Insolvency 2021

Last Updated November 23, 2021

Moldova

Trends and Developments


Authors



Gladei & Partners has been recognised by all major international legal directories as the leading Moldovan business law firm. The firm's 11 lawyers are active both in advisory and dispute resolution, and have advised and represented international financial institutions (IFIs) and foreign and multinational clients in all areas of business law. The firm has assisted the buyers in most of the major Moldovan M&A deals, advised foreign investors entering the Moldovan market, and provided complex legal assistance to Moldovan companies with foreign investments, throughout all stages of corporate life. In the insolvency area, the firm is active both in regulatory advisory and client representation areas. In addition, the lawyers have been retained to assist in pre and out-of-court negotiations and mediations. Recently, the firm was retained by an IFI to help the Moldovan government reshape the insolvency legal regime.

The Insolvency Legal Regime – a Brief Overview

Since independence in Moldova, the insolvency legal framework has evolved from two previous bankruptcy laws, of 1992 and 1996, to the first (2001) and then the current (2012) insolvency laws.

The first bankruptcy law was focused on regulating the status of the entities unable to pay their due debts and the procedures to be applied to them. This first attempt to regulate not only bankruptcy, but also restructuring (called "reorganisation" at that stage) procedures has paved the way for more robust and practical further regulation aimed at saving still-functioning but financially distressed entities.

The second bankruptcy law was quickly followed by a dedicated Law on the Restructuring of Enterprises, which dealt with the isolation procedure (essentially, the moratorium) and the post-isolation period, aimed at restructuring all the negotiated debts. These two laws failed, however, to properly address important issues, such as the sale of the debtor’s estate, the role and legal status of the main participants, and liability for bankruptcy.

The brand-new Insolvency Law of 2001 was the early bird of the new wave of Moldovan modern civil and commercial laws, followed shortly by the Civil Code and the Civil Procedure Code. Following the German insolvency model, the new law regulated the plan versus the liquidation procedures, aiming to set up a legal framework on the one hand for restructuring and revitalisation of entities which could stay afloat, and, on the other, effectively protecting creditors’ rights in the bankrupt companies.

The subsequent decade called for active testing of the above law provisions, against the background of the 2007–2009 world financial crisis, which dried up the financial flow of many Moldovan businesses and caused their inability to pay and their over-indebtedness. Within the post-regulatory impact assessment, the market operators and other stakeholders highlighted the practical issues related to the defective law provisions and poor or controversial law enforcement. The legal reform working group, established under the aegis of the Ministry of Economy and representatives of the interested parties, as well as international experts, have crossed swords on the most controversial issues, including secured creditors’ rights, and simplified bankruptcy and accelerated restructuring proceedings, in an attempt to find compromises.

As the Informative Note to the draft Insolvency Law pointed out at that stage, when it comes to the implementation of insolvency regulations, the Republic of Moldova does not have a good track record, caused primarily by ambiguous legal provisions, lack of the necessary human resources, restrictive application of the insolvency proceedings, and artificial maintenance of bankrupt entities within the business circuit. It was therefore decided to pass a new insolvency law, with the main purpose of clarifying how to restore the debtor's solvency by applying the judicial reorganisation procedure and creating opportune and functional legal conditions for recovering the creditors' claims against the debtor in the shortest possible time, while also maintaining the debtor's economic activity.

The new Insolvency Law No 149 was adopted on 19 June 2012 and enacted in March 2013, to allow the market and its participants to prepare for the new regulation. The new law followed the same German insolvency regime and was deeply rooted in the Romanian Insolvency Code, but without transposing the insolvency prevention proceedings. The law applies to all profit and non-profit legal entities and individual businesses, but does not apply to public law legal entities, banks (which have dedicated legal provisions) and individuals (who are not yet subject to insolvency proceedings). Insolvency court procedure matters are also regulated by the Civil Procedure Code. The activity of insolvency practitioners is further regulated by a separate Law No 161/2014 on Authorised Administrators, in effect since January 2015.

The new legal framework has resulted in two significant and contradictory effects. On the one hand, creditors, both unsecured and secured, have found articulated legal provisions to employ for the purpose of having business debts resolved. With more precise and clear-cut procedural terms (not necessarily followed in practice, however, by the overloaded Moldovan courts), creditors would be equipped with a tool for comparative analysis of individual versus collective debt resolution processes. Emergence of the latter has fuelled creditors’ solidarity, bringing them around the same table, something rarely seen before. This, in turn, has catalysed the deeper creditors’ interaction processes, creating premises for out-of-court preventative insolvency proceedings (see below). 

