18.04.2024

Practical aspects of an action for annulment of a contract brought by a company in insolvency proceedings

Insolvency of a legal entity is characterized by the fact that, once such proceedings are opened, such legal entity and its assets are subject to the special rules and mechanisms provided by Law No. 85/2014 on insolvency prevention and insolvency proceedings. This normative act is applied as a priority, being special, derogatory, and is supplemented by the rules of the Code of Civil Procedure to the extent that it does not derogate from it (according to Art. 342 para. (1) of Law no. 85/2014).

Thus, in the case of a common law action (e.g. an action for the annulment of a contract) brought by a company in insolvency proceedings, the rules applicable to that claim must be corroborated with the rules specific to insolvency proceedings.

In what follows, we will focus our analysis on certain aspects encountered in practice concerning the intersection between insolvency and civil procedure, as the rules applicable to a lawsuit are often complicated or, at least, modified when the "insolvency" element is involved. This can give rise to difficulties in (i) determining the competent court, (ii) analyzing the interest in bringing a civil claim, or (iii) enforcing the legal effects that such a claim might produce.

By way of example, two companies conclude a contract for the sale of a plot of land on which the purchaser intends to build a residential complex. Subsequently, while taking the necessary steps to obtain planning permission, the purchaser learns that the legal status of the land in question does not allow him to build the desired building and does not build anything. In this context, part of the land is sold on to third party sub-sellers. Subsequently, the buyer goes into insolvency proceedings (and even bankruptcy) and, in order to obtain reimbursement of the price paid, applies for the annulment of the contract of sale on various grounds of nullity (either absolute or relative nullity). Thus, a legal person (in insolvency proceedings) makes a claim through the insolvency practitioner for a declaration of nullity of the contract of sale concluded prior to the opening of the insolvency proceedings, including a request for the parties to be restored to their previous situation. In this situation, various practical issues may arise, as will be discussed below.

1. Jurisdiction of the court

The first issue to be raised concerns the court's jurisdiction to hear an application by an insolvent company to annul a contract of sale.

In this regard, we consider that it is necessary to take into account the provisions of Article 45 of Law No. 85/2014.[1] which set out the duties of the syndic-judge and implicitly its jurisdiction.

Although the enumeration provided by the legislator in Article 45 of the Insolvency Law is not exhaustive, it can be noted that, in principle, the syndic-judge is competent to resolve those applications which have as their object the analysis of the acts issued in the insolvency proceedings by the insolvency administrator, creditors or other participants in the proceedings. Therefore, in the exercise of its duties, the syndic-judge exercises judicial control over the activity of the insolvency practitioner, being competent to settle the lawsuits and applications of a judicial nature related to this special procedure (Art. 45 para. (2) of Law no. 85/2014).

Thus, it can be deduced that, in principle, the syndic-judge does not have the competence to resolve claims or actions that go beyond the scope of the insolvency proceedings, such as the action for the annulment of an agreement concluded prior to the opening of the insolvency proceedings, operations that are not expressly provided for by Law no. 85/2014. Therefore, such an action is governed by the provisions of ordinary law and jurisdiction lies with the ordinary court. Such a conclusion was also held under the old rules, in the recitals of the decision of the High Court of Cassation and Justice No 5 of January 19, 2009 on the application of the provisions of Article 11 para. (2) sentence I of Law No 85/2006 on insolvency proceedings.

Thus, to return to the hypothesis considered in the present analysis, the action for a declaration of nullity of a contract of sale concluded prior to the buyer's insolvency is not a dispute concerning acts concluded in connection with insolvency proceedings. At the same time, this would not be an action for the annulment of fraudulent acts concluded by the debtor during the suspect period, specifically regulated, and the provisions of Article 117 et seq. of Law no. 85/2014 are not applicable.

Further, we consider that it is important to analyze whether such a judicial approach would be effective or not, i.e. whether or not it would be affected by the suspensive effect by operation of law provided for by Art. 75 of Law No. 85/2014. According to it, from the date of the opening of the insolvency proceedings, all judicial, extrajudicial actions or enforcement measures for the realization of claims on the debtor's assets are suspended by operation of law, and the enforcement of their rights can be done only within the insolvency proceedings.

Given that in the example given, the action for annulment of the contract is brought by the insolvent company, as plaintiff, and that this does not raise the question of enforcing a claim against the insolvent company, but on the contrary, the insolvent company seeks to enforce a right, we consider that we are not in the hypotheses strictly regulated by the law, since the suspensive effect of law is not applicable.

2. Interest in exercising such an action

Another aspect that could raise problems in practice is the interest in bringing such an action.

In analyzing the requirement of interest, we point to Article 33 of the Code of Civil Procedure, which states that the person making a claim is required to justify an interest which, in turn, must be determined, legitimate, personal, legitimate, personal, born and actual.

