Harmonisation of insolvency avoidance rights from the Romanian perspective

The EU directive harmonising certain aspects of insolvency law, a Proposed Directive published by the European Commission on 7 December 2022, sets minimum harmonisation standards in all member states regarding avoidance actions.

According to current Romanian Insolvency Law, the concept of avoidance actions already exists and can be defined as the right of the insolvency administrator/liquidator to bring actions before the syndic judge for the annulment of fraudulent acts or operations of the debtor to the detriment of creditors' rights during the two years prior to the opening of proceedings. If the insolvency administrator/liquidator does not bring an action, the Creditor’s Comittee can also contest fraudulent acts or operations before the syndic judge. In any case, the Insolvency Law also allows a creditor holding more than 50% of the value of the registered claims to initiate avoidance actions.

General avoidance rules

The following acts or operations by the debtor may be cancelled for the return of the goods transferred or the value of other services performed:

1. acts of gratuitous transfer carried out in the two years preceding the opening of the proceedings with an exemption for sponsorship for humanitarian purposes;
2. operations in which the debtor's performance clearly exceeds that received, carried out in the six months prior to the opening of proceedings;
3. acts concluded in the two years prior to the opening of proceedings with the intention of all parties involved to avoid the pursuit of assets by the creditors or otherwise prejudice their rights;
4. deeds of transfer of property to a creditor for the discharge of a previous debt or for the benefit of a creditor, executed within six months prior to the opening of proceedings, if the amount which the creditor could obtain in the event of the debtor’s bankruptcy is less than the value of the deed of transfer;
5. the establishment of a preferential right for a claim that was unsecured in the six months prior to the opening of proceedings;
6. advance payments of debts made in the six months prior to the opening of the proceedings if their due date had been fixed for a date after the opening of the proceedings;
7. acts of transfer or assumption of obligations made by the debtor within a period of two years prior to the opening of proceedings with the intention of hiding/delaying the state of insolvency or defrauding a creditor.

In the cases provided for in points (4) to (6) above the right to request the annulment will not apply to acts concluded in good faith in execution of an agreement with creditors, entered into as a result of out-of-court negotiations for the restructuring of the debtor's debts, provided that the agreement was reasonably conducive to the financial recovery of the debtor and was not intended to prejudice and/or discriminate against any creditors.

Romanian Insolvency Law also provides a list of acts or operations, which may be cancelled depending of the quality of the co-contracting person. Therefore, acts or transactions concluded within two years preceding the date of opening of the proceedings with persons in a legal relationship with the debtor may also be cancelled and benefits recovered if conducted with the following:

1. a general partner or a shareholder holding at least 20% of the company's capital or, as the case may be, of the voting rights in the general meeting of shareholders where the debtor is a limited partnership or an agricultural, general partnership or limited liability company;
2. a member or administrator where the debtor is an economic interest group;
3. a shareholder holding at least 20% of the debtor's shares or, where applicable, holding the voting rights in the general meeting of shareholders where the debtor is a joint-stock company;
4. a director, manager or member of the supervisory bodies of the debtor, cooperative society, limited liability joint-stock company or, where applicable, agricultural holding company;
5. any other natural or legal person in a position of control over the debtor or its business;
6. a co-owner or beneficial owner of a common asset;
7. the spouse or relatives up to and including the fourth degree of the natural persons listed in points (a) to (f).

Limitation period and consequences

The action for the annulment of fraudulent acts concluded by the debtor to the detriment of creditors can be brought by the insolvency administrator/liquidator or the creditor holding more than 50% of the value of the registered claims. This action must be brought within one year of the expiry of the time limit set for drawing up the report on the causes and circumstances leading to the debtor’s insolvency – which cannot exceed 40 days from the date of appointment and can be extended by the syndic judge for a maximum period of 40 days in cases with high complexity – but no later than 16 months from the date of the opening of the proceedings. Because it is not expressly regulated, the limitation period is three years if the action is started by the Creditors' Committee as a result of the passivity of the administrator or liquidator.

If the claim is allowed, the parties will be reinstated in their previous situation. The acquiring third party in the transfer of annulled property will return the transferred property to the debtor's estate or, if the property no longer exists or there are impediments of any kind to the debtor’s take over, the third party must return its value as of the date of the transfer by the debtor, established by an expert's report carried out in accordance with the law. The acquiring third party, who has returned to the debtor's estate the property or the value of the property transferred to him by the debtor, will have a claim against the debtor's estate equal to the price paid, to which may be added at most the increase in value of the property determined by any investments made by him, provided that the third party has accepted the transfer in good faith and without intent to hinder, delay or deceive the debtor's creditors. At his request, the third party acquirer in good faith will be entered in the tables of claims with the claim arising from the return of the asset or its value to the debtor's estate and will be entitled to participate in distributions. The third party acquirer in bad faith, however, will be entitled to receive only the price paid and will be entitled to participate in distributions.

Status of ongoing contracts

As a general rule, contracts in progress will be deemed to have been maintained at the date of opening of the procedure.

However, in order to maximise the value of the debtor's assets, within a limitation period of three months from the date of the opening of the proceedings, the insolvency administrator/liquidator may terminate any contracts, unexpired leases and other long-term contracts as long as these contracts have not been fully or substantially performed by all parties involved. The liquidator must reply within 30 days of receipt of the contractor's notice, given within the first three months of the opening of the proceedings, requesting him to terminate the contract. In the absence of such a reply, the liquidator will no longer be able to request performance of the contract, which will be deemed to have been terminated.

In the event of termination of a contract, an action for damages may be brought by the co-contractor against the debtor and will be dealt with by the syndic judge.

Conclusion

Major reform is not expected in Romania with the passage of the Proposed Directive, only small changes to comply with the minimum harmonisation requirements on avoidance actions.

For more information on current Romania avoidance actions, possible changes to these actions, and opportunities under the Proposed Directive, contact your CMS client partner or local CMS experts.