The Insolvency procedure
What do you do when the company with whom you have been trading goes into insolvency.
The first reaction is to blame someone. The next reaction is to review your financial position in relation to the company which has gone into insolvency. You will need to review your written contracts with them and to see if the position is protected.
This article deals with the position under insolvency and not under bankruptcy. It is a feature of Romanian law that once the insolvency procedure is started then all contract’s etc. with the company are frozen. This means that you cannot unilaterally cancel any contract with the insolvent company. The person with that power will be the receiver appointed by the Court under the insolvency procedure. This produces the effect that you the creditor can be in limbo so far as your contract is concerned until the liquidator makes a decision as to whether or not continue the contract or to cancel it.
The terms of the contract can be very important especially if you negotiated a contract with a company which has a trigger event if the company fails to pay its debts on time or you become aware of an event of possible insolvency. If you had been trying to obtain money from the insolvent company but tried to help it at the same time by continuing to work with it then you could be punished for your own attempts to help.
It is therefore very important that when drafting a clause in a contract which will trigger the cancellation of the contract upon the insolvency of the other party that the clause is drafted in such a way that you have the right to cancel the contract before the act of insolvency, rather than the act of insolvency itself being the trigger event. This of course can be a delicate part of the negotiation procedure with the other party as no one wants to insinuate that the party with whom they are negotiating is financially weak.
It is also important to understand the procedure from the Romanian perspective. The law provides a number of steps in the process and strives to allow the company which is insolvent to trade out of the position where the insolvency has been brought about by cash flow difficulties and poor management rather than the business being basically sound. There are a number of steps in the trading out process. The primary steps are the commencement of the procedure on the basis of an application by the insolvent company or a creditor who is owed more than forty thousand RON; the drafting and approval by the court of the recovery plan and the treatment of the various claims according to the recovery plan and the law.
For there to be such an insolvency procedure there has to be a court decision declaring the company insolvent. This is done under the provisions of Law 85/2014. Within 30 days of the insolvency ruling a receiver has to be appointed who will oversee the procedure. It is he who makes the decisions on the continuance and future running of the business and the administrators at the time of the insolvency no longer have any authority with regard to the running of the company in that respect.
The Receiver together with the judge will receive from the insolvent company the recovery plan and together they will decide if the plan is feasible and if the recovery plan will allow the company to trade out of the insolvency. The plan can include provisions whereby the creditors receive a lower amount of money than their debts but this may be more preferable to the creditors than no money at all.
The Recovery plan must be approved by a meeting of the company’s creditors and then subsequently confirmed by the judge. The recovery period can last for three years and in some circumstances four years.
At the end of the procedure the judge can rule that the company can come out of the insolvency procedure especially if the recovery plan has worked or alternatively if it has not that the company is bankrupt and should be liquidated.
Despite the Recovery plan it is necessary for the creditors to review their own position. It may very well be that they have priority debts or securities which they can use to enforce the payment of their debts ahead of the other creditors. If you are dealing with a company which you consider could be or about to become insolvent it is important to contact your lawyer at an early stage to ensure that your business is protected as far as possible to allow you to continue your business and not allow the failure of another business to destroy the business which you have built.