Lawyers and insolvency specialists polled by MEDIAFAX are in agreement that the bill does not protect Romania’s economy, but rather discriminates against the private sector and raises issues of constitutionality and violations of European Court of Human Rights regulations, as well as the Treaty on the European Union.
The measure would also encourage the accrual of arrears by state-owned companies, just as this issue is at the center of discussions with the International Monetary Fund and European Commission.
Moreover, even lawyers that refrained from comment generally argued that such a plan would not be endorsed by the legislature, calling the proposal “a scam too big even for Romania’s Parliament” or “a plan unworthy of comment.”
The Government intends to bar the state’s creditors from launching foreclosure proceedings or placing distraint on shares in national companies received as guarantees, and will also refrain from guaranteeing loans with these shares, for five years. The restriction will be implemented through a bill drafted by the Finance Ministry.
Gabriel Zbarcea, managing partner with Tuca Zbarcea & Asociatii, said the bill breaches several constitutional principles, including equality before the law, free access to justice and non-retroactive application of legislation. Zbarcea argues that telling the creditors that their guarantees no longer have any actual value is not only illegal, but also immoral, leaving them to wait around for the debtors, who cannot be compelled to pay their debts through legal means.
“The justification for this bill – ‘the fragility of Romania’s economy, affected by the economic crisis’ – is childish, incomplete and meant to confuse. Romania’s economy is not made up only of state-owned enterprises, but firstly of private companies, traders, freelancers, citizens, who are in various commercial relations every day and have also been deeply affected by the crisis. What about them? What about their loans, their guarantees?” Zbarcea said.
According to Ion Dragne, managing partner with Dragne & Asociatii, the bill clearly affected the creditors’ rights to cash their credit against the state, since state shares would be exempt from legal seizure.
“This constraint on the categories of state assets that may be under seizure is only the last in a series of decisions through which the state has attempted to postpone proceedings against public institutions, launched on the basis of enforceable titles, as it is well-known that such proceedings cannot be launched before an interval of six months after the debtor institution receives the payment order and, anyway, it can ask the courts for a grace period or to be allowed to pay the debt in installments, options which are unavailable for other forms of foreclosure,” Dragne explained.
He believes that after the state’s right to use its shares in banks and companies as sureties, financial institutions might become reluctant to provide state-guaranteed loans, deprived as they are of an important and easy to recover surety.
Cristian Bacanu, lawyer with MDM Legal, provided a more technical interpretation: as set down in the draft, the measure violates proportionality, since it stands to affect creditors who gave financing precisely because they expected to be repaid by foreclosing the sureties, in case voluntary repayment was impossible or refused.
Bacanu also argued that the law appears to apply retroactively: “It is one thing to give guarantees that may not be executed for at least five years, and another to apply this rule to guarantees given in the past.”
“There is also the issue of cost, since, most likely, the costs of certain loans without guarantees are higher than those of loans with concrete guarantees. In theory, the creditor takes lower risk if it receives a surety or can foreclose assets. This could result in complaints before the Constitutional Court and European Court of Human Rights (ECHR), as well as national courts, which would be obliged to directly apply the Convention. The ECHR says a country’s judge is the first defender of the European Convention on Human Rights. Romanian legislation has suspended the payment of salary rights obtained by certain magistrates or auxiliary court personnel,” he said.
He added that judicial practice seems to affirm the interpretation whereby the suspension of salary rights is not a proportional measures, as judicial executors are even now implementing court rulings which have been suspended by law, since the courts reject those laws without waiting for the position of the Constitutional Court or ECHR.
Nevertheless, Bacanu believes the Finance Ministry’s bill could be constitutional if the state created a guarantee mechanism that assured the creditor he would be repaid even if the surety cannot be foreclosed.
Marius Vicentiu Coltuc, of the eponymous law firm, says the measure violates article 110 of the Treaty on the Functioning of the European Union and article 148 of Romania’s Constitution, and will create significant economic blockage.
According to article 110 of the Treaty, “no Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products. Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products.”
This means, Coltuc explained, that the EU limits the freedom of member states to restrict the free movement of goods, by prohibiting discriminatory and protectionist taxes.
“In other words, article 110 forbids fiscal discrimination between imported and domestic products. Under article 148 of the Constitution, following Romania’s accession to the EU, the provisions of the EU’s treaties as well as the other community regulations have priority over contradictory provisions set in domestic laws,” he added.
Coltuc also said that the bill breaches the principle of proportionality and will result in banks refusing to lend to state-owned companies.
Andrei Brasoveanu, of law firm Ciurtin, Brasoveanu & Partners, believes the Finance Ministry’s concern for the security of the state’s stakes in various companies is natural and “part of the job description,” but that legally, its grounds are completely wrong.
“The Government’s proposal to protect the state’s stock from seizures deprives its guarantees of all legal effects. If the state does not respect its payment obligations – and, as we know from VAT refund procedures, this is effectively its tendency – the creditors will be unable to execute their guarantees over the state’s stock (…) and are left only with the option of suing the state to recover the respective debts, which will maybe happen after the completion of the case, meaning in about three years at the earliest,” Brasoveanu explained.
Therefore, by directly and brutally using its legislative powers, the state intends to create preferential treatment for its own property, the lawyer added.
Vasile Godinca-Herlea, coordinating associate with insolvency house Casa de Insolvență Transilvania (CITR), said that, although the current economic context has required taking special protection measures, suspending foreclosures for five years is likely to distort competition and destabilize the security and dynamics of the civil circuit.
“Firstly, it is an unreasonably long interval, which, let’s say, subliminally, lets us in on the Government’s estimates of the length of the crisis, at least five years. (…) Indirectly, the measure encourages arrears. It protects state-owned companies, which have always enjoyed preferential treatment, to the disadvantage of the private sector,” he said.
What’s more, Vasile Godinca-Herlea argued, is that this measure hinders the privatization process itself, as one cannot block the foreclosure of these shares and, concurrently, sell them in accordance with privatization legislation.
The Government argues this temporary restriction is justified on account of “the fragility of Romania’s economy,” affected by the economic crisis, which requires maintaining the stability of companies in strategic industries and the state budget’s predictability, in order to pay for salaries, medical and educational services.
The state’s stock in national companies may be used to guarantee loans. If the loan is not repaid, creditors can use the civil procedure code in court to order a seizure or distraint on this stock.
The state owns majority stakes or the entire stock of 937 companies, whose 2010 revenue accounted for 16% of the gross domestic product. On top of this, dividends from the state’s stakes made up 0.34% of the GDP in 2010. This group includes CEC Bank, with a share capital of over 1 billion lei (EUR230 million) and a market share of 6.37%, and EximBank, with a share capital of RON800 million and a market share of 1.18%.
“These companies operate in strategic industries – energy, air, rail and sea transport, banking – significantly influencing the operation of companies in other fields. Their liquidity, solvability and operability impact the stability of the economy as a whole. Because they provide services of public interest, these companies are also important from a social perspective,” says the draft.