Financial crisis and insolvency of local authorities
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Financing public infrastructure projects such as airports, bridges, tunnels, schools, hospitals, represents a complex and interesting challenge both for the local administrative bodies which, always lacking sufficient funds are looking towards taking loans from private financial institutions (knowing that, for the moment, in Romania, borrowed money are cheaper than money raised by issue of municipal bonds), and for the private financial institutions called to finance such public projects.
The local administrative bodies, having the ratio of the debt service increased from 20% of their income to 30% once the Law no. 273 regarding the local public finances (the “Law 273”) was adopted in 2006, are allowed now to borrow more money for their projects. But what happens if such local administrative bodies reach an unsustainable level of indebtedness and cannot repay their debts?
The Law 273 formally introduced into the Romanian legislation, through its articles 74 and 75, the concepts of “financial crisis” and of “insolvency of the local administrative bodies”.
Although the Law 273 entered into force on January 1st, 2007, the articles 74 and 75 were intended to become applicable only starting January 1st, 2008. Then, after only almost three month of legal applicability, the Law 273 was amended by the Emergency Ordinance no. 28 published in the Official Gazette on March 21th, 2008, and the entering into force of the articles 74 and 75 was postponed to a further date on which a special law regulating the implementation procedure of such articles will be enacted.
At present, the project of the “Law regarding the financial crisis and the insolvency of the local administrative bodies”, drafted by the Ministry of Interior and of Administrative Reform, is subject to public debate.
The law project aims to regulate the general framework of the procedures regarding the fulfilment of liabilities and of the financial recovery of the local administrative bodies in financial crisis or insolvency.
According to the provisions of the law project but also pursuant to art. 74 of the Law 273, the financial crisis is defined as the state of the patrimony of the local administrative body, characterised by the existence of certain financial difficulties, by the acute shortage of liquidities, which leads to the non-fulfilment of the liquid and due payment obligations for a certain period of time. This is presumed in case of:
? the non-fulfilment of the liquid and due payment obligations, older than 90 days, which exceed 15% of the annual budget of those local administrative bodies;
? the non-payment of the wage entitlements stipulated in the income and expenditure budget for a period exceeding 90 days as of the due date.
On the other side, as it is provided for by art. 75 of the Law 273, the insolvency is the state of the local administrative body, characterised by the insufficiency of available funds for the payment of the due debts. This is presumed in the following cases:
? the non-fulfilment of the liquid and due payment obligations, older than 120 days, which exceed 50% of the annual budget, without taking into consideration the obligations which are subject-matter of commercial litigations;
? the non-payment of the wage entitlements arisen from the employment relationships and stipulated in the income and expenditure budget, for a period exceeding 120 days as of the due date.
The application for the opening of the insolvency procedure can be submitted to the tribunal by a creditor or by a group of creditors who have one or more uncontested, liquid and enforceable claims against a local administrative body in the amount mentioned above.
In order for such information to be made available to the public, it has been suggested that a National Register comprising the financial crisis situations of the local administrative bodies and a National Register comprising the insolvency situations of the local administrative bodies be created. These registers will be administered by the Ministry of Economy and Finances and will be available on the website of this institution.
Until the special law regulating the implementation procedure of the articles 74 and 75 of the Law 273 will be enacted, the creditors of the local administrative bodies may use the general enforcement procedures (regulated by the Civil Procedure Code or the Code of Fiscal Procedure, depending on the nature of the debt) for recovery of their debts.
Magdalena Lupoi,
Attorney-at-Law
28th C General Constantin
Budisteanu, 1st District, RO-010775 Bucuresti
Tel.: +40-(0)21-312 58 88
Fax: +40-(0)21-312 58 89
magdalena.lupoi@noerr.com
www.noerr.com
