Improving insolvency legislation: Lessons from Romania

The views expressed in the Let’s Talk Development blog are solely those of the author(s). 

Efficient insolvency legislation is crucial for economic stability and investor confidence helping to ensure that resources are reallocated efficiently, businesses can recover or exit the market smoothly, and creditors are treated fairly. This blog presents lessons from Romania, emphasizing the need for and methods to achieve streamlined insolvency processes to prevent financial losses and promote economic growth—insights that are applicable globally.

Romania’s insolvency legislation often prolongs business liquidations, causing losses for creditors, tying up capital, and reducing investor confidence. A recent Subnational Business Ready (B-READY) report analyzed the effectiveness of insolvency across nine Romanian cities between 2023–2024. It found that selling debtor's assets during liquidation can take up to 415 days in business-oriented cities like Cluj, despite streamlined and digitalized steps in other parts of the process.  Higher availability of assets, instead of aiding recovery, can lead to economic loss and longer proceedings.
 

Inefficiencies in Asset Sales

Auctions have become a bottleneck in the liquidation process due to insufficient legislative details on starting prices and progressive price reductions. Creditors vote on auction bases and methods, often aiming for maximum returns despite market shortages and inflated prices. This reluctance to compromise leads to delays, as assets remain unsold at high prices. Globally, liquidation values are typically lower than regular sales.

Creditors actively intervene to set high auction prices, while judges have limited authority to expedite the process, leaving liquidation administrators with little room to propose effective auction plans.
 

Legislative Gaps and Creditors' Role

Creditors vote for plans that tend to include several auction sessions, where the price decreases by a few percentage points only, causing multiple delays in proceedings. 

The extended time required to sell assets through public auctions is due to a legislative gap in Law 85/2014 (as amended), which regulates insolvency proceedings (the ‘Insolvency Law’). A clear legal framework, increasing the efficiency of realization of assets, is missing. Moreover, while the legislative framework opens the door for online auctions, its implementation does little to encourage the use of the online auction platforms, in contrast to countries such as Hungary or Croatia where the use of online auctions is a matter of daily practice.
 

Impact of Online Auctions

Organizing auctions and selling debtor’s assets can be a very long procedure in various Romanian cities. The timespans in the graph below include the time required for asset evaluation, inventory, and resolution of parallel disputes:

The Insolvency Law mandates auction advertisements on the UNPIR website but only suggests using electronic platforms. Cities like Brasov and Oradea, which use online platforms more, report shorter asset sale times. If it ensures transparency and integrity of the process, a national electronic platform for online auctions could streamline sales and attract foreign investors.
 

Recommendations for Improvement

Insolvency frameworks should aim to maximize recovery for creditors, while giving viable companies the possibility to restructure. In Romania, a gap in the regulation of auctions prevents a reallocation of assets back to productive economic activities. An explicit obligation for progressive price reductions can be included in the law.  Enforcement proceedings could involve clear legal consequences for non-compliance, empowering judges to oversee price reductions, and strengthening the role of insolvency administrators in their implementation.

To prevent resources from remaining stuck in insolvency proceedings, several measures can be recommended:

• Moderate Compromise on Asset Prices: Creditors should be encouraged to accept moderate price reductions for quicker asset realization. This approach can prevent prolonged proceedings and ensure quicker reallocation of resources.
• Enforcement of Deadlines: Strict enforcement of deadlines provided by legislation is necessary. Timely resolution of insolvency cases can boost investor confidence and economic stability.
• Progressive Reductions of Asset Prices: Including explicit obligations for progressive price reductions in the law is recommended. This can prevent assets from being overvalued and unsold, speeding up the liquidation process.
• Use of Digital Tools: when appropriate transparency and integrity measures are implemented, the adoption of online auction platforms to facilitate asset sales should be encouraged. Digital tools can attract foreign investors, and reduce the time required for asset liquidation.
   

Conclusion

Efficient insolvency legislation is essential for economic health. Lessons from Romania can help other countries improve their own insolvency frameworks. By addressing the inefficiencies in asset sales, empowering creditors with clear legislative guidelines, and adopting digital tools, countries can ensure quicker and more effective insolvency proceedings.

^{The authors are grateful to Andres F. Martinez and Penelope Demetra Fidas for their precious comments, and to Maksym Iavorskyi for his contribution to the Subnational B-Ready in Romania — Business Insolvency Chapter. All Subnational B-Ready reports and data are available at: https://www.worldbank.org/en/businessready/subnational.}