The insolvency law

Student: Brinzea Paula Bianca

Group: 8821
Project supervisor: av. dr. ec. Alexis Daj

Contents
1. General....................................................................................................................... 2
2. Entities subject to insolvency procedure....................................................................3
2.1 Entities subject to general insolvency procedure..................................................3
2.2 Entities subject to simplified insolvency procedure...............................................3
3. Mandatory conditions for the commencement of the insolvency procedure.............3
4. Procedures.................................................................................................................. 4
4.1 Judicial reorganization........................................................................................... 4
4.2 Bankruptcy............................................................................................................ 5
5. Official bodies implementing the insolvency procedure.............................................5
5.1 The syndic judge................................................................................................... 5
5.2 The creditors assembly........................................................................................ 6
5.3 The special administrator...................................................................................... 6
5.4 The receiver.......................................................................................................... 7
5.5 The liquidator........................................................................................................ 7
6. The insolvency procedure........................................................................................... 8
7. Casese of insolvency.................................................................................................. 9
7.1. Flanco................................................................................................................... 9
7.1.1 Causes............................................................................................................ 9
7.1.2 The reorganization plan................................................................................ 10
7.2 Hidroelectrica...................................................................................................... 11
7.2.1 Causes.......................................................................................................... 11
7.2.2 The reorganization plan................................................................................ 13
8. References................................................................................................................ 14

1. General
When an individual or organization can no longer meet its financial obligations with its
lender or lenders as debts become due. Insolvency can lead to insolvency proceedings, in which
legal action will be taken against the insolvent entity, and assets may be liquidated to pay off
outstanding debts. Before an insolvent company or person gets involved in insolvency proceedings,
it will likely be involved in more informal arrangements with creditors, such as making alternative
payment arrangements. Insolvency can arise from poor cash management, a reduction in the
forecasted cash inflow or from an increase in cash expenses.
According to Law 85/2006 regarding the Insolvency Procedure, Insolvency is that state of
the debtors patrimony, characterized through the obvious incapacity to pay the demandable debts
with the available sums of money. (Art. 1, paragraph 2). Insolvency is often mistaken for
bankruptcy (which is a legal procedure for liquidating a business or property owned by an
individual, which cannot pay its debts out of its current assets), but in fact the insolvency procedure
is a safe net which allows the company to get back on track with due payments while better
structuring its business. It may eventually lead to bankruptcy, but only under certain conditions.
The difference between insolvancy and bankruptcy is essential, as they produce different
effects. The piece of legislation which defines the insolvency (Law85/2006) states that Insolvency
is that state of the debtors patrimony, characterized through the obvious incapacity to pay the
demandable debts with the available sums of money. (Art. 1, paragraph 2).
Currently, in Romania, the insolvency procedure is in line with modern standards, based on two
significant commercial principles typical for any free market economy, as follows:

the attempt to recover the company through reorganization;

the organization of bankruptcy proceedings in a manner enabling the creditors to recover
their receivables in as much as possible.

As of 2006, Romania has a new law that regulates the insolvency procedure, i.e., Law no. 85/2006
on insolvency procedure, which replaced the former Law no. 64/1995 on judicial reorganization and
bankruptcy procedure.

2. Entities subject to insolvency procedure

2.1 Entities subject to general insolvency procedure

Corporate entities
Cooperative companies
Cooperative organisations
Agricultural undertakings
Groups of economic interest
Any other private legal person that carries out economic activities

2.2 Entities subject to simplified insolvency procedure

1. Traders, natural persons, who act individually
2. Family associations
3. Debtors that comply with one of the following conditions:
they have no asset in their patrimony;
their articles of association or accounting documents cannot be found;
the director may not be found;
the headquarters no longer exists or no longer corresponds to the address in the
Trade Registry.
4. Debtors that did not timely submit with the court certain documents set forth by Law no.
85/2006.
5. Corporate entities dissolved prior to filling the claim for opening the insolvency procedure.
6. Debtors that have declared in the claim filed with the courts their intention to undergo
bankruptcy or those which are not entitled to undergo judicial reorganization procedure.

