Impact of COVID-19 Outbreak on Insolvency and Enforcement Proceedings

23 March 2020

Romania has registered in the last few years a constant and significant decrease of insolvency procedures, evidencing the companies’ economic health.

In such context, an increase in the number of insolvency proceedings throughout Romania was not expected this year. However, the initial projected number of insolvency proceedings for 2020 might soon become obsolete given the new coronavirus (“COVID-19”) pandemic.

While a short-term business disruption may be overcome by most companies in the months to come, in case the current situation caused by the COVID-19 outbreak is prolonged, companies will struggle to maintain a steady income, a decent profit margin and, in the end, their capability to duly perform and comply with their financial obligation towards their business partners.

Thus, companies should understand the perils they face in terms of insolvency proceedings initiated against them or their contractual partners. In addition, one should also carefully consider the impact on their business should a key business partner (e.g., major supplier, anchor tenant etc.) become insolvent and factor in the potential consequences. This assessment should be made also considering the current emergency status declared in Romania and the temporary measures deriving therefrom.

1. Relevant temporary measures imposed in the context of the emergency status

 

On 16 March 2020, the Romanian President instated the emergency status throughout Romanian under presidential decree no. 195 (the “Decree”). The emergency status is declared for an initial 30-day term, that may be prolonged, and is effective immediately.

The Decree includes measures meant to alleviate the current difficulties affecting various sectors and to streamline the operation thereof. Out of the measures tackling the issues related to the judicial system we have listed below the provisions that may also reverberate over insolvency or enforcement proceedings.

a)Throughout the emergency status, the civil litigation files (including commercial files and insolvency files) are postponed. However, during the emergency status, the courts’ activity will continue only in case of urgent matters, to be established based on the guidelines issued by the Superior Council of Magistracy.

In practical terms, hearings in any file (including a request to initiate insolvency or enforcement proceedings) shall be automatically postponed until the Decree ceases its effects. Depending on the length of the emergency status, the file might be blocked for quite some time and thus not benefit from an accelerated trial, as is generally the case for insolvency proceedings. This is expected to affect both the debtors (whose potential restructuring attempts may be hindered), but also the creditors (whose possibility to obtain the reimbursement of the amounts owed to them by the debtors may be delayed and potentially lead to cash flow difficulties).

b)After the emergency status will cease, the course of the litigation files that were suspended under the Decree will be resumed.

According to the Decree, the courts will establish the next hearing term within 10 days from when the emergency status ceased; however, delays are to be expected given the fact that the courts will have to process a large number of files in this 10-day term.

c)Terms to challenge court decisions that are ongoing when establishing the emergency state will be discontinued (in Romanian: “întrerupte”), and a new term will begin to elapse when the emergency status will cease.

d)Statute of limitation terms (in Romanian: “termenele de prescripție”) and extinction terms (in Romanian: “termenele de decădere”) that were pending when the emergency status was declared will be postponed throughout the duration of the emergency status.

 

2. Insolvency and enforcement in the context of the COVID-19 outbreak

 

Even if the backdrop generated by the COVID-19 outbreak may be considered as force majeure or any other event that leads to the postponement of contractual obligations, such as fortuitous case, the payment obligations may not always be suspended, as force majeure (or fortuitous case) is generally not applicable to obligations that refer to generic goods (Romanian: “bunuri fungibile”), including payment obligations. Thus, in case this provision is applicable, irrespective of whether an event is considered force majeure (or fortuitous case), this will not suffice to claim the non-performance of a payment obligation.

Given the financial pressure that might affect companies as a result of them having to temporary postpone their activity and face a potential slowdown, one may anticipate an increase in the number of companies that will face payment incapacity. Covering the amounts due for the technical unemployment as well as non-postponement of other payment obligations are only few of the examples that may result in financial difficulties for companies, eventually leading to a potential insolvency.

2.1 Effects of the temporary measures over the insolvency proceedings

 

Postponement of pending statute of limitation and extinction terms throughout the emergency status does not in any way equate to a postponement of payment obligations. Thus, in the absence of a specific contractual exemption, any amounts due under an agreement will continue to be owed by the debtor, on the scheduled due date. The postponement of the statute of limitation term refers strictly to the right to request the specific performance, to initiate litigation or to enforce such amount. Thus, obligations that become due during the emergency status may still ultimately lead to the insolvency of the debtor, in case all other conditions are fulfilled.

Moreover, in the current context generated by the emergency status and the postponement of the civil litigation files, another temporary difficulty that will affect the opening of the insolvency proceedings is generated by the expected delays in the activity of the courts of law. Basically, any new file, such as a request to initiate insolvency proceedings, shall be automatically suspended and a decision in this regard shall be rendered only after the Decree ceases its effects. Depending on the length of the emergency status, the file might be blocked for a significant time. This is also the case for ongoing insolvency proceedings.

2.2 Effects of the temporary measures over the enforcement proceedings

 

The Decree specifically provides that enforcement proceedings will continue only in case it is possible to observe the sanitary discipline rules imposed by the National Committee for Special Emergency Situations.

While not expressly stated in the Decree, this provision will most likely be applicable only to ongoing enforcement proceedings. In case of enforcement proceedings that have yet to be initiated, the provisions regarding the general postponement of civil litigation files will be applicable, as the enforcement proceedings will have to be initially confirmed by the relevant court of law.

Considering the general rule of continuing the enforcement proceedings, it is to be expected that most proceedings that do not involve third-party contact will continue as scheduled. This includes seizure of accounts and incomes (except for those referring to budgetary claims), identifying and seizing of the debtor’s assets etc. However, the enforcement process might be delayed by the Decree given that many enforcement officers will be reluctant to perform any major debt recovery measures (i.e., organizing public auctions, selling foreclosed assets, distributing the recovered proceeds to the entitled creditors) in order to properly observe the sanitary discipline rules mentioned above and avoid any risk for further contamination, as well as the rights of the parties involved in the procedure, such as the right to challenge any enforcement measure.

2.3 Ongoing insolvency proceedings

 

Many of the companies that were already subject to insolvency proceedings before the COVID-19 pandemic will most likely face a slowdown in terms of their rehabilitation process, especially those companies against which the insolvency proceedings were recently opened or were already following a reorganization plan.

Thus, in case of companies that were in the early stages of insolvency when the pandemic affected the normal course of events, the insolvency procedures against them will be subject to a temporary postponement due to the provisions of the Decree. This postponement might significantly delay the creditors’ chances to recover any outstanding amounts within a foreseeable timeframe, despite the insolvency practitioners’ efforts to continue the procedures outside the courts and prevent a complete shutdown.

In respect of insolvent companies undergoing restructuring methods based on a reorganization plans, the success of their rehabilitation depends on continuing their businesses and producing revenue in order to repay their debts within the reorganization period. Many of these business strategies aimed at overcoming the insolvency state shall be impacted and delayed in the current context.

In such case, the debtors, together with all other participants in the insolvency proceedings, may:

●investigate alternative restructuring options included in the reorganization plan;

●prolong the existing reorganization plan with an additional one year-term, if such option is still available to them;

●if feasible, investigate new restructuring methods to be included in the reorganization plan to adjust the latter to the new economical context, subject, of course, to the approval of the creditors and the court of law and with the observation of the applicable legal provisions.

Ultimately, in case the reorganization plan fails, this will eventually lead to the debtor’s bankruptcy.