Growing Pains of Romanian Legal System
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Septembrie 2008 |
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REFF & ASSOCIATES SCA - correspondent lawfirm of Deloitte |
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Website
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The change of the political regime after 1989 could not have been done without the change of the legal system, which forms the very basis of it. The old laws had to be replaced by new ones or at least amended in accordance with the principles of democratic government and free market economy. New institutions and legal mechanisms had to be created and implemented by legislators and governments, from which few had ever experienced the realities, challenges and traps of a democracy. Thus the configuration and the growth of the new “legal land” were made in pains, with lot of turns, dead ends, mistakes and compromises.
Evidently, the growth did not stop yet and the pains, although less obvious and less intense, are not over. The every day practice of law made us aware of the obstacles and difficulties caused by the misunderstanding of the business realities, by incompetence, by erroneous implementation of the law, legislative inconsistencies, or by a lack of will in adopting clean-cut solutions.
This article outlines some of these “pains” that our legal system faces, troubling the business and forcing the advisers to seek alternative solutions.
Intra-group loans/securities
Doing business at an international level requires a different organization than acting locally. Organizing a group of companies could improve efficiency and create business synergies. The resources may be allocated more easily and more efficiently. Generally the groups are always seeking to optimize their financial activity. Such optimization also includes granting of loans or securities inside the group. The intra-group financing may be pursued on the following directions:
- Downwards (mother company to subsidiary);
- Upwards (subsidiary to mother company);
- Horizontal (subsidiary to subsidiary).
The first case does not raise any particular legal problems as the law recognizes the possibility of any shareholder to finance the activity of the company in which it holds equity, because of the economic interest that the shareholder has towards the company.
The second and the third cases are subject to some limitations stipulated by the Companies’ Law. According to this law it is considered a criminal offence the deed of the promoter1 of a company to borrow money, directly or indirectly, from a company under his administration or from the company that controls or is under the control of the administered company or determine such companies to establish a security over its assets for the promoter’s debts.
Consequently it used to be a criminal offence for a subsidiary, administered by the mother company (promoter of the subsidiary) to grant a loan or a security in favor of its mother company.
Of course the incrimination is not free of critics; on the contrary we consider that the legislators’ approach should have been clearer and more systematic.
For instance it is not very clear why they chose to incriminate only the promoters and not the subsequent shareholders of the company. If it is to interpret strictly the wording of the law and this shall be the case as a criminal offence cannot be interpreted extensively, in case the mother company is not the promoter of the subsidiary no criminal offence exists.2 Another issue was given by the fact that at the moment of incrimination the legal entities were not subject to any criminal liability. Consequently one might have said that the interdiction does not apply to legal entities (e.g.: mother company). Also the legal term of “control” was not defined under the Companies’ Law and thus the incriminated situation was not very clearly determined.
Such inconsistencies forced the legislator to come up with a solution for the needs of the corporate groups. Hence, a recent amendment to Companies’ Law provided that it is not a criminal offence for a promoter (company) to receive a loan from the company under its control and administration. Although the amendment intended to solve the problems of intra-group finance, he did not succeed entirely because it seems the legislators forgot to exclude from criminal liability the granting of security, which strictly speaking means that such activity remains a criminal offence.