3. Mandatory conditions for the commencement of the

insolvency procedure
Law no. 85/2006 sets forth two mandatory conditions, which need to be cumulatively met in
order for the creditors to be able to commence the insolvency procedure against their debtor:
1. the creditor has a certain, liquid and outstanding receivable against the debtor for more than
90 days;
2. the receivable must exceed the amount of RON 45,000, or 6 national gross average
salaries/per employee, for receivables arisen out of labour relations.
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The debtor itself is compelled to submit a claim for the commencement of the insolvency
procedure within 30 days as of the date the state of insolvency has occurred. In the meaning of
Law no. 85/2006, insolvency refers to the insufficiency of the available funds for the payment
of certain, liquid and outstanding debts, as follows:
1. the state of insolvency is presumed as obvious when the debtor, after 90 days as of the
maturity date, failed to pay its debt towards the creditor; such presumption is relative
meaning that a proof to the contrary is admissible;
2. the state of insolvency is reputed to be imminent if it can be proved that the debtor will

not be able to pay its outstanding debts with the available liquidities on the maturity
date.

4. Procedures
1. the judicial reorganization procedure, aiming to rescue the debtor;
2. the bankruptcy procedure aimed at liquidating debtors assets and paying all outstanding
debts.
Likewise, Law 85/2006 sets forth another classification of the insolvency procedures as follows:
1. the general insolvency procedure applying to the debtors mentioned at point 3.1. above;
such entities shall undergo successively, the judicial reorganization procedure and the
bankruptcy procedure or, separately, on a case by case basis, only the judicial
reorganization procedure or bankruptcy procedure;
2. the simplified insolvency procedure applying to debtors mentioned at point 3.2. above; such
entities shall directly undergo the bankruptcy procedure.

4.1 Judicial reorganization

In case of judicial reorganization, after confirmation of the reorganization plan, the debtors
business will be managed by the special administrator under the supervision of a receiver (judicial
administrator) appointed by the syndic judge. The special administrator is appointed by the debtors
general meeting of shareholders. The syndic judge may decide to withdraw, entirely or partially, the
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special administrators powers of managing the debtors business. The debtor will also be subject to
a reorganization plan. If such reorganization plan is successful, the debtor will continue its activity.
In case the debtor fails to comply with the reorganization plan or such plan is not successful, the
syndic judge may approve the commencement of the bankruptcy proceedings.

4.2 Bankruptcy
The bankruptcy procedure shall be applied in the following cases:
1. the debtor expressed its intention to undergo the simplified procedure;
2. the debtor did not express its intention to reorganize its activity;
3. the debtors objection to the creditors request to commence the insolvency procedure was
rejected by the syndic judge;
4. none of the entitled persons proposed a reorganization plan or the proposed plan was not
accepted and confirmed;
5. the debtor expressed its intention to reorganize its activity, but did not propose a
reorganization plan or the proposed plan was not accepted and confirmed;
6. the payment obligations and other incumbent obligations are not accomplished according to
the conditions stressed in the reorganization plan or the activities carried out by the debtor
during the reorganization procedure trigger loses to its patrimony;
7. the receivers report proposing the commencement of the bankruptcy procedure was
approved.

5. Official bodies implementing the insolvency procedure

According to the law, official bodies implementing the insolvency procedure are the court,
the syndic judge, the creditors assembly, the special administrator, the receiver (judicial
administrator) and the liquidator.

5.1 The syndic judge

All proceedings regarding judicial reorganization and bankruptcy, except for second appeal
filed against the decisions of the syndic judge, are under the exclusive competence of the court
tribunal having jurisdiction over the central headquarters of the debtor. A syndic judge randomly
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appointed by the courts computer system conducts the proceedings. The main attributions of the
syndic judge are as follows:
1. to decide upon commencement of the insolvency procedure, both general as well as
simplified procedure;
2. to appoint or, as the case may be, replace the temporary receiver or liquidator and set
forth their attributions;
3. to confirm the receiver or the liquidator appointed by the creditors assembly;
4. to examine the legal actions filed by the receiver or liquidator;
5. to settle the potential objections filed by the creditors, by the debtor or of any other
persons;
6. to decide upon the closing of the insolvency procedure.
The rulings of the syndic judge are final and enforceable and may be challenged with a Court of
Appeal.

