RESTRUCTURING vs INSOLVENCY

RESTRUCTURING vs INSOLVENCY
Romanian companies between the challenges of the market and survival solutions

The Romanian economy is confronted with major challenges stemming from internal as well as external factors: legislative instability, workforce shortage, inflation, lack of competitivity and growing gaps between companies due to uneven access to innovation and technological development resources. In this context, many Romanian companies experience a growing financial pressure forcing them to reassess their operating mode and are even faced with an extreme choice: restructuring or insolvency.

Restructuring can take the form of a restructuring agreement or a company voluntary arrangement. These solutions come with a chance for recovery for companies that are not insolvent but require a substantial financial and management effort, via the reorganization of debts and optimization of operations.

The reorganization, involving the company’s going into insolvency, is a more radical solution requiring significant compromise such as the loss of control over the company, damaging the reputation of the company and sometimes even bankruptcy. Nevertheless, unfortunately, it remains the most used option.

Here follows a comprehensive overview of the key elements of these procedures, as provided under the Law no. 85/2014 on insolvency and prevention of insolvency.

Restructuring as means to avoid insolvency

Under the Law no. 85/2014, companies in financial distress may resort to restructuring via two procedures: the restructuring agreement and company voluntary arrangements, referred to by the legislator as « insolvency preventing procedures ».

Whether via the restructuring agreement or the company voluntary arrangement, the company submits a restructuring plan for approval by creditors to avoid future insolvency. So, although the company may still be able to keep up with its current obligations, there is a risk of being unable to do so in the future without corrective actions.

As part of this procedure, the debtor appoints a restructuring administrator (administrator al restructurarii in Romanian) / official assignee (administrator concordatar in Romanian), chosen among approved practitioners in the field.

The restructuring administrator / official assignee shall:

• Check and ascertain the state of distress of the company or draw up the report on the state of distress of the company, as the case may be;
• Draw up or, as the case may be, assist the debtor in drawing up the plan;
• Assist the company or, as the case may be, negotiate the restructuring plan and act on settling any dispute between the debtor and the creditors, or between the creditors;
• Monitor the compliance of the debtor with its obligations under the restructuring plan.

The restructuring agreement/plan is voted on under certain conditions by the creditors. It presents the composition of the debtor's assets (assets, liabilities, and their value) as well as an analysis of its economic situation, including the causes of the difficulties encountered.

The plan lists the debts, distinguishing between those covered by the plan, with the degree of repayment planned, and those excluded from the plan, also providing the causes for exclusion. It also covers disputed claims, without this implying recognition of the disputed rights.

An explanatory statement, validated by the administrator / the official assignee, must demonstrate how the plan prevents insolvency and ensures the viability of the company.

The proposed restructuring measures may include the reorganization of activities, modification of assets or liabilities, valuation of assets, merger, demerger, or modification of share capital by share capital increase or converting debts into shares.

The plan must specify the arrangements for consulting employee representatives and the impact on employment (layoffs, suspension of contracts, reduction of working hours). It must also include, among others, a forecast budget, estimated financial flows, necessary financing, a simulation of distributions to affected creditors in the event of bankruptcy and a debt payment program based on financial flows and the duration of the plan.

There are several major differences between the two procedures:

• In the case of voluntary arrangements, the syndic judge plays a more important part, ruling on the request to open the procedure; whereas the restructuring agreement, after being voted by the creditors, is only confirmed by the judge in an administrative procedure, without summoning the parties.
• In the case of voluntary arrangements, from the date of opening the procedure, in principle, all foreclosures against the debtor are automatically stayed or cannot be started, irrespective of the nature of the debt, for a period of 4 months. During this stay, the limitation period for the right to request foreclosure is also suspended.
• Only the debtor can start the restructuring procedure while the procedure of voluntary arrangements can be filed by both the debtor and any other creditor, under certain conditions;
• After the opening of the procedure of voluntary arrangements, it is forbidden to terminate essential contracts with the debtor company or to refuse their performance due to non-payment of the amounts due, whereas in restructuring agreements there is no such limitation; also, in voluntary agreements, as long as foreclosures are stayed, interests, late payment penalties and any other costs related to the covered debts are automatically suspended, until the date of approval of the plan.
• The law does not provide for a maximum duration for the restructuring agreement but imposes an obligation to supervise the implementation of the agreement by the administrator for a period of 3 years. On the other hand, in the case of voluntary arrangements, the maximum duration for the implementation of the measures provided for in the restructuring plan is 48 months since approval by enforceable decision, with a possibility of extension of 12 months. During the first year, it is mandatory to pay at least 10% of the value of the debts covered by the voluntary arrangement.

Therefore, unlike voluntary arrangements, the restructuring procedure is simpler, more flexible and less monitored and controlled by the restructuring administrator and the syndic judge. However, voluntary arrangements have their advantages, even if temporarily, sometimes essential to the survival of the company (for example, the temporary suspension of foreclosure from the opening of the procedure).

