Romania – the challenge to get turnaround right
By Valentin Voinescu & Cătălina Dan of Nestor Nestor Diculescu Kingston Petersen
Background
Turnaround and restructuring have always been difficult in Romania. Companies rarely turn to out of court proceedings, mostly due to lack of experience and institutional encouragement, while in court proceedings (i.e. the judicial reorganization) are formal and lengthy with little to no success.
Past crisis have also proven that market disruptions in Romania are usually triggering a significant increase in the number of corporate insolvencies and, unfortunately, more often than not, companies end in bankruptcy.
Opportunity for a restructuring reform
European Union member states are bound to adopt and publish, by July 17 2021, laws and regulations implementing into national law the provisions of the Directive (EU) 2019/1023 on restructuring and insolvency (the „Directive”).
As the deadline approaches, certain national legislators and policymakers have already passed the relevant legislation which either improves the already existing restructuring framework or opens a whole new path to faster and more effective restructuring proceedings. For other states, however, in lack of a comprehensive restructuring foundation, complying with the provisions of the Directive entails a reform of the entire insolvency/restructuring system. This is also the case for Romania which, at the moment, lacks a diverse toolkit that could enable a distressed debtor to swiftly restructure their business with a view to preventing an insolvency scenario.
Given the current status of the restructuring and pre-insolvency legislation in Romania, the implementation of the Directive is quite a challenge for the Romanian legislator to tackle. Setting up a restructuring framework that is fully compliant with the Directive will require the Romanian policymakers to pass not only amendments to the already existing insolvency law, but rather a whole new legislative package.
Current status of implementation
The Romanian Ministry of Justice has partnered with the European Commission in an endeavour to crystallise a well-tailored legislation for Romanian distressed debtors that also takes advantage of the Directive’s proposed solutions. As such, the Early Warning Tools and Preventive Restructuring frameworks project (the „Project”) has been established. The Project is funded by the European Union through the Technical Support Instrument (TSI) programme which supports EU member states to design and implement reforms by providing technical support. The Project brings together the representatives of the Ministry of Justice, the European Commission, as well as a group of experts contracted by the European Commission, namely the consortium consisting of AARC, CITRL SPRL and Business Hub Central Denmark.
The first meeting within the Project took place on July 7th 2020 and during the course of 2020, the consortium has launched consultations with several stakeholders in order to have an overview of the problems and difficulties both distressed debtors and their creditors face as a result of the current pre-insolvency framework.
A draft law which aims to amend the existing insolvency law (i.e. Law no. 85/2014 on insolvency prevention procedures and insolvency proceedings) has been made available for consultation with the relevant stakeholders in February 2021. The draft law has been subject to a first debate on February 26th 2021 and is intended to be launched for public consultation in March 2021.
Turnaround Management Association Romania (TMA) has been deeply involved in the activity of the consortium and has provided a valuable contribution both during the preliminary consultations and during the discussions on the draft law.
What is next?
There are however certain key aspects prescribed by the Directive which seem to have been overlooked, at least at this stage of the consultations, by the draft law. These need to be further addressed in order to provide for a truly modernized and enriched reform of the Romanian restructuring proceedings. Therefore, the laws and regulations that will be passed in order to comply with the Directive need to also focus on:
(a) the implementation of early warning signs which would help to timely address a crisis - it is likely that they will not be implemented during the course of this year;
(b) introducing a new regulated profession, namely the “restructuring practitioner”; and
(c) a proper definition of a debtor that is faced with difficulties so as to include both financial and non-financial issues.
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