Vol. XVIII No.2
May 2013

HERZFELD & RUBIN, P.C. LAWYERS PROFESSIONAL CORPORATION
IN ASSOCIATION WITH
RUBIN MEYER DORU & TRANDAFIR

LATE PAYMENT: WHAT TO DO?

In Romania’s current economic environment, many businesses close simply because they are unable to deal with the crisis. Often, the cause for this failure is linked to late payments from customers. This is particularly applicable to small and medium size enterprises that do not have the resources to handle constant late payments from their customers. A delay in the fulfillment of commercial obligations generates growing consequences and collateral damages which initiates a detrimental chain of events; the failure of a customer leads to the failure of the distributor which leads to the failure of the manufacturer which leads to the failure of the raw material producer, and so on. Thus, a delay can affect the entire economic environment of the nation. Since this has become a real issue across the European Union (“EU”) leading to many bankruptcies, the EU has decided to take action and create the tools necessary to considerably diminish late payment practices. In particular, they are seeking to aid foreign companies that wish to enforce their rights against companies established in other member states because businesses that sell across borders are especially vulnerable.

In Romania, the late payment issue goes even deeper.  A tendency is developing among business owners to delay their payment obligations by finding legal solutions to suspend them or even to write them off through insolvency and reorganization. This late payment culture needs to end so that the economy can flourish again. The new pieces of legislation enacted by the EU and the action plans dedicated to disseminating the new provisions are aimed precisely at achieving this goal.

This article purports to show the general legal means that commercial companies have at their disposal against late payments under Romanian law. The article will only touch on the general legal regimen of obligations between commercial undertakings and not the relationship between commercial undertakings and contracting authorities.
 
The Current Situation In Romania
Immediately after the start of the 2008 economic crises, certain Romanian businesses, regardless of whether or not they encountered financial difficulties, started to use the crisis as an excuse to justify late payments. More recently, insolvency procedures have become a “safe haven” for business owners seeking to suspend or even discard their obligations. Under Romanian law, businesses are under an obligation to petition for their own insolvency in court if they know that they are unable to timely pay their debts with the funds available to them and this situation is likely to continue for longer than thirty days. If their financial situation exceeds six months, not petitioning for insolvency becomes a criminal offence. Therefore, if a company is unable to pay its debts, not only is there a possibility for it to petition for its insolvency, but there is a legal obligation to do so.

Additionally, creditors can ask for the insolvency of their debtors if they hold a liquid, certified receivable exceeding 45,000 lei that has been due for more than ninety days.

While the insolvency procedure of a company is underway, all claims and enforcement procedures are suspended by law. In addition, if the debtor considers reorganization and is entitled to it, in the reorganization plan, the amount of the receivables of certain categories of creditors can be diminished down to the value they would receive in case of bankruptcy and liquidation. Because of these the legal provisions, insolvency procedures are being used as a safe haven for debtors, in addition to its intended purpose: the successful reorganization or bankruptcy of failing businesses.

Other common late-payment commercial transaction practices in Romania include offering creditors payment instruments such as checks, promissory notes or bills of exchange. These practices prolong the due dates and are advantageous because they are in themselves enforcement titles. The debtor would not have to be taken to court in order for enforcement procedures to be possible. But, in the event that they are not paid on the due date, there are no consequences for their issuers. The Romanian Criminal Code provides for a criminal offence only when companies/individuals knowingly issue checks with insufficient funds for the check to be cashed. Thus, checks are not issued often and the most common instrument is the promissory note.

However, with the new more burdensome rules regarding late payment for commercial obligations, the practices described above might change and debtors will be less inclined to allow late payments.
 
The New Procedures for Late Payments In Commercial Transactions
Under Romanian law, the interest rates and late payment interest rates for payment obligations are provided by Government Ordinance no. 13/2011 (“GO 13”). These provisions have been recently amended by Law 72/2013 enacted for the implementation into the Romanian legislation of the Directive 2011/7/EU on combating late payments in commercial transactions, adopted on February 16th, 2011.

GO 13 provides that the parties are free to contractually establish the interest rates applicable for the repayment of a loan, as well as for the delay in the fulfillment of a payment obligation. The “regular interest” is the interest owed by the debtor calculated for the period up to the due date. The “late payment interest” is the interest owed by the debtor for the non-payment at the due date. In case the parties do not contractually establish the bi-level interest rates (the “regular interest” and the “late payment interest”) the legal interest rates will apply. The “legal regular interest” has the same level as the reference interest rate established by the National Bank of Romania. The “legal late payment interest” is the regular legal interest plus 4%. The “regular legal interest” and the “legal late payment interest” applicable to legal relationships that do not derive from the exploitation of an undertaking for the purposes of achieving a profit is to be reduced by 20% from the general legal rates mentioned above. However, in agreements between commercial undertakings and between commercial undertakings and contracting authorities, the “legal late payment interest” is the regular legal interest plus 8%. This difference between the two types of legal late payment interest rates was established by Directive 2011/7/EU. In cases of legal relationships with a foreign element (of extraneity) governed by Romanian law and when the debt is in a foreign currency, the “legal regular interest” is 6% per year. Thus, the applicable “late payment interest” in the commercial relationship between a foreign company and a Romanian company, if not provided by the agreement and if subject to Romanian law would be 14% per year.

