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Romania: Insolvency in the context of the Covid-19 pandemic

8 May 2020 – During the current state of emergency, the Romanian government has adopted a series of measures aimed at reducing the negative effects of the COVID-19 pandemic on the business environment in Romania, such as supporting the payment of technical unemployment, state guarantees for loans with subsidised interest rates for SMEs, and VAT refunds to companies. However, in some sectors of the economy being severally hit, we expect possible future insolvency cases.

1. Immediate action to be taken by the management of a company in the current context

According to Law no. 85/2014 on insolvency prevention and insolvency procedures ("Law no. 85/2014"), a debtor in financial difficulty is a debtor who, although executing or capable of executing its due obligations, has a short-term level of liquidity and/or a high level of long-term debt that may affect the fulfilment of its contractual obligations, given the financial resources generated from operational activity or external financial resources.

There are a number of measures that companies can take to provide liquidity/cash funds for the payment of the certain liquid and due debts in order to avoid insolvency.

First, an assessment of the company’s current contracts must be carried out, in order to determine the effects in case of non-fulfilment of these contracts. Companies affected by the coronavirus may request the certificate for the attestation of the emergency situation in order to:

(i)  demonstrate to other contractual partners the situation of force majeure in which they find themselves;

(ii)  benefit from the measures offered by the Romanian government to support such companies.

2. Immediate measures to be taken to improve the liquidity situation of a company in financial difficulty

2.1. Measures offered by the Romanian government

Companiesin financial difficulty can use the measures offered by the Romanian government that aim to support companies:

i)  directly affected by the restrictive measures provided by authorities during the COVID-19 pandemic that have suspended their activities during the emergency situation;

ii)  that have not been directly affected by the restrictive measures, but have been affected by the pandemic.

2.2. Other measures to be considered by distressed companies

Distressed companies should also try to negotiate the suspension of contracts, such as rental contracts, bank contracts or any other contracts whose execution is too costly for the company. The banks have already deferred certain credit re-payments or extended loans.

Companies can also reduce their employee work schedule and therefore pay its employees a salary commensurate with the hours worked.

Another measure addressed by many businesses in the emergency period aimed at the rapid sale of stocks / goods is offering discounts, respectively the sale of products / services in the online environment.

3. Responsibilities of management in the emergency situation – financial difficulties/illiquidity

Company management must be up to date on and analyse:

a)  the latest annual financial statement, verified by the tax administrator and auditor;

b)  the quarterly P&L;

c)  the full list of all assets, including all accounts and banks through which the company runs its funds;

d)  the list of payments and asset transfers made by the company in the last six months;

e)  profit and loss account for the previous year.

By analysing these documents, company directors can ascertain if the company is in financial difficulty / unable to pay within the meaning of the insolvency procedure.

4. Filing for the insolvency procedure

A debtor in a state of insolvency is required to submit to the court a petition subject to the provisions of the law within a maximum of 30 days from the appearance of the state of insolvency, if the value of his outstanding debts exceeds RON 40,000 (approximately EUR 8,200) and the amount of tax liabilities is less than 50% of the total of the debtor's outstanding debt.

Nevertheless, if, at the expiration of the 30-day period mentioned above the debtor is involved in extrajudicial negotiations for the restructuring its debts, it has the obligation to notify the court that it is involved in such negotiations and file a motion to be subject to the insolvency procedure within five days from the failure of the negotiations.

Company directors are able to file for insolvency without a shareholders’ decision. However, if the debtor is filing directly for bankruptcy a decision of the shareholders approving filling for bankruptcy is required.

5. Management liability risks in the current situation

Failure to submit the filing for insolvency by the debtor’s legal representative within a period exceeding six months from the expiration of the 30-day period from the appearance of the state of insolvency is sanctioned by the Romanian Penal Code with imprisonment or with a fine.

The requests for opening the insolvency procedure submitted by the debtors during the emergency period will be analysed by the courts, as stated in the Decision of the Superior Council of the Magistracy dated 30 April 2020.

6. The advantages of instituting insolvency proceedings

Opening the insolvency proceeding can be quite beneficial for the respective company, given that:

i) as of the date of the opening of the procedure, all the judicial, extrajudicial actions or measures of enforced execution for the fulfilment of the claims on the debtor's assets are legally suspended. The creditors’ rights can be satisfied only within the insolvency procedure and thus creditors should submit applications for the admission of debts with the relevant court;

ii) in urgent cases that would endanger the debtor’s assets, the insolvency judge may order the temporary cessation of any enforcement procedures against the debtor before the insolvency procedure is opened. Such requests are considered urgent and therefore these requests will be solved by the courts even during the state of emergency;

iii) on-going contracts are considered to be maintained at the date of opening the procedure, but in order to maximise the value of the debtor's assets, within a statute of limitation of three months from the date of opening the procedure, the judicial liquidator may terminate any contract, unexpired leases, or other long-term contracts, as long as these contracts were not fully or substantially executed by all parties involved;

iv) no utility service provider (i.e. electricity, natural gas, water, or telephone services) is entitled, during the observation period and during the reorganisation period, to change, refuse or temporarily interrupt such service to the debtor or his property if it is a captive consumer.

For more information please contact Răzvan Popa, Partner, at

e-mail

, and Mihaela Elena Năstase, Senior Associate, at .