On the other hand, increased legal protection of debtors, in an attempt to save functioning undertakings and prevent their liquidation, was used, or quite often abused, by debtors to "put the creditors in the queue" (as one Moldovan businessman described it). Coupled with the poor enforcement of criminal law provisions on fictitious and purported bankruptcy, and civil law provisions on the subsidiary liability of directors, this resulted in a sharp increase in the number and scope of insolvency proceedings. So, between 2013 and 2020, the number of insolvent entities rocketed from 213 to 2,762, as per the official statistics.

A particularly controversial matter referred to the insolvency of residential construction developers and the attempted protection of acquirers of units in construction. Even though, back in 2008, Moldovan law allowed for the registration of unfinished constructions and of the interest of unit-holders with the cadastral registry, the level of legal negligence remained high, which fuelled repeated sale schemes and thus concurrent claims of different unit buyers upon the developer’s insolvency. The magnitude and social impact of the scheme was so large that it drove the lawmaker to find an "innovative" solution, to make such unit-holders equal with secured creditors, in terms of priority. This, in turn, created an even bigger problem, however, in that potential secured creditors, primarily banks, became reluctant to finance residential property development programmes, feeling the "insecurity of their security".

The Latest Reform – the Modernised Insolvency Law

The practical enforcement of the 2012 Insolvency Law has revealed numerous dysfunctions. The assessments made by both the Moldovan authorities and international institutions, the most notable being the World Bank Report on the Observance of Standards and Codes of December 2014, revealed, among other things, that debtors were unable to attract post-commencement financing, the restructuring procedure remained hardly, if at all, applicable and there was partial infringement of the rights of some participants due to the lack of regulations that would ensure the possibility of challenging important judgments or orders. In consequence, the tenure of the insolvency process, as well as the related costs, increased dramatically, affecting the right of all the participants to a fair trial.

From the early days of enforcement of the new law, the Ministry of Economy set in motion a steering committee, collecting market feedback and keeping a finger on the pulse of the new regulations. Within the first five years of enforcement of the new law, the market voices had become so loud that the ministry called upon the development partners, and the World Bank responded by dedicating resources to assist the Moldovan authorities in the forthcoming legal reform. 

Initially, this legal reform was focused on certain, clear-cut areas, such as ensuring effective protection of creditors’ rights, enabling out-of-court insolvency prevention mechanisms and ensuring post-commencement financing and revival of sound businesses. The Moldovan authorities have seen the scope of reform in the spirit of the World Bank Doing Business 2018 report, to offer restructuring tools to companies that are economically viable but face temporary financial distress, in order to maintain business activity, but also to offer modern features allowing the speedy liquidation of non-viable businesses. 

The massive market support for the legal reform and the deep involvement of various stakeholders, under the aegis of the Ministry of Economy, have driven the process towards developing a set of amendments which became law, being passed by parliament on 16 June 2020 (enacted in September 2020). In a nutshell, the new law:

  • removed the obligation to obtain a prior final court judgment on debt collection to be entitled to commence insolvency proceedings;
  • offered the possibility for the debtor to rebut the insolvency presumption and to claim compensationfor the damages caused by abusive insolvency petitions;
  • offered better protection to secured creditors, by extending the reasons for lifting a moratorium and clearing their priority against quasi-secured creditors; 
  • facilitated post-commencement funding;
  • protected the value of the debtor's estate, by imposing mandatory independent valuation and by limiting the decrease in the sale price; 
  • improved the mechanisms for co-operation between insolvency administrators and creditors, offering individual creditors' rights of information;
  • prevented wrongdoings of insolvency administrators, while allowing steadier business flow; and
  • articulated and developed the "pre-negotiated" accelerated insolvency proceeding.

Even if the scope of the legal reform was not to cover all forms of insolvency prevention regimes (which calls for a new wave of reform), the "pre-negotiated" accelerated insolvency has become a worthy tool for both the financially distressed debtor and its major creditors (primarily, the financial ones). It enables them to sit together and find a compromise, translate it into a restructuring plan, submit it to the court for endorsement and implement it in an expedited manner, to preserve value and prevent bankruptcy.