Insolvency is prefered to restructuring

According to statistics, in 2023, 6,650 companies have filed for insolvency (the main causes being liquidity shortages or the decapitalization of the company by shareholders through the repeated withdrawal of funds), while 90 have opted for restructuring.

Most of these companies were active in the field of trade, constructions and manufacturing. Insolvency is a legal procedure intended for companies unable to pay outstanding debts.

Regulated under the Law no. 85/2014, it can be opened at the request of the company or of the creditors. Once the procedure is opened, a judicial administrator (an insolvency practitioner, natural or legal person) is appointed by the meeting of creditors to supervise either the reorganization of the company, based on a plan approved by the creditors and the court, or the liquidation of the company's assets with a view to bankruptcy.

During this process, creditors' actions are suspended, providing the company with temporary protection.

This procedure benefits companies in serious financial difficulty, providing them with legal protection against creditor actions and an opportunity to negotiate a reduction in debts. Additionally, if judicial reorganization is not viable, insolvency allows an orderly liquidation of assets, thereby maximizing recovery by creditors.

However, there are also risks that must be known. The main risk is the loss of control over the company to the judicial administrator and the meeting of creditors who make the decisions.

Furthermore, being in insolvency causes stigmatization which can affect relationships with partners and employees. If the reorganization fails, the company may be liquidated, resulting in total loss of assets and cessation of business.

The conditions for filing for insolvency

The procedure of insolvency can be opened if the debtor's debts exceed the threshold of 50,000 lei. If requested by employees, the threshold for opening the procedure is 6 gross average salaries per employee. The debtor in a state of insolvency must submit an application to the court in maximum 30 days after onset of the state of insolvency. The procedure can also be opened at the request of a creditor.

a. Notification of creditors

The decision for opening of the procedure must be published in the Bulletin of Insolvency, such publicity accounting for means of notification of all interested parties (creditors, debtors, third parties) regarding the state of insolvency. The judicial administrator (or the judicial liquidator) individually notifies known creditors of the opening of the procedure of insolvency, indicating the deadline for the registration of the claims, the date of the first meeting of creditors and other relevant details.

b. The reorganization plan

Drafted by the judicial administrator¹, the plan must propose concrete measures for the financial recovery of the company, such as debt restructuring, sale of non-essential assets, renegotiation of contracts or even reduction of staff (e.g. collective layoffs, job cuts etc.).

The plan must be approved by the meeting of creditors. An important part preceding the drafting of this plan is the correct assessment and inventory of the company's debts. Excepting the employees, whose claims will be recorded by the judicial administrator in accordance with the accounting books, all other creditors whose claims are prior to the date of opening of the procedure must file an application for admission of claims within the time limit set by under the decision to initiate the procedure.

Advantages and challenges of the reorganization procedure Reorganization comes with many advantages.

The first and most obvious is that it allows the company in difficulty to pursue its activity under the protection of the court. The companies thus benefit from a period of calmness, being protected against foreclosure. Another important advantage is the flexibility of the reorganization plan. The company can propose specific measures tailored to particular needs, whether this involves refinancing debts, renegotiating contracts with suppliers, or reducing operational costs. Additionally, the reorganization plan may include bringing in new investors, selling unprofitable assets, or even changing the management structure to improve the management of the company.

Although the reorganization offers significant benefits, it is not without challenges. One of the biggest challenges regards the resources needed to implement an effective reorganization plan. This includes not only financial resources, but also time, managerial and legal experience, and the ability to manage relationships with creditors and employees. The reorganization process can be complex and lengthy, requiring close coordination between the company, the judicial administrator, the creditors and the court. The impact on employees is another significant challenge. Staff reductions or changes in organizational structure can lead to lower morale and productivity, which can harm recovery efforts. Additionally, the company's credibility on the market may be affected, and relationships with business partners may suffer, which may further complicate the reorganization process.

Once the decision to open the procedure is final, all acts and correspondence issued by the debtor, the judicial administrator or the judicial liquidator must visibly mention "în insolvență", "in insolvency", "en procedure collective" in Romanian, English and French.

Factors that influence the choice

The insolvency prevention procedures apply to the debtor before entering into insolvency in order to avoid it, while the reorganization procedure applies in the cases when the insolvency procedure is already opened.

These procedures mainly involve negotiations with creditors, possible temporary stays of foreclosure, statutes of limitation, and interest accumulation, all without losing control over the company.

Under reorganization, a company already in insolvency seeks to survive by adopting, in a controlled and regulated environment, measures to protect its assets and maximize their value, reduce debts, protect employees' jobs, among others.

However, if the reorganization plan fails, there is a risk of the company going bankrupt. These procedures aim to give a company in financial distress a chance of survival and to guarantee payment of creditors as much as possible. In general, despite its risks, most companies prefer the reorganization procedure for benefitting of the foreclosures being stayed. However, this does not automatically imply the safeguarding of the company.

Note

1. The judicial administrator may appoint other specialists, such as lawyers, chartered accountants, or other experts to support him in his mission.