Correct functioning of prevention mechanisms - essential factor for preventing insolvency

George Marinescu
English Section / 17 mai

Correct functioning of prevention mechanisms - essential factor for preventing insolvency

Versiunea în limba română

Following the crises that followed from 2019 until now and the over-indebtedness of companies, individuals, but also of states, it is vital that the mechanisms to prevent insolvency or bankruptcy work correctly and an interpretation agreed by all insolvency practitioners and of courts of law in force, stated the participants at the 15th edition of the Business Law Conference, organized for two days (May 16-17, 2024) by the Faculty of Law of the University of Bucharest, in partnership with SCA Piperea&Associations and Society Romanian Research for Public and Private Affairs (SOROCAPP).

At the opening of the conference, which this year is being held under the theme of Business Law in survival mode, university professor Dr. Gheorghe Piperea, partner of SCA Piperea&Associatii said: "The company in difficulty and the over-indebted consumer are the main actors of business in survival mode. The state is a subsidiary actor, which over-indebted itself for subjective reasons and which ended up in the situation where it requested the approval of a PNRR, which is nothing more than a judicial reorganization program with all kinds of conditions from the creditor. The states, following the crisis periods from 2019 onwards, borrowed irresponsibly, led the European Central Bank to print money, which ultimately led to the indebtedness of individuals".

Răzvan Dincă, dean of the Faculty of Law, said: "The moment we fail to take note of the development of technology or the legal development of a current value, at that moment we will start to die from a scientific point of view. At the conference there are topics of urgent topicality, which concern the new challenges of the European directives regarding consumers, AI, and others, but I am convinced that through the debate we will tame them and transform them into means to bring society forward in a good way" .

Aurel Ciobanu, the dean of the Bucharest Bar, brought into discussion a new side of the law, namely the criminal law of business: "Some time ago, we were discussing that the criminal law is diversifying, entering some areas that we did not foresee 20 years ago . One component started to be the business criminal. When the first challenges of criminal business appeared, our reaction was that it is on the border between commercial and criminal. You had to explain the differences between certain notions of law. From my point of view when you say business law and especially criminal business law it is more than a criminal matter. That is why I recommend approaching business criminal law cases with several specialists because the level of complexity goes beyond the criminal sphere. This conference scores a little at the level of professional training in the faculty, because we are talking about business law, including a business criminal that will become in time an object of study, a subject of law and help the criminal to move to the next stage of development. Grounds are already being laid for penal officers to review their professional background and professional goals".

His Lordship stated that he has recently witnessed with sadness a refusal of legal professionals to specialize in new fields, who choose to remain opaque to the new dimensions that the branches of law must have.

Aurel Ciobanu stated: "We have colleagues who wonder why we invest in digitization and Artificial Intelligence. It is madness to oppose the knowledge of progress, because new dimensions presuppose the opening of new markets".

Early warning and notification - almost non-functional mechanisms

Nicoleta Mihai, insolvency practitioner, Associate Partner, Head of Restructuring & Insolvency - KPMG, Romania, stated that through Directive 1023/2019 on restructuring frameworks, the European Commission wanted entrepreneurs, businesses to be protected by implementing early warning systems , employees and companies that have a certain viability.

Mrs. Nicoleta Mihai specified: "The legislator established the body that makes the first element of early warning and decided that the Ministry of Economy, Entrepreneurship and Tourism will develop a platform for the general public to enter and capture the data from there to find out the risks necessary for the analysis contractual partners. The warning occurs when the payment of obligations to the state budget is not executed, through notification and automatic alert. These elements are implemented, but are they sufficient for the business environment, are they transmitted in real time to the debtor or to the business environment? My opinion is no. Notifications from ANAF arrive late to the taxpayer, who must protect himself from the negative behavior of the business partner. The costs of performing an analysis are very high for SMEs. That is why the European directive wanted us to have quick access to these systems. At this moment we are talking about the platform of the Ministry of Finance that provides financial statements but which are a year behind the entry into contact between business people. Companies are going through a difficult time, and the life of a company changes a lot in 6 months. The data on the website of the Ministry of Finance will never be sufficient for a proper and current analysis. The coordinates of the warning as drawn up in the legislation refer to the non-execution of some budgetary obligations. But the warning mechanisms don't work and we don't even have a list, a table of insolvency professionals".

