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Litigation & Insolvency under the state of emergency

Vlad Nicolae
Vlad Nicolae
Catalin I. Radbata
Catalin I. Radbata

I. GENERAL OVERVIEW 

On 16 March 2020 the President of Romania issued Decree no. 195/2020 (the Decree), thereby declaring a national state of emergency for 30 days. The Romanian authorities had also previously taken measures to limit the effects of the SARS-CoV-2, by closing all public schools and nurseries on 11 March 2020.

Further restrictions, such as the closing of businesses, and lockdowns were subsequently imposed through military ordinances between 17 – 25 March 2020 (Ordinances 1, 2 and 3/2020). Restaurants, cafés, shopping malls, and dental clinics amongst others were closed. Indoor cultural, scientific, artistic, religious, sport, and entertainment activities were suspended. Outdoor activities were strictly limited as well. At the same time, the Government of Romania proposed a series of measures aimed at helping businesses struggling to cope with the new situation (Emergency Ordinances no. 29 and 30/2020). These measures include:
– subsidies to support and freeze the current work force for the employers impacted by the measures (75% of the national gross average salary, i.e. maximum RON 4,072 per employee per month)
– waiver of interest and penalties on the fiscal obligations that become due starting with 21 March 2020, up to 30 days after the end of the state of emergency
– general stay on the enforcement of fiscal claims
– extension of the deadlines to pay local taxes from 31 March to 30 June 2020
– extension of the deadline to apply for the restructuring of fiscal debts until 30 October 2020
– deferral of utility payments for SMEs that totally or partly closed their business.

The measures and aid mechanisms are consistent with the rapid spread of the SARS-CoV-2. Yet, what are the immediate effects for creditors and debtors under this state of emergency?

We will highlight below the main implications for creditors in need to enforce their claims and preserve their rights. At the same time, we will also describe the effects on debtors that need to protect their businesses and continue to operate.

II. LITIGATION AND ENFORCEMENT 

II.1. OVERVIEW

According to the Decree the activity of the courts is stayed save for “emergency cases”. What specifically constitutes “emergency cases” has been initially determined at the level of each circuit of Courts of Appeals (fifteen circuits in Romania). Most of the Courts of Appeals listed as emergency cases the following (with relevance for creditors seeking enforcement of claims):
– injunctions (ordonante presedintiale)
– temporary stay of enforcements
– stay of enforcements against the debtors that filed for insolvency (Article 66.11 of the Law no. 85/2014 on insolvency proceedings)
– leave of enforcements (incuviintare executare silita) only based on injunctions
– provisional measures (e.g. freezing of bank accounts and/or assets)
– interim taking of evidence (asigurarea probelor)

However, there were discrepancies between the circuits and thus on 24 March 2020 the Superior Council of Magistrates (CSM) issued the Decision no. 417 unifying and listing what emergency cases means. Relevant to creditors seeking enforcement, CSM clarified amongst others that emergency cases are also to be deemed: (a) all applications for leave of enforcements (i.e. not only leaves that were based on injunctions), and (b) any other requests referring to exceptional circumstances.

Enforcement officers may continue to operate provided, however, that their actions and measures comply with the sanitary rules in place at the time. At the same time, it should be noted that only indirect enforcements may continue, such as freezing of bank accounts, sale of assets and distribution of proceeds, etc. Evictions and direct enforcements (Article 888 et seq. of the Romanian Civil Procedure Code) such as the taking over of a specific asset or having it delivered by the debtor, are stayed.

II.2. ONGOING ENFORCEMENTS

Enforcement proceedings currently ongoing may continue. Creditors that have already initiated such proceedings and were granted leave to enforce will be allowed to continue the enforcement. Enforcement proceedings, however, must be carried out while observing the new sanitary and lockdown rules in place. Consequently, the final and effective outcome aimed by creditors seems illusory at the moment, as at least the auctions for the sale of the assets are, in principle, prevented from taking place. The Union of the Enforcement Officers (UNEJ) has asked the Ministry of Justice to clarify the limits and features on how the auctions could be allowed via videoconference. An answer is expected soon.

II.3. CREDITORS WITH AN ENFORCEMENT TITLE

If a creditor holds an enforcement title (titlu executoriu in Romanian), then it may apply to an enforcement officer to start the enforcement process. Common enforcement titles include court judgments, loan agreements concluded by banks, promissory notes.

