Recovering a debt can be a serious problem for almost every business owner regardless of the industry or the profession. Collecting a debt can be an arduous process anywhere, but coupled with the anxiety associated with the Romanian justice system and a general lack of understanding as to the protections afforded to creditors by Romanian law, doing business and lending in Romania is often too daunting for most lending institutions – particularly in troubled times. Fortunately, the Romanian legal system does provide an expedited framework for creditors to collect debts, and this article describes the legal tools available to them in Romania that allow for the recovery of their debts.
Different procedures for debt recovery
Under Romanian law, if a debtor has not paid the amount due by the due date, a creditor may initiate a court proceeding against the debtor for the recovery of the debt within the three-year statute of limitations. Additionally, of course, creditors may use the insolvency procedures set forth in Law 85/2006 (the “Insolvency Law”) where applicable.
Since October 2007, when the Government Emergency Ordinance no. 119/2007 (“GEO 119”) came into effect, as part of Romania’s responsibilities in its accession to the European Union, two expedited procedures for debt recovery have co-existed -- the summons procedure, created by Government Ordinance no. 5/2001, and the payment ordinance procedure, established by GEO 119. Where applicable, creditors may opt between either of these two expedited recovery procedures, or they may continue to resort to the procedure provided by the general provisions of the Civil Procedural Code, but which takes longer to fully implement.
Summons and payment ordinance procedures
If the creditor has enough information regarding the solvency of its debtor, and if the claim be attested entirely by written evidence, then the best option is for the creditor to use one of the two expedited procedures. Both the summons and the payment ordinance procedures refer to claims that are determined, liquid and matured. A claim is determined when its existence is under no doubt, it is liquid when its amount can be perceptibly determined, and it is matured when it has become due.
The summons procedure is a special and immediate court proceeding that may only be used for the collection of pecuniary debts resulting from a contract or other written instrument, signed by both parties. The payment ordinance has a narrower area of application, in the sense that it regulates the collection of pecuniary debts deriving only from commercial agreements, defined as agreements concluded between traders or between traders and contracting authorities.
While invoices signed by the debtor represent the basic proofs submitted in court, attesting to the debtor’s payment obligation, the payment ordinance procedure allows for a higher flexibility in providing evidence in court. Consequently, a creditor using such a procedure may successfully submit, in addition to the aforementioned invoice, other documents evidencing its claim against the debtor, such as correspondence. This is an important aspect that turns the payment ordinance procedure into a more advantageous procedure for creditors, as compared to the summons procedure.
Another advantage of the payment ordinance is the fact that the debtor may acknowledge only part of its debt while, under the summons procedure, this is not permitted. Consequently, the judge may rule only with regard to such partial debt, and the creditor will therefore be able to collect part of its debt based on the expedited procedure; while for the rest of the alleged debt the creditor may submit a claim in court based on the general common procedure.
General common procedure
According to the Civil Procedural Code, which describes the basic procedure on debt recovery, before commencing an action, the creditor must attempt to settle the matter amicably with the debtor. The creditor must send a written notice to the debtor inviting him to a meeting to negotiate an amicable settlement. The notice must have all the documents proving the creditor’s claim attached and must be sent at least 15 days prior to the date of the proposed meeting. If the parties succeed in settling the debt amicably, the debtor pays the amount due and no court proceeding is commenced.
If the parties do not reach an agreement, or if the parties reach an agreement, but the debtor breaches it, then the creditor may submit a court claim to which it has to attach all the documents proving that the parties have attempted an amicable settlement prior to the action filed with the court. Without such proofs, the court claim will be dismissed.
As in the case of the payment and summons procedures, the competent court for the common procedure is the local or the county court, depending on the amount of the debt in question.
Main advantages and disadvantages between the expeditious and the common procedures
An advantage of the two expedited procedures is the fact that creditors must only pay a stamp tax amounting to 39 lei, representing the equivalent of around €10, while with actions brought pursuant to the common general procedure, creditors must pay a stamp tax representing a certain percentage of the debt amount and, consequently, the higher the amount of the debt, the higher the stamp tax that the creditor must pay.
The greatest advantage of the expedited procedures is the speed by which a determination can be made allowing a judgment to be delivered in approximately 2-3 months -- the text of GEO 119 requires the court to render a decision within 90 days. Significantly, the expedited procedures do not contain the requirement that the parties first attempt to settle the matter amicably, and this also shortens the entire process.
Succinctly stated, the disadvantages of the common procedure lie in the amount of the court fees and the duration of the procedure (lower court, appeal and second appeal), which can sometimes take 2-3 years before a final and binding judgment is delivered. But the common procedures must be used instead of the expedited summons or payment ordinance procedures, when the creditors need more than documents to prove their claims (e.g., witness depositions or expert testimony). However, when the existence, the due date and the amount of the debt is substantiated with documentation, creditors have at hand one of the two expedited procedures, instead of the burdensome and long procedure set forth in the civil procedural code.
The insolvency procedure
Statistics show that in 2008, between 12,000-14,000 insolvency requests were submitted. The prognosis for 2009 estimates that insolvency requests will double. Indeed, creditors too often submit insolvency requests, even if they do not have enough information on the lack of solvency of their debtors, their only purpose being to put pressure on debtors in order for the latter to pay their debts. Unfortunately, in the end, this strategy often turns against them.