5.2 The creditors assembly

The creditors assembly is made up of the declared creditors of the debtor and is convened
and chaired by the receiver or liquidator (unless the law or the syndic judge requires otherwise).
Within their first meeting the creditors assembly may appoint a creditors committee formed of 3 or
5 creditors of the first 20 creditors chosen according to the amount of the debts. The committee thus
appointed will replace the committee comprising 3 to 7 creditors previously appointed by the syndic
judge. The main attributions of the creditors committee are as follows:
1. to analyse debtors financial status and to make proposals to the creditors assembly on
debtors activity;
2. to analyze the reports drafted by the receiver or liquidator and, as the case may be, to
challenge such reports;
3. to draft reports on the measures taken by the receiver or by the liquidator, to present said
reports to the creditors assembly and make new recommendations if the case;
4. to request the withdrawal of the debtors right to manage its business.

5.3 The special administrator

Following the initiation of the procedure, the shareholders general meeting of the debtor, legal
entity, will appoint, on its expense, a representative as a special administrator, in order to represent
the debtors interests as well as their interests, and to participate in the procedure on behalf of the
debtor. The main attributions of the special administrator are the following:
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1. to express the debtors intention to enter into the bankruptcy procedure or to reorganize its
activity;
2. to propose a reorganization plan;
3. to manage debtors activity under the supervision of the receiver after the confirmation of the
plan;
4. to participate to the inventory following the commencement of bankruptcy procedure;
5. to receive the final report and the closing balance and to participate in the meeting convened
for the settlement of the objection and approval of the final report.

5.4 The receiver

On the recommendation of the creditors committee, the creditors holding minimum 50% of
the value of the claims may decide the election of a receiver (individual or legal entity), authorized
practitioner in insolvency, and to fix his remuneration. This official receiver is in charge of fulfilling
the actions relating to the insolvency proceedings, until the bankruptcy is ordered. The receivers
main attributions are the following:
1. to elaborate the reorganization plan;
2. to manage debtors business activity;
3. to file actions for declaring void any fraudulent acts, concluded by the debtors and causing
damage to the creditors rights, as well as certain asset transfers and business operations
entered into by the debtor and the setting up of guarantees likely to prejudice the creditors
rights;
4. to maintain or terminate certain contracts concluded by the debtor;
5. to conclude transactions, waiver of debts and personal guarantors, relinquish security
interests upon the confirmation by the syndic judge.

5.5 The liquidator

In case the syndic judge decides upon the commencement of the bankruptcy procedure, a
liquidator shall be appointed. Such liquidator may also be the former receiver. The main attributions
of the liquidator are:
1. to manage debtors activity;
2. to file actions for declaring void any fraudulent acts, concluded by the debtors and causing
damage to the creditors rights, as well as certain asset transfers and business operations
entered into by the debtor and the setting up of guarantees likely to prejudice the creditors
rights;
3. to sell the assets of the debtor;

4. to conclude transactions, discharge debts, discharge the personal guarantors, relinquish

security interests, all upon confirmation of the syndic judge.
One of the most important attributions for both the liquidator and the receiver is filing
actions aimed to annul deceptive acts concluded by the debtor. Thus, no later than 16 months as of
the date of commencement of the insolvency procedure the court may be invested to declare void
the agreements the debtor has entered to the detriment of creditors, during the last 3 years prior to
the commencement of the procedure.