On a separate note, the change of the jurisdiction of the courts dealing with insolvency cases had a significant impact on the practical application of insolvency proceedings. In 2017, the competence to examine insolvency cases shifted from the courts of appeal to the district courts.

This latter reform helped to decrease the workload of the courts of appeal, considering that the insolvency cases were transferred from four courts of appeal to 15 district courts. Furthermore, the courts of appeal, instead of the Supreme Court of Justice, have since become responsible for the cassation proceedings.

Nowadays, the Insolvency Law is actively enforced, being largely perceived as offering answers to most of the practical issues. Meanwhile, the Moldovan Constitutional Court, as a guarantor of constitutionality and legality, continues to keep this law under its wing, protecting it from various attempts to distort it for political or any other purposes. An eloquent example of this is the recent decision of the Constitutional Court of July 2021 where the court found Amendment Law No 252/2020 to be unconstitutional. This law was clearly pushed for political reasons and was adopted literally in the middle of the night, overturning the previous efforts and the purpose pursued by the above-described reform.

A New Status Quo Instituted by the COVID-19 Pandemic

The COVID-19 pandemic increased the risk of companies facing payment inability and, consequently, the insolvency area and its related proceedings became the key feature used for saving businesses. In these conditions, state authorities and international organisations around the world tried to react by setting up a series of rules and guidelines to help save businesses from bankruptcy and to help them capitalise to the greatest possible extent on restructuring procedures. An example in this regard are the COVID-19 Notes issued by the World Bank Group.

The main measures applied worldwide referred to:

  • preventing companies from being prematurely pushed into insolvency;
  • ensuring the smooth functioning of restructuring proceedings; and
  • implementing flexible debt repayment options.

Unfortunately, the Moldovan authorities did not do their homework. Neither at legislative nor at government level, have any specific measures been taken to protect businesses from insolvency. Although there have been discussions at government level regarding the suspension of creditors’ rights and, respectively, of debtors’ obligations to submit insolvency petitions, such discussions did not materialise into laws or government resolutions.

On the other hand, international actors like the European Bank for Reconstruction and Development (EBRD) launched initiatives meant to mitigate the impact of the COVID-19 pandemic. As an example, EBRD, in partnership with the Economic Council to the Moldovan prime minister and this firm’s office, issued a publication in Moldova containing emergency legal advice and practical guidance to help SMEs identify the best course of action amid the financial distress and business uncertainty caused by the pandemic, thereby building their resilience.

Surprisingly, however, even without the implementation of any special measures, the number of insolvency cases has not increased significantly compared to previous years. Moreover, there are signs of business revival, although the existing problems certainly cannot be ignored.

Trends in the Insolvency Market

It has become increasingly obvious that the Moldovan business community no longer has a dim view of insolvency. This area is becoming more relevant precisely by virtue of the opportunities it offers to save a business from bankruptcy. It is expected that attention will be further focused on scenarios that will ensure the rescue of viable companies. Such approach is in line with the vision promoted by the Doing Business report.

Furthermore, as a follow-up to the 2020 reform, the Moldovan authorities intend to carry out a general housekeeping of insolvency cases, by creating a Registry of Insolvency Cases which will ensure the publicity and opposability of the information concerning insolvent companies. 

At the present time, there is no centralised database of insolvency cases. Only seven out of 15 first-instance law courts offer statistics on the number of insolvency cases registered or pending per year, with no specifics on the type of insolvency procedure or its outcome. In addition, data is also not always available for every year.

Gladei & Partners

63, Vlaicu Parcalab Street
Of. 10D, Chisinau
MD-2012
Republic of Moldova

+ 373 22 240 577

+ 373 22 240 541

office@gladei.md www.gladei.md
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Trends and Development

Authors



Gladei & Partners has been recognised by all major international legal directories as the leading Moldovan business law firm. The firm's 11 lawyers are active both in advisory and dispute resolution, and have advised and represented international financial institutions (IFIs) and foreign and multinational clients in all areas of business law. The firm has assisted the buyers in most of the major Moldovan M&A deals, advised foreign investors entering the Moldovan market, and provided complex legal assistance to Moldovan companies with foreign investments, throughout all stages of corporate life. In the insolvency area, the firm is active both in regulatory advisory and client representation areas. In addition, the lawyers have been retained to assist in pre and out-of-court negotiations and mediations. Recently, the firm was retained by an IFI to help the Moldovan government reshape the insolvency legal regime.

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