In light of the European Commission’s recent proposal that an EU Directive be issued regulating insolvency and pre-pack proceedings, Romania’s insolvency and bankruptcy legal framework does not currently provide rules on pre-packs or on the preparation of a sale of a debtor's assets before insolvency proceedings are formally opened.
Such preparation is possible and even considered by creditors, but in practice it is far more usual for the proceedings to be used for the sale of the performing assets or parts of the businesses rather than to prepare the entire business for sale before the proceedings are initiated.
Currently, under Romanian insolvency law, which regulates both bankruptcy and insolvency proceedings, the sale of assets is only possible in a proceeding that is ongoing. The sale can, in theory, also occur before the insolvency proceedings begin, but only within a pre-insolvency proceeding that would need to be initiated before the sale and is supervised by the insolvency courts. The sale of the entire business, however, would be a stretch of the declared aim of preventing insolvency and would actually lead to a de facto liquidation.
The general rule provides that the sale of assets, either separately or as a whole, including as a transfer of business can only be conducted after a list of assets is prepared, a valuation of assets and an approval by creditors of the sale strategy are available. In practice, this takes significant time and often sales are made at low value compared to the value of the going concern. Therefore, the enactment of a pre-pack option would be extremely useful for Romanian companies in financial difficulty.
Few exceptions are regulated, allowing secured creditors to expedite the sale of assets mortgaged in their favour. While these options are favourable compared to the general rule, they cannot be deemed to represent pre-packs, as they also occur after the proceedings have been initiated and rarely apply to the entire business being sold.
Regulating pre-packs would also be useful in Romania given that a small share of companies (under 5%) entering insolvency survive the process. The reason for this low survival rate is either because debtors fail to convince creditors to accept the reorganisation plans they propose or because the reorganisation plan is seldom a masked liquidation of the debtor. In case of liquidation, recoverability is significantly low, especially for non-secured creditors.
Potential difficulties in implementing the Draft Directive
The potential implementation of the Draft Directive as it is currently proposed may face significant practical difficulties in Romania given the current construction of the country’s insolvency legal framework.
Romania’s current framework provides a significant set of conditions for the debtor to comply with before the insolvency proceedings are initiated in order to protect the debtor against cancellation of its payments and against other legal actions. For example, preferential payments or securing unsecured debts preformed during a certain period before the initiation of insolvency should undergo significant scrutiny from the insolvency courts and judicial administrators supervising the proceedings. A correlation of the proposed Directive’s pre-pack provisions with these existing provisions will be required.
Also, since the current pre-insolvency stage is not clearly regulated in Romania (except for the abovementioned requirements of non-discriminatory treatment), a separate framework should be put in place regulating potential discussions or negotiations with creditors as well as non-creditor-approved sale mechanisms outside the initiated proceedings.
Therefore, given that in the current insolvency context in Romania, characterised by significantly unsuccessful proceedings and low recovery rates, any reform as proposed by the Draft Directive that gives debtors an opportunity to continue operating and helps creditors recover more of their receivables would be welcome. As mentioned above, however, due care and attention would be needed in the implementation of any new proceedings to ensure that pre-pack options are reliable and transparent.
For more information on how the proposed EU Directive could affect your Romanian business, contact your CMS client partner or these local CMS experts.