Insolvency & Restructuring

Romania: Any Chance in Fighting Abusive Insolvency Requests?

Schoenherr has recently been involved in one of the most important insolvency cases in Romania. Besides being a high profile case it also benefited from extensive media coverage as well as political involvement.

In the case, the insolvency proceedings had not been used for the purposes provided by Law 85/2006 on insolvency proceedings (Law 85) but for other purposes. Schoenherr faced several questions. What is the actual scope of the insolvency proceeding? When is an insolvency request abusive? Who and how can one fight such requests?

What is the scope of the insolvency proceeding?

Article 2 of Law 85 provides that the scope of the insolvency law is to establish a collective procedure with a view to settle the debts of an insolvency company. Consequently, the procedure applies only to companies in a state of insolvency or if insolvency is imminent. The procedure has a clearly defined purpose: to settle the debts of the insolvent company.

So insolvency requests not fulfilling these conditions are to be qualified as ungrounded, or even abusive.

When is an insolvency request abusive?

We must distinguish between insolvency requests (i) filed by a creditor and (ii) filed by the debtor itself.

In Romania the insolvency request is extensively used as a debt recovery proceeding. Creditors file such requests to pressure their debtors to settle the due debts and avoid entering into insolvency proceedings. So far, this has proven to be one of the most efficient debt recovery tools. In many such cases, debtors settle the debt or part of the debt or undertake a payment schedule.

But much case law qualifies such requests as abusive, as the insolvency proceedings are not used for the purpose provided by the insolvency law. This is evident, as in many such cases when filing the insolvency requests the creditors have no (or little) interest in opening the insolvency procedure against their debtor.

On the other hand, insolvency requests may also be filed by the debtors themselves. The case law evidenced several scenarios when a request by the debtor may be abusive. One of the most clear-cut examples sees the debtor filing for insolvency to avoid or to stay pending enforcement proceedings commenced against its estate. Another case is when the debtor is not actually insolvent but wants to benefit from the insolvency proceedings to cut off some of its (usually unsecured) debts.

In the above case, the debtor used the insolvency proceedings despite its being neither insolvent nor facing imminent insolvency, in order to terminate a series of ongoing contracts with third parties. Under Law 85, the judicial administrator may terminate the debtor’s ongoing contracts with a view to maximize the debtor’s estate. Although risky, this approach may prove most convenient as there is no clear authority as to the effects of such a termination.

The Romanian doctrine disagrees on several aspects of damage claims the debtor’s partner may file with the insolvency proceedings after the contract terminates. The debate includes the qualifying of the damages as current or historic receivables, the obligation to register the receivables with the creditors’ table, and the debtor’s obligation to settle them as current or in accordance with the priority rank following their registration with the creditors’ table.

Who has the right to fight abusive insolvency requests, and how?

The debtor may challenge the insolvency request filed by a creditor; Law 85 qualifies the opening of the proceedings filed by a creditor as contentious. Further, if the presumed debtor can substantiate the request is abusive, it may ask the syndic judge to require the creditor who filed the request to pay a security up to 10% of the claimed receivables prior to the judge deciding on the merits of the request. If the insolvency request is denied, the debtor may use the security to cover damages incurred following the abusive filing.

It is a common for creditors other than the one requesting opening of the insolvency to intervene in the insolvency file before the proceedings begin in order to substantiate the insolvency state of their debtor, proving also their receivables towards the debtor’s estate. It is still questionable whether another creditor can intervene in such files in the debtor’s interest; namely, against the filing creditor (or other creditors supporting the commencement of the insolvency proceedings) with a view to prove that the insolvency request is ungrounded or even abusive.

There is no consistent case law on the matter, and the little available case law qualifies a request to intervene as inadmissible. The author believes that as long as the proceedings are contentious, and creditors’ request to intervene are de plano admissible, any creditor holding a due and exercisable receivable has the right to intervene in the file, irrespective if such request is made in its own or in the debtor’s interest.

The solution is different when the debtor files for insolvency. Law 85 qualifies such requests as uncontentious, so requests to intervene in the file before the insolvency proceedings begin are considered inadmissible. On the other hand, the creditors may oppose the decision on how the insolvency began. If the opposition is granted, the syndic judge must retract its initial decision. When creditors or other interested parties intervene in the file, it becomes contentious and requests to intervene should thus be admissible.

The debtor used the insolvency proceedings despite its being neither insolvent nor facing imminent insolvency, in order to terminate a series of ongoing contracts with third parties.