Is Your Company Heading for Insolvency? Warning Signs and Your Options

What insolvency means in legal terms

Under Romanian Law no. 85/2014 on insolvency prevention and insolvency proceedings, a company is insolvent when it does not have enough available funds to pay debts that are certain, liquid and due, meaning clear debts of a determined amount that have reached their due date. The value of the company's assets is not decisive: a company with buildings and equipment can still be insolvent if it lacks cash to pay.

The law also distinguishes between obvious insolvency, which is presumed when debts remain unpaid for a certain period after their due date, and imminent insolvency, where it can be shown that the company will not be able to pay its debts as they fall due with the funds it will have available at that time.

Warning signs you should not ignore

Insolvency rarely appears overnight. Signals are usually visible months in advance:

• you pay suppliers later and later and keep renegotiating terms;
• you postpone tax payments or salaries;
• your bank accounts are garnished or you receive notices from bailiffs or the tax authority (ANAF);
• you use new loans or partner funding only to cover old debts;
• losses repeat year after year and equity keeps shrinking;
• you lose key customers without a realistic alternative.

The options available

A preventive composition (concordat preventiv) is a tool for companies in financial difficulty that are not yet insolvent. The company proposes a recovery plan to its creditors, with debt reductions or rescheduling. If the plan is accepted by the statutory majority and approved by the insolvency judge, it also binds creditors who voted against it. Management stays in place and the company avoids the stigma of insolvency. The law also provides for an ad-hoc mandate, a confidential negotiation with creditors through an appointed mandatary.

Judicial reorganisation takes place after insolvency proceedings are opened. The business continues under a plan approved by creditors and confirmed by the insolvency judge, setting out how and over what period debts will be paid. During the proceedings, enforcement against the company is generally stayed, which gives room for recovery.

Bankruptcy (faliment) is the procedure in which the company's assets are sold and the proceeds are distributed to creditors in the order set by law, after which the company is struck off. It applies when recovery is no longer possible or a reorganisation plan fails.

Choosing between these options depends on a few concrete questions: does the company still have a profitable core business, are there customers and contracts worth keeping, are the main creditors willing to negotiate, and how large is the debt compared with the value of the business? An honest answer based on real figures usually shows which route is realistic.

The director's duty to file for insolvency

Article 66 of Law no. 85/2014 provides that an insolvent debtor must apply to the court to open proceedings within 30 days at most from the onset of insolvency. The application must be filed together with the documents required by law, including financial statements, a list of assets and a list of creditors.

Delay has consequences. Filing significantly later than the legal deadline may even amount to the criminal offence of simple bankruptcy under the Romanian Criminal Code. An honest, timely review of the company's finances is therefore in the director's own interest.

Personal liability of the director (Article 169)

Under Article 169 of Law no. 85/2014, the insolvency judge may order members of management who contributed to the insolvency through certain acts to bear part of the company's debts personally. These acts include using company assets for personal benefit, keeping fictitious accounts or losing accounting records, diverting assets and continuing a business that was clearly leading to cessation of payments.

Liability is not automatic. The act, its link to the insolvency and the resulting loss must be proven. Even so, a director who documents decisions, keeps proper accounts and acts in time is in a much stronger position.

To protect yourself, keep a record of major decisions and the reasons behind them, avoid preferential payments to related companies or people, and do not transfer assets out of the company during the difficult period. Such transactions may later be reviewed by the judicial administrator or liquidator and may even be set aside.

The information above is general. Every financial situation is different and requires an individual analysis before choosing a procedure.

This article is for information only and does not constitute legal advice. For an analysis of your specific situation, contact a lawyer.