The Spring of 2020 was about to blossom when the world got trapped in a global shutdown as a result of the COVID-19 pandemic. The private sector tried to adapt by activating continuity plans. Working from home and interacting online with colleagues and customers has become the new paradigm for service businesses. In addition to a wide range of social distancing restrictions designed to contain the virus (including closing down or significantly limiting public access to many commercial, government, and leisure facilities), Romanian authorities have instituted various specific temporary relief measures, such as unemployment benefits; moratoria on consumer and corporate debt, business rent, and utilities expenses; state aid schemes representing loan and guarantee facilities for small and medium-size enterprises (SMEs); guarantees for mortgage loans; filing deferral for tax returns and rescheduling of income and property tax; and waivers of mandatory insolvency filing and extension of certain stages in pending insolvency cases.
While a gradual return to the “normal” business routine is expected to bring about an increase in production, trade, travel, and consumption, the pandemic-generated disruption of the global supply chains could still significantly affect the operation and cash flow of many business players. Liquidity shortages may prompt foreclosures and insolvency cascades across various business sectors, with systemic insolvency risks starting to loom. Are private and institutional stakeholders prepared to brace for this scenario? What are their turnaround options? The court and enforcement systems are not designed to function under the pressure of hundreds and thousands of simultaneous foreclosures or corporate insolvency filings. Court dockets are already clogged with extremely complex insolvency cases featuring collective creditor participation and negotiations, intricate disclosure and reporting duties, court supervision, and many checking points. The legal process still demands physical attendance, and social distancing rules applicable in courts are already expected to generate extended case calendars. An avalanche of extra filings would increase the time span of insolvency cases even further. As preserving value as a going concern is essential, debtors entering insolvency face rather gloomy prospects – particularly SMEs, for which insolvency financing is less available and considerably more expensive. Furthermore, even pre-insolvency alternatives require court supervision and approval under the current law.
Against this background, out-of-court restructurings seem a flexible and accessible tool for debt resolution and preserving going concerns. In the absence of a court-driven process, debtors and their major creditors (lenders, suppliers, and tax collection agencies) may work out restructuring arrangements based on their own timelines and under the protection of confidentiality. Although restructuring negotiations are case-specific, it is worth noting that in 2010 Romanian authorities endorsed two sets of non-binding principles and attendant guidelines for voluntary out-of-court restructurings regarding mortgage loans and corporate debt. Even so, their existence is hardly known in practice. They are currently available in Romanian on the National Bank of Romania’s webpage. Given the current context, Romanian authorities and lender associations may want to advertise the availability of such aiding tools more vigorously, with a view to creating a predictable, orderly, and reliable practice.
Successful out-of-court debt restructurings often require additional funding and other inducements, and special situation funds may be better placed for investing in distressed assets, including by divesting loan portfolios from banks. In this context, Romanian authorities may want to reconsider the limited tax deductibility of losses generated by debt trading that was instituted in early 2018, and also the current tax treatment of corporate debt forgiveness as taxable income, which are viewed as significant disincentives. As a mid- and long-term goal, viable court restructurings could be achieved by a structural reform of insolvency law, which should aim at creating specific, fast-track court reorganization proceedings for small and medium businesses. The World Bank and UNCITRAL’s Working Group V: Insolvency Law have already produced proposals and guidelines for implementing this objective.
In addition, Romanian authorities may want to consider a national modular business continuity plan for pandemics and other material disrupting contingencies. Lessons learnt from the COVID-19 experience could be put to good use in the prevention or limitation of future economic losses generated by similar events.
By Ioan Chiper, Head of Finance, Projects and Restructuring, DLA Piper, Romania