6. The insolvency procedure

The main purpose of the insolvancy procedure is to create a collectice procedure so that the
insolvent debtor can cover its liabilities. The procedure itself is sort of an intensive therapy for
companies. The most common situation is this: a certain debtor cannot pay its suppliers; the same
firm cannot recover money from some of its partners. When the revenue/expenses balance becomes
negative, the state of insolvency kicks in. It can be asked by the company itself or by third parties
which are interested in recovering as much as possible from their debt. The insolvent company can
go to court within 30 days from the moment the insolvency situation has started and asked for the
start of the insolvency procedures. From that moment on, bank debts and penalties are no longer
payed and forced executions are stopped, while the firm is trying to recover its own due money
from third parties or create liquidities through other means. Also, utility suppliers are required to
supply their services to the debtor during the entire insolvancy period. This includes the lenders if
the debtor has leased its work space, even it their lease contract says the cancellation of the contract
if one of the parties enters insolvency. But the insolvency can turn out to be a two edged sword. If
the company doesnt file the request in 30 days, and it ends up becoming bankrupt after one of its
creditors file for insolvency, the debtor may be found guilty for fraudulent insolvency. Also, if the
debtor requests for the insolvency dishonestly, hoping to escape payments, the firm bears the risk of
paying for the damage to those it was hoping to defraud.
What happens after a firm starts the insolvency procedure? The insolvency request is usually
solved within 5 days in court. If the insolvency is admitted and the insolvency procedure is opened,
a judicial administrator is appointed. Once a judiciary administrator is appointed, the former
manager is no longer in charge of the firm. Only the special administrator will be involved in the
process. . The key to recovery is the reorganization plan, which is created by the special
administrator, who is an insider of the business and knows how it works, together with the judiciary
administrator. A list of the debtors creditors is also created, and these creditors will form the
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creditors assembly. If the reorganization plan is not viable, or the creditors dont accept it, then the
company enters bankruptcy. If the plan is viable and accepted, the insolvency procedure can take
up to maximum 3 years, which offers enough time for the debtor to recover, while being managed
by an objective administrator. There is no minimum term for recovery. If, say, the firm manages to
pay its debts within 6 months, then it can ask the court to end the insolvency procedure. But if the
firm doesnt pay its debt within 3 years, it automatically becomes bankrupt.

7. Casese of insolvency
This law produces effects and protects the interest of both private and state companies. That
is why I chose as examples the companies Flanco and Hidroelectrica.

7.1. Flanco
There are some famous cases of insolvancy that actually helped the firms to get back on
track. One of these firms is Flanco, a Romanian retail store chain, selling consumer electronics with
over 70 stores. Flanco was part of Flamingo International, a Romanian company based in
Buchurest. Its main creditors were by ING, UniCredit Tiriac Bank and BRD - Groupe Socit
Gnrale.
In September 2010, 60% of the company was bought by the company Asesoft Web, owned
by Sebastian Ghita and Iulian Stanciu for 14 million dollars. The other 40% was owned by ING,
UniCredit Tiriac Bank and BRD - Groupe Socit Gnrale, banks that had credited the company
during its extention period and to which Flanco had failed to pay its debts.
7.1.1 Causes

Flanco filed for insolvency in December 2009, when the sales dropped with 50% from
November the same year and after the negociations for restructuring the 17.5 million euros debt to
ING failed. That same year, Flancos suppliers decided not to provide any more products to the
stores, which is why the companys officials blamed the drastic drop in sales on the lack of products
from the stands. The financial crisis that started in 2009, in Romania, was also a main factor for the
companys poor sales.
7.1.2 The reorganization plan