The insolvency practitioner also showed that a problem is the fact that payments are made between 84 and 270 days after the invoices are issued, and this would attract the insolvency of several companies in our country, the wave of insolvencies being reduced only thanks to the IMM Invest program which, although it was originally supposed to guarantee loans to SMEs for only three years, it appears that it will stretch to six years, until the companies come out of trouble and pay back bank loans taken for working capital and investments.

Nicoleta Mihai also referred to the fate of the government agency that will deal with the management of companies with majority or full state capital. Mrs. Mihai specified: "AMEPIP has over 100 public companies that need managers, directors, the implementation of all performance indicators, and the agency's role is to establish financial performance indicators and non-financial indicators in order to have a proper management contract . It's a good thing, there will be studies and advertising campaigns, which will lead to the awareness of the managers who will be monitored in the activity, something that will attract increased attention from entrepreneurs in appointing personnel with management and execution functions. Inadequate management is one of the main causes of companies becoming insolvent".

Decapitalization of companies - a cause of insolvency

One of the reasons why SMEs end up in Slovenia is their decapitalization through the withdrawal by associates or shareholders of sums of money, which, in many cases, are not even subject to taxation.

Radu Diaconu, lawyer, Managing Partner - Băncilă, Diaconu si Asociaţii, stated that usually such situations are found in companies with few associates, who are generally members of the same family, companies that represent over 90% of the economic agents in the economy Romanian. Radu Diaconu said: The respective entrepreneurs say that the company is very rich and they want part of the cash to reach them and they ask us what they can do. The law provides for restrictions, but there are practical solutions such as a service contract between the entrepreneur and the company, the distribution of dividends, the distribution of reserves, etc.. (...) I found in practice two ways that offer solutions to withdrawing money from the company . The first, in the case of joint-stock companies, is the acquisition of one's own shares followed by their cancellation, a matter often encountered in practice, with restrictions but also with advantages. Law 31/1990 establishes that an AGM or AGEA decision is needed, but it is not a problem for the associate who coordinates things, then the value must not be higher than 10% of the subscribed capital and the payment of the shares will be made only from the available profit or from the company's reserves. Here comes the following element: if the company decides to buy the shares in order to reduce the share capital, all the above restrictions are no longer applicable. Basically the company buys from the shareholder as many shares as it wants to buy at a price agreed between the two parties which can be higher than the share capital. The company is elected with its own shares, the shareholder with the money, after which the share capital is reduced, a reduction that can reach, for example, 80%. What can the creditor do? If caught in time, he can file an opposition within two months. In reality this does not really happen, the capital reduction is accounted for, a negative reserve is created in the balance sheet and the possibility arises that the company may end up in an insolvency situation. This is the version from SA. In SRL there is no option of acquiring the shares and canceling them, but law 31 allows the withdrawal of the respective partner with the consent of all the other partners, but the value received is higher, and the reduction of the share capital and the other effects from the SA follow."

Regarding the decapitalization of companies, Dan Paul, the president of the Association of Brokers, said: "It is interesting to determine whether the reduction of share capital through the restitution of share capital is zero-tax or not. For example, Fondul Proprietatea does this for the benefit of shareholders annually, sometimes biannually. It is a procedure by which the shareholders are given back a part of the capital, and the tax does not exist. The state is legally shunted by the dividend tax, a kind of fiscal optimization. The procedure is used by the guys on Wall Street, who legally avoid a tax on dividends and use this to their advantage. Fondul Proprietatea had an initial capital of 4 billion euros and is heading for a smooth landing through the permanent reduction of the share capital. American funds have a limited establishment policy of 7 or 10 years. Investors know from the beginning whether they make money or not during this period and try to optimize as much as possible".

