Evolution Of The Insolvency Law During The Economic Downturn

The Romanian legal framework on insolvency procedure has been consistently improved following the enactment of Insolvency Law no. 85 (Law 85), which entered into force on 21 July 2006.

Background

Law 85 replaced the former Bankruptcy Law no. 64/1995, establishing new mechanisms for shortening the judicial procedures in order to accelerate the reorganisation of companies undergoing financial difficulties or to put an end to their existence and preserve as many of the creditors' rights towards the bankrupt companies as possible (through the bankruptcy procedure).

The constant amendments to Law 85 have been mainly influenced by the conditions provided by the Romanian insolvency practice. Before the enactment of Law 85, approximately 71% of insolvency cases led to bankruptcy proceedings, while only a small percentage of insolvent companies managed to undergo a successful reorganisation. New mechanisms for shortening the procedures, and accelerating the reorganisation proceedings were thus necessary. Further, alignment with European Insolvency Acquis Communautaire was mandatory.

During the years of economic growth of the country, Law 85 underwent only minor amendments. However, since the beginning of the economic downturn, the number of amendments has increased (once in 2009 and twice in 2010).

Because of the crisis, more companies have been facing financial difficulties. A lack of liquidities on the market has led to a significant increase in the number of debt recovery proceedings and insolvency cases. In practice, creditors were using insolvency proceedings as a means of debt recovery. Filing for insolvency against their debtors has mainly been done to pressure debtors to settle receivables in order to avoid entering into insolvency.

In order to stop this phenomenon and to ensure that companies facing insolvency have a fair chance to undergo a reorganisation proceeding, Law 85 has been amended. Due to such amendments insolvency has started to be perceived also as a proceeding by way of which the debtor could seek judicial protection from its creditors and companies could actually undergo a successful reorganisation. During 2010 the number of companies filing for insolvency and trying to undergo reorganisation proceedings has significantly increased.

Some of the most important amendments to Law 85 are discussed below.

Shortening the procedure and reducing the number of the insolvency requests

Beginning in 2009 the concept of special insolvency...