Recently Romania has adopted a law regarding an arrangement to avoid bankruptcy. This law will benefit a company that has financial difficulties. Companies can cover their debts by a legally enforceable renegotiation. The preventive arrangement is a mechanism used to avoid insolvency and it consists in a settlement between the Debtor Company and its creditors as to how that Debtor Company will pay its debts.
The preventive arrangement is a contract signed between the Debtor Company and creditors who hold at least 2/3 of the total value of the debts of the Debtor Company. By such arrangement the Debtor Company proposes a recovery plan to cover the debts of the creditors against the company. The creditors agree to support the Debtor Company’s plans to overcome the financial difficulties of the company.
Once companies which are facing difficulties understand and accept the necessity to apply the preventive arrangement, they will benefit from a period to make payment of their debts. Provided that creditors who hold a majority of at least two thirds of the debts of the company will accept the recovery plan the Debtor Company is able to modifying and delaying the dates of payment, reducing, deleting or suspending any forced execution.
One of the effects of the preventive arrangement is that minor creditors are a party to the preventive arrangement. The syndic judge, who approves the arrangement, may impose a delay of upto a maximum of eighteen (18) months to pay the debts. The most important effect of this procedure is for the Debtor Company to preserve cash and to use it to continue the activity of the company. In this way the Debtor Company may generate the income needed to cover and pay the debts accepted in the scheme of preventive arrangement. More often the lack of liquidity at a certain moment will cause the insolvency of the Debtor Company, who is caught between the lack of the liquidity and the payment of the debts and the current expenses which arise from its activity.
The preventive arrangement will also result in the suspension of penalties, and interest as well as preventing the opening of the insolvency procedure against the Debtor Company, during the period of the preventive arrangement.
Starting the procedure
The Debtor Company submits to the competent court an application to start the procedure for the preventive arrangement. By this request, the Debtor Company proposes a temporary conciliator, who must be an insolvency practitioner authorized by law. The syndic judge approves the appointment of the temporary conciliator. Within thirty (30) days from the appointment, the conciliator prepares together with the Debtor Company the list of creditors and the details of the offer to be made to them.
The proposal will contain details of the project and the proposals regarding payment together with an addendum containing the Debtor Company’s declarations in respect of the current condition of financial difficulties, and the list of the known creditors, including those whose debts are not accepted by the Debtor Company.
By the project which has to be approved by the creditors representing at least two thirds of the debts accepted by the Debtor Company by value, the Debtor Company following the signing date of the preventive arrangement, will also propose the confirmation of the provisory conciliator and his remuneration for the period of the arrangement.
According to the provisions of the art. 581 and 582 of the Romanian Code of Civil Procedures, the Debtor Company can ask from the syndic judge, based on the preventive arrangement for the suspension of any execution procedure over its assets. The Debtor Company’s request is dealt with in a secret hearing, which is dealt with as an emergency and with priority by the court. The suspension of the execution procedure continues until either the preventive arrangement is approved or the majority of the creditors reject the Debtor Company’s offer.
The approval of the preventive arrangement
The Debtor Company can organize one or more meetings with the creditor in the presence of the conciliator proposed by the Debtor Company, so that the creditors can exercise the right to vote for or reject the preventive arrangement. The period of negotiation can not exceed thirty (30) days.
The creditors can exercise their vote by correspondence. The preventive arrangement is deemed as approved by all the creditors, if creditors representing at least two thirds (2/3) of the value of the debts accepted and unchallenged by the Debtor Company, vote in favour. In cases where the conditions regarding the number of the votes are not met, the Debtor Company can after thirty (30) days make a new proposal in respect of a preventive arrangement to the creditors. After the preventive arrangement is approved by the creditors, the conciliator requests the judge to approve the preventive arrangement.
Starting from the moment of the communication of the preventive arrangement, any execution procedure by any creditor is suspended. Furthermore, at the conciliator’s request the judge can impose on any creditor who did not sign and approve the preventive arrangement, a period of up to 18 months to postpone their debt. During this period the creditors cannot charge interest, penalties and any other expenses related to their debt. Within the period of the preventive arrangement, the insolvency procedures cannot be started against the Debtor Company.
By the way it is structured and implemented this procedure can prevent companies entering into insolvency if sufficient creditors agree. At the same time, the Debtor Company may continue its activity on a normal basis and trade out of its debts.
Thus, the most important effect of this procedure is the possibility for the Debtor Company to preserve cash and to use it to continue the activity of the company. In this way the company may generate the income to cover the debts it has accepted under the preventive arrangement provisions as well as continuing trading. More often the lack of liquidity at a certain moment will cause the insolvency of the Debtor Company, who is blocked between the lack of the liquidity and the payment of the debts and expenses which arise from its activity.