In September 2010, 60% of the company was bought by the company Asesoft Web, owned
by Sebastian Ghita and Iulian Stanciu for 14 million dollars. The other 40% was owned by ING,
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UniCredit Tiriac Bank and BRD - Groupe Socit Gnrale, banks that had credited the company
during its extention period and to which Flanco had failed to pay its debts.
Flanco started making profit again in 2010, although the retailer had debts of 62 million
euros. During 2010, Flanco assigned a Administrative Manager, Casa de Insolventa
Transilvania(The Transylvania Insolvency House) and came up with a reorganization plan,
presented at the Buchurest Court on July 28th and approved by the Creditors Assembly and the
syndic judge. This plan included that the creditors (mostly the banks) will regain 43 millions RON
from the 307 million debt (about 14%). As part of the reorganization, the personnel was reduced.
Flanco had 1500 employees in 2008, but by the end of 2009, only 700 people worked for the
company. In 2010 another 200 people were fired. The total surface occupied by the stores dropped
from 45000 square meters in 2009 to 31000 meters in 2010. Flanco had 74 stores in the beginning
of 2009. The following year, the company closed 8 stores, but by the end of 2010, 5 more stores
were opened.
In 2012, the company had over 42000 square meters occupied by stores and approximately
750 employees. Flancos officials say that, through the reorganization plan, the company managed
to reduce its monthly costs from 7 million RON to 4 million RON and the rent costs from 17 euros
per square meter in January 2009 to 10 euros per square meter in 2010. In 2011, the sales figure was
110 million euros, which reprezented a growth of 37.5% from the precedent year. Also, in 2011,
Asesoft Web raised its participation to Flanco by becoming the owner of 99.9% of the comapanys
shares. The other 0.1% is owned by Adrian Olteanu, the retailers Executive Director. In 2012, the
budget for business was with 30% larger in comparison with the precedent year. The sales figure for
that same year was 140 million euros. In 2011, the retailer closed 7 stores, because of the
geographical pozition or if the stores were considered to be too small, but 14 new stores were
opened in that same period of time. In 2012, the company has 77 stores and it is one of the biggest
electronics and IT sellers in Romania.
Part of the succes of Flancos reorganization was the early opening of the insolvency
procedure as well as the pertinent analysis and the correct establishment of the causes which led to
this situation. Also, the correct anticipation of the market evolution in which the company activates
was just as important.

7.2 Hidroelectrica

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Hidroelectrica is a state-owned company, its shares being held by the Ministry of Economy,
Commerce and Business Environment which has as main objective power generation and services
by using hydropower resources in Romania.
Hidroelectrica owns 272 power plants and pumping stations with a total installed capacity of 6.335
MW and an annual average power production of 19.772 GW meaning 22 - 33% of the total
national output of Romania. As of June 20th 2012, Hidroelectrica finds itself in the state of
insolvency.
7.2.1 Causes

The energy sales to the smart boys of the energy field, the defective management, bad
investments and the long drought reprezent the main reasons. Other causes were the costs of the
industrial water, the collective work contract and the aquizition of energy from third parties,
according to the judicial administrator of the company, the firm Euro Insol SPRL, specialised in
insolvency. The companys workers benefit of over 70 types of payments, bonuses and other
benefits, which cover about 59% of the total wage, this being an atypical situation.

The smart guys of the energy field

The company lost 1.1 billion RON during 2006-2012 from selling energy through direct
contracts, from which more than half were registred since 2009 and up until now. Between January
2009 and May 2012, Hidroelectrica lost about 2.7 billion RON.
Hidroelectrica, through the Ministry of Economy, is owned by the state at a rate of 80% and the rest
of the shares are owned by Fondul Proprietatea (The Propriety Fund), a joint stock company.
According to the estimations of The Propriety Funds officials, in the last two years Hidroelectrica
lost about 230 million euros because of the contracts it has with the smart guys. The so-called
smart guysof energy fields are, in fact, firms that buy electricity cheap and then sell it at a much
higher price. These firms buy from Hidroelectrica energy with prices between 103 RON si 135
RON/MWh and then they re-sell it with a medium price of 150RON/MWh. The loses that
Hidroelectrica registred these last few years are, in part, caused by this difference. In 2012, there
were nine firms that bought electrical energy from Hidroelectrica at preferential prices, according to
a report The Propriety Fund made public. This is their top, after the amount of energy bought:
1.

ALRO Slatina
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2.

Energy Holding

3.

Alpiq RomEnergie

4.

Mittal Steel Galai

5.

EFT Romnia

6.

Euro-Pec

7.

Luxten

8.

Elsid Titu

9.

