What happens when my debtor goes into liquidation?
Several questions immediately come to mind when your client cannot pay. One question in regard to Romanian debtors is what happens with the debtor’s ongoing contracts when the insolvency starts?
One of the main principles governing Romanian insolvency proceedings is that steps should be taken to re-organise the debtor affairs before the step of bankruptcy.
The first paragraph of article 86 Romanian insolvency Law states that the debtor’s ongoing contracts continue following the start of the insolvency procedure, but all clauses in a contract terminating contracts because of the insolvency procedure are null and void. The same article does provide that judicial administrator may terminate ongoing contracts to maximise the debtor’s assets.
To qualify as ongoing the contract is only deemed useful in continuing the debtor’s activity. To qualify the contract must exist at the date the insolvency procedure starts. This means that the contract must exist before the insolvency procedure started, and (ii) still exists at the date of the insolvency.
The contract must be ongoing, meaning its performance is ongoing at the date when the insolvency procedure started as well as when the administrator makes his decision to continue with the contract.
Under article 86, the judicial administrator or the receiver if the debtor has gone into bankruptcy may decide to continue or terminate the ongoing contract. The other party to protect its position or to get clarity can serve the judicial administrator with a notice requesting the latter to express his option to continue the contract. The judicial administrator must respond within 30 days from receipt of notice. Failure to respond within this term results in the contract being terminated. Thus, the judicial administrator may act in two ways: (i) expressly, by serving the other partner with a notice to terminate or continue the contract; or (ii) by not answering the debtor’s contractual partner’s notice within the 30-day term provided by article 86, in which case the contract is deemed terminated.
The judicial administrator’s option must refer exclusively to the termination or continuation of the contract. The partial termination of an ongoing contract in not possible. Nevertheless, the judicial administrator may try to renegotiate contracts deemed useful for the debtor’s reorganisation and terminate the contract only if the negotiations fail.
The judicial administrator when deciding whether to terminate a contract must make an analysis of the benefits of maintaining against the benefits of terminating the contracts.
When deciding whether to continue the contract or not, the judicial administrator must ensure that the debtor has all the necessary resources, including the necessary funds, to execute its obligations under the contract. The contractual terms will not be altered. A question arises when the judicial administrator calls his option, namely whether such decision is binding and irrevocable, or revocable. This can only be tested on a case by case Basis and we advise clients to look very carefully at all their options in such circumstances.
If the judicial administrator decides to terminate the contract, the other party may file a claim for damages against the debtor based on the provision of article 86 paragraph (2) of the act. In such case, the syndic judge will be exclusively competent to rule upon such claim and contractual clauses on dispute settlement and arbitration remain without effect.
The Romanian doctrine is not uniform in the treatment of such damages claim. One view is that they can be registered in the creditors’ table without the possibility of their registration being denied as being late. So, lawyers take the view that such damages must be considered as current and as such are subject to payment within the procedure when becoming due. When deciding whether to continue the contract, the judicial administrator must ensure that the debtor has all the necessary resources, including the necessary funds, to execute its obligations under the contract and if he has decided to continue the contract it would be inequitable for the other party then to be denied his claim.
Case law is developing in this case. As Romanian lawyers when we are asked question on this aspect of an insolvency/bankruptcy make it very clear to our clients that they are to a certain extent in the hands of the judicial administrator.