignments, such as transfers to affiliates or certain financial institutions.

If the credit agreement strictly prohibits any form of transfer or assignment, including sub-participation, the lender may need to explore other mechanisms to manage its risk, such as syndication with other lenders or securitisation structures.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

A one-off purchase of an NPL does not require a licence. However, if the NPL becomes performing again, the owner of the loan (i.e. assignee) should comply with the provisions related to non-banking financial institutions and register with the National Bank of Romania.