How far does the liability of administrators extend in case of insolvency?

In this context, the manner in which the administrators of insolvent companies are held accountable for the decisions made was also discussed.

Lawyer Ciprian Păun, university lecturer at the Faculty of Economic Sciences and Business Management at Babeş-Bolyai University, Cluj-Napoca, said: "Due to the growing power of creditors, especially budgetary creditors, the limited liability of administrators or associates because all kinds of their unlimited liabilities were structured in the Fiscal Code and in the insolvency law. In the last period, we are witnessing an engagement of the liability of the managing partner or some partners considered to have contributed to a certain damage of the respective company. The practice of the courts is almost unanimous, in Transylvania, that when a fiscal non-conformity intervenes, joint and several liability can be engaged, and the administrator is considered the one who caused this state. We have a case where a decision of an administrator transferred to accounting to keep the accounting of delegations/secondments in a certain way. Later there was a tax penalty decision and a prosecution of the associate administrator who was forcibly executed, after which there was a tax amnesty decision from the legislator. What happens to what was forcibly executed? We are in a situation where the businessman did his job in a certain legal matrix and ended up losing his house".

His lordship showed that, for example, in the USA it was proposed to create a software in which the decision variables would be entered, and the software would tell objectively what the correct business decision is, and in this way no state institution will be able to state that, because of the administrator's decision, a complicated situation has been reached. Mr. Păun also exemplified the fact that in Germany, the supervisory board of large companies also includes representatives of banking institutions as stakeholders, a representative of suppliers, a representative of customers, a representative of employees, which ensures the representation of the entire ecosystem of business.

Ciprian Păun specified: "In this matter, the role of the shareholders is greatly reduced, it no longer has a strong representation, and the owner is represented by only 30% of the Supervisory Board, which means an expropriation of his property right. German jurisprudence considers that such a structure for any strategic decision, even if it causes damage or leads to insolvency, does not lead to the liability of administrators".

Also related to the liability of administrators, Dan Paul, the president of the Association of Brokers, brought up the issue of bonds by some insolvent companies. He also referred to the situation of the companies listed on the BVB on the Aero market - Vivre Deco, Elefant Online, Qualis Properties - which have issued bonds and are insolvent. For example, Vivre Deco issued two series of bonds of 10.5 million euros.

Dan Paul stated: "In the event of the initiation of an insolvency procedure, the shares are suspended from trading until the reorganization plan is approved, but the bonds can be traded after the announcement of entry into insolvency. The responsibility for the listing of such bonds when the company becomes insolvent belongs to all the parties involved according to law 24/2017. The risks for bondholders is that in the event of insolvency their value decreases, and in the event of bankruptcy they receive nothing. The solution could be to guarantee the bonds. Another solution would concern the issuance of these bonds and listings, a procedure in which the responsibility would no longer belong only to the general director of BVB, but to several directors or members of the Board of Directors of BVB".

Regarding the administrators, the lawyer Gheorghe Piperea showed that their function is a dangerous one both for the administrators and for the company, and if the administrators no longer assume risks, but transfer them as in the USA or Germany, the company may end up in loss . His Lordship brought it up there is also the small number of applications for preventive bankruptcy on the rolls of the courts in the country, approximately 330 applications, and it has shown that until now the most well-known bankruptcy procedures are those involving CFR Marfă and Blue Air.

Univ. Prof. dr. Gheorghe Piperea, partner of SCA Piperea&Asociatiţii stated: "There are two large preventive concordats on the role of the Bucharest courts. It is about CFR Marfă and Blue Air, which are dying, and CFR Marfă has an additional problem: the state aid found by the European Commission, of 550 million euros, which must be recovered one way or another. The law says that state aid is recovered even if it leads to the bankruptcy of the debtor. Under these conditions, the state is trying to transfer the activity of CFR Marfă to another company that must operate following the death of the original company".