Electrocarbon

Wages

This was another part of the problem. The owner of Euro Insol SPRL, Remus Borza,
declared that the minimum wage of a Hidroelectrica worker was 1.643 euros. He added that the
workers benefit of 70 types of allowences and bonuses which reprezent 300% of the actual salary.
These are a few examples: 30 million RON vacation bonus, 21 million RON for circulation to and
from work, including personal trips with the family, 13 million RON pay for business trips, 18
million RON fidelity bonus, 31 million RON seniority bonus. Other bonuses granted to the
personnel from the company are funeral allowences for parents in law, grandparents or nephews and
grandchildren, fee days payed for studies, over-hours payed with 200% of the initial salary or for
the continuous fidelity of an employee to the firm. According to the collective work contract, an
employee in reserve benefits of 48 compensating wages, while a person who retieres receives the
equivalent of 12 salaries. A driver from Hidroelectrica, in June 2012, had a salary of 9900 RON.
The budgeted expenses for the personnel in 2012 rised up to 461.5 million RON, with 20 millions
more than 2011.
Hidroelectrica was obligated, through different regulations, to finance with 926 million
RON a series of investments in which the energetic component played a secondary role. All of these
expenses contributed to the degradation of the economical situation in which the company found
itself. This kind of investments, according to the Euro Insol raport, include works regarding
peoples protection and the protection of agricultural land, the insurance of water supply for
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population, industry and irigation. This kind of investments were promoted before 1990 by the old
communist regim, but after the revolution they were tranfered to Hidroelectrica, although they are
not meant to maximize the companys profit, having entirely other goals.

7.2.2 The reorganization plan

On June 20th, 2012, the Bucharest Court accepted Hidroelectricas insolvency. The court
appointed a judicial administrator, the firm Euro Insol, that will handle the reorganization of the
biggest energy supplier in Romania. The Administration Council of the company, run at that time by
Remus Vulpescu, filed this demand after it was proven that the company didnt own enough
liquidities to pay for its current needs, like the water needed to produce energy. According to Remus
Borza, the owner of Euro Insol SPRL, the insolvency procedure shouldnt last for more than a year
and a half, even though, normally, this process last approximately three years.
The Ministry of Economy made the companys reorganization plan public the week after the
insolvancy was admitted in court. In the document, it was said that a new sales politic will be
promoted, destined to allow equitable and direct acces for the industrial consumers to the electric
energy, on the competition market, in conditions that will facilitate the enhancement of the
economical potential of other companies, which produce energy from other sources (nuclear, lignit,
pitcoal). Also, a politic of increasing the efficiency in producing electric energy is adopted, along
with a policy to bring the capacity of production in line with international standards, growing, at the
same time, the safty of production. According to the Ministery of Economy, a strategy of enhancing
the unmanaged hydroenergetic potential will function. Also, the company is trying to attract private
investors to its redevelopment projects.
According to the balance sheet done for 2011, the company owns current assets worth of
611.856 million RON, expenses in advance worth of 11.385 million RON and payable dues within a
period of one year of 2.639 billion RON, advance registred incomes of 23.762 RON, thus resulting
current debts of 2.016 billion RON, which cannot be covered with the current assets. The Ministry
of Economy announced that no measures that affect Hidroelectricas partnership with its financing
banks will be promoted, like the cancellation of some debts, restructuring of loans or other
modification of the lendig/reinbursment programs active at the time the reorganization plan was
filed.

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Hidroelectrica is still far from being out of insolvency, although the companys officials
claim that the aim of the procedure is reorganization, and not bankruptcy. Since Hidroelectrica is
Romanias biggest energy supplier, if it were to go bankrupt, Romania would be in darkness, as
Remus Borza recently declared in an interview. However, these declarations are mearly figures of
speech, as Hidroelectricas bankruptcy is practically impossible because nobody can imagine that
one of the creditors will own, after the bankruptcy, the Vidraru dam for example. This procedure
(the insolvency) was used by the Romanian state as an exellent legal instrument in order to reziliate
the contracts with the smart guys and also to be able to restructure both the personnel, as well as
their wages.

8. References
http://www.citr.ro
http://www.musat.ro/pdf/capitoleeng2012/05-Insolvency.pdf
http://economie.hotnews.ro/
http://adevarul.ro/economie/stiri-economice
http://www.romanialibera.ro
http://www.ziare.com/hidroelectrica/insolventa-stiri

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