Additionally, GO 13 also contains provisions against loansharking. It provides that agreed regular interest applicable to legal relationships not derived from the exploitation of an undertaking for the purposes of achieving a profit cannot exceed the legal interest by more than 50% per year. Any provision to the contrary is automatically null and void and the creditor cannot even claim legal interest.

Law 72/2013 was enacted for the implementation into the Romanian legislation of Directive 2011/7/EU on combating late payments in commercial transactions adopted on February 16th, 2011 and enacted into law on April 5th, 2013 (“Law 72”). Law 72 provides specific measures for combating the late fulfillment of payment obligations of receivables that are certified, liquid and due, derived from contracts between commercial undertakings and between commercial undertakings and contracting authorities. Law 72 does not apply to the treatment of receivables in an insolvency procedure that is the object of extrajudicial negotiations or agreed payment schedules, or to the agreements between commercial undertakings and consumers. Law 72 provides for measures that include how the applicable interest rate is determined, the legal late payments interest rate, payment terms, both concerning regular agreements between commercial undertakings and agreements between commercial undertakings and contracting authorities , the costs for recuperating receivables, contractual provisions and abusive practices, and certain procedural aspects of late payments.

Any payment term provision or custom, late payment interest rate provision or custom, or supplementary damages provision or custom which is clearly inequitable for the creditor is considered an abusive provision or custom. The abusive character is determined by the courts which take into account: (1) material deviations from the established practices between the parties or from the customs that accord with public order and decency, (2) not abiding by the good faith principle and by the principle of diligence in the fulfillment of obligations, (3) the nature of the goods or services, (4) lack of objective reasons for establishing other terms than the ones provided by the law, and (5) a dominant position of the contracting party in regard to a small or medium size enterprise. In addition to these criteria, Law 72 provides that the following provisions are considered abusive by way of law: (1) clauses that exclude the possibility of applying late payment interest or establish late payment interests that are lower than the legal rate, (2) clauses that establish an obligation to notify the debtor so that the late payment interest accrues, (3) clauses that establish a longer term for the moment when interest starts to accrue for the receivable, (4) clauses that eliminate the possibility to claim supplementary damages, and (5) clauses that set a term for the receipt or issuance of the invoice. Abusive clauses are automatically null and void.

“Late payment interest” is applicable when the creditor has fulfilled his contractual obligations and the debtor is in payment default. The interest is applicable starting from the due date up to the moment payment is effectuated. If the due date is not provided by the agreement, “late payment interest” starts to accrue after thirty calendar days from the date the invoice was received by the debtor or if any similar payment request was received. If applicable, “late payment interest” can also begin to accrue after thirty days from the delivery of the sold goods or the date the services were performed. Furthermore, if some sort of reception or verification procedure is provided, the thirty days shall be calculated from the date of the completion of this procedure, provided it takes place within thirty days from the delivery of the sold goods or the date the services were performed. In the latter situation, the parties may establish a longer term as long as such provision is not abusive.

Contractual payment terms cannot exceed sixty calendar days. The parties may establish a longer term as long as it is not abusive. Additionally, they can agree to installment payments. However, the parties are not permitted to set any term for the issuance or receipt of the invoice. Any such provision is automatically null and void.

When recuperating receivables, the creditor can claim damages for the expenses it incurred. The creditor can also claim supplementary damages with a minimum value of forty euros (provided by law) for delays in payment which are in addition to the damages for the enforcement expenses. This amount is due starting with the date late payment interest is due.

In the event of any payment delays, the creditor can obtain an enforcement title by way of a payment ordinance, which is provided by the Civil Procedure Code. All creditors established in any member state of the European Union can make use of this procedure.

Law 72 provides an organizational framework for business owners associations and for their rights. One of the most important rights granted by Law 72 to business owners associations is that they have court standing to defend the rights and legitimate expectations of their members, especially in regard to claims for the cancellation of abusive clauses or ascertaining abusive practices.
 
Conclusion
Because late payments under the new regimen have immediate and serious consequences, debtors will be less inclined to allow for them or will try to seek, immediately, a renegotiation of the due dates with the respective creditor in a mutually beneficial manner. Even if a debtor were to consider insolvency, until it is able to do so, late payment penalties will accrue and the debt will increase considerably. Even if a debtor manages to file for insolvency, its debts will be much greater. A similar situation occurs with payment instruments because as long as the debts remain unpaid, “late payment interest” will accrue. Indeed, the provisions regarding abusive practices and contractual provisions are most welcome so that the contractual balance between commercial partners is properly established and maintained.
 
Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2013 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

 
RUBIN MEYER DORU & TRANDAFIR
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Bucharest, Romania
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