Romania: Any Chance in Fighting Abusive Insolvency Requests?

→ Emeric Domokos-Hancu

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.