Once an enforcement request is registered, the enforcement officer must apply to the relevant court to obtain a leave to enforce. Albeit between 16 March 2020 and 24 March 2020, the majority of the courts did not consider requests for leave to enforce as emergency cases, the CSM decision no. 417 issued on 24 March 2020 reversed the orders of the circuit courts and qualified such requests as emergency cases. This is line with the new sanitary rules, as leaves to enforce are decided by the judges without the parties being summoned to the proceedings.

Once the leave to enforce is obtained, then the enforcement officers may proceed with the indirect enforcement proceedings, such as freezing of banking accounts and/or assets. Of particular importance, is the registration in the Land Registries by the enforcement officers of the ongoing enforcement. This renders the process effective against third parties and may discourage the debtor to tamper with its assets (Article 822 of the Civil Procedure Code – CPC).

II.4. CREDITORS WITHOUT AN ENFORCEMENT TITLE

Creditors that lack an enforcement title have certain avenues to preserve their rights. Notably, such avenues include provisional measures, in particular filing for a freezing of debtors’ bank accounts or assets, until the creditor obtains an enforcement title (e.g. a court judgment after the state of emergency ends – Article 952 et seq. of the CPC).

Provisional measures may be requested only provided that the creditor has previously filed a regular court action against the debtor, and that such claim be evidenced in writing. In such case, the court may order the applicant to pay a deposit of up to 20% of the claim amount. If the claim is not evidenced in writing, a deposit of 50% is mandatory.

The provisional measures are heard ex parte and are generally swift before all the circuits of the Courts of Appeal. Furthermore, the existence of the claim on the merits (as a prerequisite for applying for provisional measures), may be registered in the Land Registry in certain cases, thereby offering additional protection against third parties.

III. INSOLVENCY

In normal circumstances, insolvency was considered the normal refuge for debtors in distress. Under the current conditions, insolvency proceedings are not considered as emergency cases, and thus debtors are deprived of many of the insolvency law’s features (i.e. an application for insolvency may be filed but the Courts will not proceed with the trial).

Other tools that the debtors could have used to prevent insolvency, such as ad-hoc mandates or the preventive “concordats” cannot be in principle employed either as they are not considered expressly as emergency procedures. However, given that in exceptional circumstances courts may deem certain requests as emergency cases (according to Decision no. 417 of CSM), it may be possible to argue in certain cases in favor of these alternative procedures.

Consequently, before considering insolvency, debtors should endeavor to enter into good-faith negotiations with creditors to discuss viable alternatives in light of the current state of emergency, and potential try to approach the ad-hoc mandates or preventive “concordats”. Should these approaches fail, and good-faith debtors are put under pressure by undue enforcements or provisional measures, then an application for insolvency may be filed provided that all the other legal requirements are met. Furthermore, by virtue of Article 66.11 of the insolvency law, the debtor may apply for a stay of all enforcement against it.

It should be noted that, notwithstanding the current situation, the conditions and deadlines for the directors of the companies to file for insolvency within 30 days from when the state of insolvency occurs must still be observed. Furthermore, for insolvency procedures recently opened, the deadlines to file the statements of claim do not start to run or are stayed by operation of law (Article 41 of the Decree in conjunction with Article 100.1. b) and 114 of the insolvency law).

IV. CONCLUSION 

In spite of the restrictions currently in place and the ones to follow, businesses may benefit from continuing to use the available legal proceedings and remedies. On the one hand, these should be aimed at preserving the creditors’ rights during these troubled times, given that the current measures will eventually cease their effects and in turn cause a surge in legal proceedings is expected. Consequently, taking actions now will put creditors at least in the position to have their cases heard earlier than those acting at a later stage.

On the other hand, as far as debtors are concerned, in case their activities are affected by the current measures and the new Governmental measures do not suffice to continue their business, amicable measures such as negotiations with creditors or alternative procedures to insolvency (such as ad-hocmandates or preventive “concordats”) are strongly encouraged. Should these fail however, then filing for insolvency remains an obligation. At the same time, the debtor may seek a stay against the enforcements based on Article 66.11 of the insolvency law.

Obviously, for parties to arbitration agreements providing for arbitration seated in Romania such procedures may be initiated and may unfold, provided that the measures adopted by the arbitral institutions and tribunals comply with the sanitary rules in place.

Catalin I. Radbata – RN Lex – Litigation & Insolvency
Vlad Nicolae – RN Lex – Litigation & Insolvency

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