Limits of extrajudicial restructuring

Iustin Armaşu, lawyer, Partner - Schoenherr and Associates, brought up the topic of extrajudicial restructuring of companies in financial difficulty. Mr. Armaşu said: When we talk about extrajudicial restructuring - out of court - we talk about confidentiality. In our country, there are few such successful procedures, due to the lack of confidentiality, but rather of trust. (...) The lesson learned in the last two years is not to wait for a wave of insolvencies, but we must be prepared at any moment both for safeguarding the companies that need to be saved and for short-circuiting those zombie companies in the business environment. Insolvency is what helps us to safeguard entities, but insolvency is not the only way of safeguarding; there are also alternatives, starting with extrajudicial reorganization procedures, never regulated, but which have worked in very few cases due to the lack of trust between the parties. (...) In the extrajudicial restructuring - out of court -, the most important concept is the trust between the parties, from which derives the willingness to compromise between all parties. It is very important that the debtor puts on the creditors' table all the information that can lead to the recovery of the activity".

His lordship specified that, for an effective extrajudicial restructuring, there is a need for quick intervention, sufficient liquidity, a viable business, plus cooperation and trust between financiers, debtors and the people involved in this process. Iustin Armaşu also said that the standstill (the restructuring agreement in the extrajudicial restructuring procedure) cannot be a real one, if it does not contain sanctions, but he showed that, according to the legislation in force, this agreement can be suspended, if the debtor chooses later to turn to the judicial restructuring frameworks, and the creditors of this agreement risk remaining captive in the settlement procedure from the extrajudicial procedure.

Companies' activity, monitored by state institutions

The representatives of the National Authority for Consumer Protection and the Competition Council stated during the conference that the state institutions monitor the activity of the companies so that it falls within the limits provided by the legislation in force.

Sebastian Hotca, the vice-president of ANPC stated: "ANPC's spectrum and competences are quite broad and we are trying to get the economic operators to sit at the table to try an amicable resolution of the disputes. As part of the controls, we aim to discourage incorrect, abusive and deceptive commercial practices, as well as to discourage economic operators who do not understand how to comply with the legislation in the field. We encouraged economic operators to have a dispute resolution department, so that they do not end up at the ANPC and retain their customers. The resolution of disputes within the company is characterized by the rapid resolution of customer requests. The checks we carried out at the banks were the most publicized. Following them, the banks were sanctioned for abusive commercial practices that were reported to us in over 5,000 complaints that we received at ANPC. The checks focused on incomplete information, because the consumer's right to information is fundamental. When we have correct and precise information, we can make an informed choice to proceed to trading".

Bogdan Chiriţoiu, the president of the Competition Council, added: "We have to see how the events in society and the economy, the challenges of the last period, can lead to the modification of the competition legislation. Our part of the world has had many shocks in the last 15 years. The first was the economic crisis of 2008-2009, but it did not change the way we think economically, nor the legislation, only economic policies. We had the Covid 19 crisis which was a major economic shock which was handled well but the market was flooded with money and the consequences are showing in the prices. Current inflation is the consequence of the amounts of money thrown into the market by governments to manage the economic crisis of 16 years ago and the Covid crisis. Now we have the war in Ukraine, which also puts society and the economy under pressure, to which we also add the green transition and the digital transition. All these cumulative things generate changes, which come on two levels. Thanks to digitization and things moving very fast, we are no longer satisfied with traditional competition tools. On digital, we are no longer satisfied with the mechanism that waited for the mistake, the negative impact in the market, but we regulate, we set ex-ante the rules for very large companies. Then we see a greater concern to support small companies over large ones. Now there are rules that extend the rule of protection that also occurs to large companies, but which are not very large, such as the European legislation of small companies in the food chain, which has also been transposed in our country. We introduced the concept of exploitation of the bargaining position into the legislation of unfair competition. These are the two big directions in which the economic competition legislation is completed".

The President of the Competition Council also said that he seeks a balance in the application of the law in order not to lead to an abuse by the institutions against the companies, and he expects that the first effects of the new trends in amending the normative acts will be quantified in the coming years.

Cotaţii Internaţionale

vezi aici mai multe cotaţii

Bursa Construcţiilor