1. Introduction. The grounds of the new Emergency Government Ordinance No. 88/2018
The Finance Ministry found new reasons for changing the legislation to the name of collection goal, but the Government enacted debatable means, as regards their capacity to reach the goal itself, as well as regards to the question if the chosen devices are feasible.
The last year brought legislative intervention upon the Insolvency Law No. 86/2014. The Finance Ministry initiated the Emergency Ordinance No. 88/2018, published in the Official Journal No. 840/October 2, 2018. Its grounding memorandum, signed by the Minister of Finance and by the Minister of Justice, held the following main circumstances that require the amendment of the insolvency law:
According to statistics:
– there are over 6000 companies under the observance period of the insolvency procedure, supporting 64000 employees, which require legislative and administrative measures to lead to their revival on the market;
– the arrears of the companies placed under the insolvency procedure grew with over 9% since 2015 (58 million RON) up to July 31, 2018 (63.2 million RON);
– meanwhile, the increase of the budgetary debts due to be paid after the opening of the insolvency procedure grew with 150% by comparison with the amount of the debts due to be paid at the moment of opening of the insolvency procedure.
Thus, the reasons of the amendment of the insolvency law relied on certain guide-lines, such as:
– the increase of the degree of efficiency in collection of the debts of the insolvent companies which still have the resources for revitalization;
– the conversion of the budgetary claims into shares of the debtor, to avoid bankruptcy level crossing, in certain cases of companies with real revival potential;
– ending of the abuse of rights committed by certain debtors which place themselves under the insolvency procedure for the purpose of avoiding budgetary payments.
2. The main changes of the insolvency law, that give way to the interference of the fiscal authorities into the insolvency procedures under a very confusing framework
2.1 The debt equity swap: conversion of the budgetary claims into shares of the debtor
It is a novelty, since up to now the law did not provide such possibility, but on the contrary, provided its interdiction.
With the opportunity of voting the reorganization plan, the fiscal creditor has the possibility to ask for the conversion of the budgetary claims into shares of the debtor, as a component part of the plan, based on multiple conditions that should provide confidence that the company holds the perspective to be valid for the economy vs. crossing to bankruptcy level.
To this end, the fiscal authorities may conclude an agreement with an independent appraisal specialist, in order to form their opinion on the vote they will express upon the reorganization plan.
What would follow if the plan shall be confirmed with such a component part? The law provides that the extinction of the fiscal claim is the moment when the debt equity swap is accomplished. Further on, the assigned public central institution will exercise the state’s right as a shareholder in that company.
The legal practice did not bring such cases into the public attention so far, given the short time from the passing of the EGO No. 88, the more so because up to now the law did not provide such possibility. In addition, from a methodological point of view, this measure is hard to be followed given the uncertainty regarding the moment when the debt equity swap is considered to be accomplished: the confirmation of the reorganization plan by the syndic or the final award of the syndic by which the reorganization plan is stated as successful and the company is reinserted in the market.
According to the law, the insolvency practitioner will manage the corporate changes of the shareholders structure at the Trade Registry/Shareholders Registry after the confirmation of the plan.
The traditional statistics show that only a few companies succeed in reorganization; most of the cases in which a reorganization plan is confirmed end into failure and the procedure moves over to the bankruptcy stage and the state will not be entitled to distribution, because it ceased to be a creditor by becoming a shareholder.
Anyway, the preliminary requirements imposed by the law to the state to decide on its vote on the reorganization plan (i.e. asking the opinion of an independent specialist) are binding for the state in what concerns the ceasing of the budgetary claim in favor of the capacity as shareholder.
2.2 Individual forced execution within the insolvency procedure
On one hand, after opening the insolvency procedure, the automatic stay rule is one of the basic guidelines of the procedure. It means that only the claims existing at the moment of the opening of the insolvency procedure will be put in the table of creditors and the purpose of the procedure is their recovery. No penalties of any kind can be added.
On the other hand, the unfolding of the insolvency procedure implies the accumulation of the so-called current claims (claims that come out of the agreements that continue to be performed, amounts paid in advance by the creditors to support the success of the reorganization a.s.o.).
The insolvency law provides that such claims are due to be paid immediately, with priority towards the ones mentioned in the table of creditors. But until GEO No. 88/2018, the procedure of recovering such claims was totally placed under the conjunction of all the principles of the insolvency procedure, among which the relevant one is the co-operation between creditors under the measures taken by the insolvency practitioner, placed under the legal decisions of the syndic.
Now, the law allows the fiscal authority to commence individual forced execution of the budgetary current claims older than 60 days, which are the debts resulted from the unfolding of the economic activity of the debtor during the observance period of the insolvency procedure (e.g. budgetary debts attached to the payment of the employees, income tax, VAT). Such debts are writs of execution according to the Fiscal Code, which explains why the fiscal authority are more suitable to take advantage of this amendment of the law; for all the other creditors holding current claims is usually difficult to quickly obtain a writ of execution.
This amendment is considered to be the utmost interference of the fiscal authorities into the insolvency procedure. At the same time, it is the most intricate problem of this legislative intervention because the individual intervention of an executional body is hard to handle considering the legal statute of the insolvency practitioner and the principles of the insolvency procedure.
3. Fiscal interests led also to criminal law changes, brought by the EGO No. 88/2018, regarding the offence of simple bankruptcy
The debtor facing overwhelming fiscal debts (more than 50% out of its total debts) can no longer apply for the opening of its insolvency procedure.
The financial and accountancy assessment imposed by the change of law in accordance with the relevant case law increases the state of confusion of the debtor in choosing between a lawful or an unlawful conduct as per the Article 240 of the Criminal Code (noncompliance with the term within which the insolvent debtor is compelled to ask its own insolvency procedure).
Anyway, the debtor’s delay of applying for the opening of its insolvency procedure is unavoidable, damages the creditors and – at the same time – seriously questions the matter of guiltiness of the debtor in terms of the offence of simple bankruptcy.
The burden of proof during a possible investigation is much more difficult for the prosecution and it pleads in the favor of the debtor, that might more easily invoke the in dubio pro reo defense and a possible conviction is less probable to pass the requirement of the beyond reasonable doubt rule.
The change of law increases the difficulties of evidence administration during the investigation of an offence of simple bankruptcy, all the more so because the legal practice revealed the necessity of a judicial expertise for the purpose of an accurate investigation of such type of offence.
The harsh need of budgetary collection determined the new amendments brought to the insolvency law. This is similar with the recent conduct of the Prosecution Bodies to intervene, as an influencing force, into the insolvency procedures, by multiple ways (e.g. conservative measures on assets, garnishment on the unique account of the insolvency procedure, preventive measure of suspension of the insolvency procedure) charging companies for alleged offences of tax evasion or money laundering, for the same purpose of budgetary collection. The overall impression is that the state authorities cooperate aggressively in the name of collection goal, but the means are debatable, in many ways. Firstly, it is questionable if the new means are really able to support the increase of collection goal; secondly, they are even contestable and to this end multidisciplinary legal assistance is needed in representing the creditors or the debtors within the insolvency procedures.