From my experience over the last 12 months, administrators of Romanian companies have become increasingly aware of their potential personal liability if for any reason the company of which they are an administrator fails and ceases to trade. For foreign administrators this has caused considerable concern, especially as they may have not fully understood their obligations and the risks at the time they were appointed. This short article is intended to try and explain some of the issues which we have been asked to advise upon. It is a repeat of points made in previous articles but does not lose effect by being repeated especially as the economic climate in Romania and worldwide is causing a reduction of business activity and more and more companies are having to review their viability to continue trading.
For administrators, the liabilities of the Administrators and the officers arise when they fail to open the insolvency proceedings, or they allow the company to trade whilst insolvent. If the insolvency proceedings are not opened when they should be then there is potentially both criminal and civil liability.
The criminal liability arises under the provisions of article 240 of the Romanian Penal Code. The failure or late introduction, by the insolvent company or the legal representative of the company to apply for the opening of the insolvency proceedings within a period exceeding more than 6 months from the occurrence of the act of insolvency is punishable by imprisonment of three months to one year or a fine. It should be noted that there is a period of six months where the liability can be cured. There is also the civil liability, which is the obligation of administrator to make good the damages caused by hiding the state of insolvency. One must be careful about definitions at this point. Under Romanian law an insolvent company is one which cannot pay it’s debts as and when they become due.
There is also a liability on the administrator and others which arise apart from failure to file for the insolvency proceedings. One question that is often asked is are the administrators and others personally liable for their actions as administrators; are they liable for corporate pre-insolvency or pre-reorganization actions and can they be subject to sanctions for other reasons?
Administrators need to be aware that there can be a personal liability for wrongful acts committed before the proceedings are opened. They can be personally liable if they have committed one of the following acts if it resulted in the insolvency of the company.
These acts, which give rise to personal liability are, i) if the administrators used the goods or credits of the company for their own benefit or for that of another person, ii) if they carried out the activities of the company in their personal interest using as cover the company, iii) if they allowed the continuation of the activity of the company for their personal benefit that led to the company ceasing to make payments., iv) they kept fictitious accounts, or caused accounts to be prepared in such a way that they did not comply with the normal accounting rules, v) if the administrator fails to deliver the accounting documents to the judicial administrator or the judicial liquidator, both the fault and the link between the deed and the damage are presumed, vi) the presumption being relative; they have misappropriated or concealed a part of the company’s assets or have fictitiously increased the company’s liabilities; vii) they obtained loans by false accounting to delay that date when the company would no longer be able to make payments, viii) in the period before the failure of the company they paid some creditors in preference to others, or ix) they committed acts intentionally that contributed to company’s insolvency as ascertained according to the provisions the law. If any of these are proved against an administrator, then they will be obliged to pay the debts entered in the table of receivables of the company.
It must be borne in mind that for an Administrators’ liability to arise the alleged offences must be proved. There is no automatic presumption of fraud when the insolvency procedure is opened. The alleged wrongdoing must be proved and accepted by the authorities. Thus, whilst an act of incompetence is one thing it is not necessarily a criminal offence or give rise to a civil liability.
The administrators position also changes from the date of opening the insolvency procedure. From that date the shareholders will appoint a special administrator, who will run the company’s activity during the insolvency or reorganization. The creditors do not have the right to manage the debtor’s activity but may require the debtor to perform certain actions through the decision of the creditors’ committee. If, considering a motivated request, the court decides to suspend the debtor’s right to manage its business the judicial administrator will manage the business under the supervision of the judge.
Whilst the putting of a company into insolvency or entering judicial administration can be a difficult time for all concerned, provided the administrators have during the time of their appointment run the company in a proper manner and have not committed any of the acts referred to above then the administrators should be comfortable in their position. Difficult questions maybe asked buy provided the company was run correctly any questions of personal liability should not apply.