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Moldova: Navigating the Insolvency Legal Landscape

Moldova: Navigating the Insolvency Legal Landscape

Issue 10.12
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Moldova faces significant challenges in terms of insolvency in the future. In exploring the factors influencing this area of law, we examine the current state of affairs, anticipate trends, and look at how legal practitioners are gearing up to meet the expected rise in demand. Let’s break down the key points.

Weathering Economic Shift

Despite concerns about a surge in insolvency cases due to the lasting effects of COVID-19, Moldova’s economy has proven resilient against insolvencies. Official data from September 2023 shows a slight increase in insolvency proceedings for the previous period starting in January compared to the 2022  period. However, the prolonged war in Ukraine might lead to a rise in insolvency filings. As Ukraine is one of Moldova’s strategic business partners, the economic aftermath of the conflict, coupled with the state of emergency declared in February 2022 (extended to December 2023), has exacerbated existing financial challenges. Despite the inflation rate surging to 30.24% in December 2022, National Bank’s intervention during 2023 reversed the trend, leading to a deflation of 5.45%.   Unfortunately, this has not translated into reduced borrowing costs or improved credit access for businesses. Therefore, businesses are struggling to secure favorable credit terms or renew existing ones.

Moldova’s vital agricultural sector faces challenges from two consecutive years of drought and persistent low grain prices. Farmers have been proactively submitting various requests to the government through their associations. Their appeals include measures to reduce the tax burden, prevent the import of low-priced grain from Ukraine, and secure state subsidies. The government is actively seeking viable solutions to meet these demands and address the agricultural community’s pressing issues.

Building Capacities for Anticipated Demand

Moldovan lawyers are gearing up for a rise in financially troubled companies. They offer services to identify and address insolvency risks, primarily focusing on salvaging struggling companies through reorganization. The aim is to prevent insolvency rather than address it once it becomes inevitable. The economic situation in the region is challenging, with problems like logistical issues, higher interest rates, and less access to credit. Banks too are acting to help struggling businesses. They’re adjusting loans, selling claims, and dealing with distressed assets to avoid long-term insolvency procedures. This teamwork between lawyers and banks is all about creating a solid system. The goal is to spot insolvency issues and actively find ways to solve them.

Upcoming Legislative Changes to Business Concerns

Acknowledging the challenges faced by Moldova’s business community, the Ministry of Economy has announced plans for legislative changes related to business insolvency in 2022. These proposed changes address issues such as the need for a minimum threshold for creditors, delays in the insolvency process, evaluation of pledged assets, and non-compliance with restructuring plans. While the contemplated legislative changes have yet to materialize, a notable update in 2023 introduced a technical enhancement to proceedings. Now, the court must transmit data directly from the judgments to open insolvency proceedings to the public registers of state records, improving efficiency in the legal processes. A more efficient legal framework for insolvency remains a priority.

Critical Legislative Needs for the Future

Looking ahead, legal experts emphasize the urgent need for a comprehensive revision of Moldova’s Law No. 149 on Insolvency dated June 29, 2012. To tackle ongoing challenges, the government is urged to adopt measures tailored to the viability of businesses. Viable companies could benefit from loan moratoria and payment flexibility, while non-viable ones may require faster liquidation rules and more straightforward insolvency procedures to reduce time and costs. Additionally, it’s crucial to establish explicit provisions regarding over-indebtedness, including the legal presumption of late payments persisting for more than 60 days. This should lead to the initiation of the insolvency procedure by specific creditors who must substantiate their claims. Clear guidelines are crucial for imposing financial sanctions to counter bad-faith misuse of insolvency filing rights. In practice, certain creditors exploit this institution to hinder the debtor’s activity by applying interim measures during the examination stage and compelling transactions for their benefit. This abusive practice may trigger intentional insolvency in today’s economic conditions.

As Moldova grapples with the complex dynamics of insolvency in 2023, legal practitioners are pivotal in guiding businesses through these challenging times. Legislative reforms, collaborative efforts between policymakers and the business community, and proactive consultancy services lay the foundation for a resilient legal framework adaptable to evolving business needs amidst economic uncertainties. Government interventions, safeguard measures, and community initiatives are essential for providing a safety net for businesses facing financial strain, ensuring the long-term sustainability of Moldova’s business backbone.

By Adrian Sorocean, Head of Restructuring, Insolvency, and Bankruptcy, ACI Partners

This article was originally published in Issue 10.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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