Debt recovery is one of the most challenging parts of day-to-day business, especially in an environment where debtors aim to hinder enforcement by fraudulently diminishing their estate.
A long-term trial on the merits, which can last anywhere between two and three years, exposes creditors to the risk that their debtors will become insolvent in the meantime or that they will avoid enforcement by carefully conceived chains of asset transfers to third parties.
In these scenarios, creditors end up spending important amounts on favorable but inefficient court rulings due to the state of the debtor’s estate. Below are a few essential points regarding measures that can be taken in Romania to prevent debtors from purposefully diminishing their estate with the aim of escaping enforcement.
Opportunity and Costs Assessment
In many cases, a correct assessment of the opportunity and costs of such measures is key to: (i) correctly deciding whether it would make sense financially to litigate or not and (ii) drawing up the litigation strategy.
The advisability of pursuing these measures should therefore be addressed during the early assessment stage of the dispute.
If a request for interim and conservatory measures has a small chance of being granted, depending on the state of the debtor, the creditors may lack any reasonable assurance that their prospective endeavors shall lead to a successful enforcement of a court’s ruling on the merits. In that case, it may not be a wise decision to invest in litigation costs.
Scope of Interim and Conservatory Measures
Essentially, interim and conservatory measures are aimed at securing the recovery of receivables by either placing a ban on the transfer of the debtor’s assets to third parties or placing the assets upon which the creditors claim property-related rights in the hands of a receiver.
The creditors are thereby assured that their efforts and expenses incurred during the trial can be followed by a successful enforcement through the selling of the assets banned from transfer or placed in receivership.
As a general rule, the Romanian courts are keen on granting applications for these types of measures, with the aim of protecting to the fullest degree the creditors’ receivables.
To that same end, courts rule expediently on applications for interim and conservatory measures, on average not later than one month after application.
Types of Interim and Conservatory Measures
The procedural rules in force in Romania provide for three main types of such measures: (i) Conservatory seizure, (ii) Attachment, and (iii) Receivership.
Conservatory seizure consists of placing a transfer prohibition upon the assets owned by the debtors. An attachment is placed on the amounts of money and securities payable to debtors by third parties. As a result, these third parties are impeded from making their usual payments to the debtors, by redirecting the payments towards the enforcement officers.
The conservatory seizure and the attachment may be sought by creditors who demand payment of money from their debtors in court.
Sometimes, creditors claim ownership or other real rights over debtors’ assets. Receivership consists of placing these assets in the custody of a third person (a receiver), whose duty is to preserve them and, eventually, to hand them over to the winning party at the end of the litigation.
Depending on the facts of the case, creditors may have to provide cash collateral in order to obtain an interim conservatory measure. The cash collateral is aimed at securing the debtor for losses incurred due to the blocking of their assets on grounds of an ill-founded claim.
For instance, if the receivables claimed by the creditors are certain, overdue, and expressly specified in a written agreement, the court is to decide whether a collateral deposit is necessary. In this case the collateral may not exceed 20% of the claimant’s receivables.
If the claimant’s receivables are certain and overdue but not specified in a written agreement, the collateral deposit has a fixed mandatory value of 50% of the value of the receivables.
When receivership is applied for by creditors claiming ownership or other real rights over assets held by the debtors, the court may decide if cash collateral of up to 20% of the claims is necessary.
It is highly recommendable for creditors to assess the necessity of and where appropriate to apply for interim and conservatory measures from the outset of the trial.
The likelihood and potential amount of a collateral deposit in conjunction with the merits of the claim, as well as the financial status, reputation, and good faith of the debtor are key factors to be evaluated in this respect.
By Ioan Roman, Partner, and Viorel Bran, Senior Associate, Maravela | Asociatii
This article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.