Entrepreneurs across industries plan their businesses by often assuming that similar previous experience can be a helpful tool in more or less predicting the regular course of their activity or of a project. They take into consideration possible downfalls, including the steps to be taken if something goes wrong. They may already know and take as a regular risk the fact that, unavoidably, one or another contractual partner may default on a payment, perform work late or improperly, or deliver poor quality materials, and that eventually claims could arise. Their business must be prepared to deal with those claims and have a solid risk management procedure. Costs and time have to be budgeted, as these valuable resources will be drained by unavoidable disputes in court or other legal proceedings.

However, over past years, many plans have gone off the rails with two phenomena on the rise in Romania. Many businesses have not been prepared to witness how the insolvency of a debtor or a criminal proceeding can blow out a collection procedure or transform a dispute into a time- and cost-consuming saga, especially if not appropriately handled.

Some risks related to these scenarios are predictable and must be given due regard in any running project.

Under Romanian law, the rule is that the insolvency of a debtor suspends all recovery actions. All creditors are called to pursue their claims collectively. Businesses must consider that their claim will be among the last ones in the queue waiting for distribution if they cannot avail themselves of securities, and especially if the insolvent debtor has bank loans and mortgages, debts to tax authorities, and owes salaries to its employees.

Unlike other jurisdictions, the Romanian law holds all the creditors and their claims in one single proceeding, which is administered by an insolvency judge (called the syndic judge). No parallel recovery proceeding is allowed, save for very limited exceptions provided by the law. But usually no regular claim may escape the collective process administered to the insolvent debtor.

Consequently, the unwelcome surprise is that a creditor may end up in a cumbersome collective recovery process with completely different rules than regular contract-based litigation or debt recovery. Another legal strategy is required, time frames are extended, and budgets reconsidered. Bottom line: an average of two to three years of having allowed for regular settlement of one claim or another becomes unfeasible.

On a different note—but sometimes even in parallel with insolvency proceedings—the debtor may be involved in criminal investigations in relation to its contractual dealings. Under Romanian law, criminal proceedings hold back civil proceedings.

If a criminal investigation leads to prosecution, civil courts may suspend the regular litigation, recovery, or even insolvency proceedings in order to wait for the outcome of the criminal trial. This may again cause a change of plans for a regular creditor, as it may wish to consider whether it is entitled to pursue the pending civil claims within the criminal proceedings. Some creditors may resolve their civil disputes in criminal courts within the boundaries of the criminal trial, being civil parties in such trial. Others will have to remain simple spectators and wait for the end of the trial in order to resume the debt collection procedures and perhaps even see how the debtor’s assets are wiped out in the criminal proceedings through enforcement measures or sanctions, such as the confiscation of property.

“Under Romanian law, the rule is that the insolvency of a debtor suspends all recovery actions.”

Furthermore, criminal proceedings may have an adverse impact on the debtor’s insolvency proceedings and compromise the success of its redress, by attachment of key assets ordered by the prosecutors. If the debtor’s capacity to conduct business is paralyzed in this way, the insolvency proceedings will most certainly be extended, with time frames difficult to predict, thus even forcing the debtor’s bankruptcy.

Altogether, with the latest trends, businesses have to be aware of the specific risks and rules that come into play with a contractual partner that faces difficulties of financial nature or becomes involved in criminal proceedings. They must act diligently toward securing their best interests while at the same time aligning their actions with the mandatory legal requirements, from the very early stages of a difference, irrespective of the type of dispute resolution forum to which they plan to refer, be it litigation or arbitration. In numerous cases, reacting too late, engaging in lengthy negotiation processes, or securing uncertain settlements when the debtor is on the verge of insolvency can jeopardize the chances to eventually recover the debt and even involve other legal risks.

Therefore, realistic impact scenarios and business continuity plans must be developed and must be adjusted to the concrete legal rules, as relevant for the circumstances with a view to maximize chances of a positive outcome in potential collective recovery proceedings, but at the same time ensuring compliance with the legal duties.