Creditors entitled to request insolvency
The conditions imposed by the Insolvency Law allowing creditors to submit insolvency requests against their debtors, legal entities or even natural persons, are quite permissive. They regard the existence of a determined, liquid and matured claim that is older than 30 days, and has a value that exceeds either 10,000 lei, in ordinary cases, or the multiple of six average annual national income wages for employees. For reference, the annual average national wage was approximately 350 Euros in 2008.
Once these conditions regarding the claim have been met, the creditor may submit the insolvency claim with the court. The Insolvency Law does not require the creditor to provide evidence proving the insolvency of its debtor, and this makes the commencement of such a proceeding quite simple. However, at the debtor’s request, the syndic judge may oblige the creditor to lodge a deposit representing a maximum 10% of the value of the claim. Such deposit will be returned to the creditor if its insolvency request is accepted, or it may be used in order to cover any losses suffered by the debtor if the creditor’s request is rejected.
Commencing the proceeding
When an application for insolvency is filed, the debtor may request that the court approve a plan by which the debtor can reorganize in an effort to pay its debts. The judge may confirm or deny the plan. If the judge determines that the application filed by the creditor or debtor is sound, if the debtor does not propose a reorganization plan, or if the reorganization plan is dismissed, the judge opens an insolvency proceeding and appoints a judicial administrator for the debtor legal person.
The main consequences of opening an insolvency procedure are: the statute of limitations for all the creditors’ claims is suspended; no penalties or interest may be added to the receivables that are the object of the claim after the commencement of the insolvency procedure; the debtor may no longer run its own business and all of the managerial tasks of the business are taken over by the judicial administrator appointed by the syndic judge. The debtor must submit all information and documents showing the situation of the company, such as balance sheets, list of creditors, list of assets, accounts and banks used by the debtors and other such information, to the judicial administrator.
Effects of opening the procedure on other litigations
Since the date of the commencement of the procedure, all judicial or extra-judicial actions regarding the fulfillment of claims against the debtor or its assets are suspended. The decision regarding the opening of the procedure must be communicated to all of the courts in whose jurisdiction the headquarters of the debtor lies, as registered with the trade registry, and to all the banks where the debtor has opened accounts. Moreover, after the opening of such proceedings, the judicial administrator must notify all the creditors who are registered in the accounting books of the debtor and inform them of the terms under which they may register their own claims against the debtor with the court.
Effects on acts concluded by the debtor
All the acts and correspondence issued by the debtor, the judicial administrator or the liquidator must include, in Romanian, English and French, the following expression: “in insolventa”, “in insolvency”, “en procédure collective”. The syndic judge may rule that the management of the debtor be performed not by the debtor itself, but by the judicial administrator, and such judicial administrator may apply to the syndic judge for the annulment of the acts concluded by the debtor that are determined to be in fraud of its creditors’ rights during a 3-year period prior to the date of commencement of the procedure.
Risks of opening the insolvency procedure for the purpose of debt recovery
As mentioned above, some creditors make use of this procedure, even if they do not have enough information on the lack of solvency of their debtors in order to persuade the debtor to pay its debts. However, after a thorough analysis of the economic status of the debtor, it may well turn out that the debtor is indeed insolvent and unable to repay all its debts, thereby extinguishing the creditors claim or severely restricting any recovery.
Therefore, the biggest disadvantage of the insolvency procedure is the fact that the amounts of money collected from selling the debtor’s assets is often insufficient to cover all of the creditors’ claims. The judicial administrator will make an inventory of all the debtor’s assets and may, based on the decision of the creditors approved by the judge, sell the assets, the proceeds of which may be distributed to the creditors and be used to pay the expenses of the insolvency procedure.
The Insolvency Law establishes the order in which the creditor’s claims are satisfied. For instance, the amounts obtained from the selling of assets which are subject to a guarantee will be paid to the creditors for whom the guarantee was set up and, only after the satisfaction of these creditors’ claims, may the remaining proceeds – if any – be distributed to the other creditors. Also, claims brought by public institutions and salary claims have priority to the claims of other creditors. Another disadvantage is the long duration of an insolvency procedure, which may last for years.
Creditors should be aware of the fact that the Insolvency Law has not been created as a legal tool for debt recovery. On the contrary, an insolvency request should be submitted in court only if there is enough information that the debtor is unable to cope with its determined, liquid and matured debts. Creditors should recall that their direct interest is to recover their debts and, if they open an insolvency procedure, this may obstruct the debtor’s ability to continue its activity and, consequently, make it impossible for the creditor to collect its debts.
In a fast moving economy, where blocking the financial resources of a company in dead-end attempts for amicable debt recovery actually means blocking the entire business of such company, the two expedited procedures afforded by Romanian law provide for a fast means by which creditors can efficiently and effectively recover debts. Therefore, the choice among the different procedures for debt recovery under Romanian law should be wisely chosen by creditors, with a view to the particular circumstances of the case and also based on accurate information and thorough advice.
Rubin Meyer Doru & Trandafir
SOCIETATE CIVILA DE AVOCATI / LAWYERS PROFESSIONAL CORPORATION
IN ASOCIERE CU / AFFILIATED WITH HERZFELD & RUBIN, P.C.