Where the claimant is insolvent, the analysis of the interest must be circumscribed also from the perspective of the fundamental principles of insolvency proceedings.

This is because, once the insolvency proceedings have been opened, the applicant's interest is converted from an individual interest (that of the insolvent debtor) into a collective interest (including the creditors included in the insolvency proceedings) for the protection of all creditors who may benefit or who are likely to be affected by the admission of such an action.

Thus, in such a specific situation, the claimant is required to justify the benefit that it would derive from the admission of the action, both for itself and for the creditors included in the creditor's estate.

In the hypothesis under consideration, as long as the claimant is the current owner of the property acquired by the contract of sale, the question might arise as to whether or not the insolvent company's interest would indeed be justified, that is to say, whether both it and the creditors included in the insolvency estate would actually obtain a benefit as a result of the possible admission of the action for annulment of the contract of sale.

From that point of view, the question of a lack of interest on the part of the applicant could be raised, since, if the claim were allowed, the insolvent company would have to return the land purchased, which forms the subject-matter of the contract of sale. If the land had been divided into several plots and part of those plots had been sold to third parties by the applicant itself, part of the land would no longer be part of the applicant's assets at the time the action was brought. In such a case, if the application were allowed, the vendor himself would evict the third party sub-debtors, which would give rise to numerous other claims against the evicted vendor and increase the liabilities of the bankrupt company. In such a scenario, therefore, the admission of the action would seriously harm both the interests of the insolvent applicant and those of the creditors included in the insolvency estate, leading to an increase in the liabilities, which would run counter to the purpose of the insolvency proceedings, which is to maximize the debtor's assets and cover the insolvent debtor's liabilities as quickly as possible.

In such a case, there would be a risk that the action would be dismissed as devoid of interest, given the intervention of factual and legal circumstances specific to the insolvency proceedings, which transform the individual interest into a concurs concursual interest.

We consider that the requirement of interest is to be analyzed by the courts on a case-by-case basis, so that in practice, situations may be identified in which the interest in bringing the action persists even in the context of the insolvency of the plaintiff, this requirement being analyzed according to the specifics of each case.

3. Effects of the admission of the application

From the point of view of the effects that could be produced by the admission of an action for annulment of a contract of sale brought by an insolvent company, we consider that it is often difficult, if not impossible, to restore the parties to their previous situation.

This is because, in practice, factors such as the passage of time or economic pressure make it impossible to fully comply with the effects of the reversal of measures that have already been applied and entered the economic circuit.

These factors are even more persistent as a result of the opening of insolvency, which is characterized by maximizing the degree of asset recovery and recovery of claims in a timely and efficient manner - two of the basic principles of insolvency proceedings, according to Article 4 of Law No. 85/2014.

Given the situation taken as an example in this analysis, in the case of a successful application for the annulment of the contract of sale, the return of the parties to the previous situation could raise problems, as the retransfer of the land that was the subject of the contract of sale would be difficult, if not impossible, since part of the land had previously been sold to other third party sub-debtors, who were not even parties to the dispute for the annulment of the contract.

Even in the hypothetical situation in which it would be possible for the buyer to return the land, the question might arise whether the return of the price paid by the insolvent plaintiff would really be to its advantage and that of the creditors included in its insolvency estate.

Thus, the question could be raised as to whether the restitution of the price would in fact benefit them, since the price returned would be lower than the price at which the land in question would be sold at the present time, given the upward trend in prices on the real estate market in recent years. In practical terms, the question may be whether it would not be more advantageous for the land in question to remain in the estate of the insolvent claimant and to be sold in the insolvency proceedings, since it is possible to obtain a higher amount than the price which would be returned if the application for annulment of the contract were to be granted.

Thus, an apparently favorable decision in favor of the claimant may present difficulties in its implementation in the insolvency proceedings.

4. Conclusions

Finally, we emphasize that in the case of a common law action brought by a company subject to Law No. 85/2014, the rules applicable to that claim must be corroborated with the rules specific to insolvency proceedings. In this context, we believe that it is advisable for all participants in the insolvency proceedings to remain vigilant even in the situation where the debtor seeks to capitalize on interests before the ordinary courts.

An article signed by Carmen-Alexandra Mureșan, Managing Associate - cmuresan@stoica-asociatii.ro - and Corina-Ioana Șerbănescu, Associate - cserbanescu@stoica-asociatii.ro - STOICA & Associates

[1]Art. 45 para. (2) of Law no. 85/2014 "The duties of the syndic judge shall be limited to the judicial control of the activity of the receiver and/or the liquidator and to the processes and claims of a judicial nature related to the insolvency proceedings. Managerial powers shall belong to the insolvency administrator or liquidator or, exceptionally, to the debtor, if the debtor's right to administer his assets has not been removed. The management decisions of the insolvency administrator, the liquidator or the debtor who has retained his right of administration may be reviewed as to their appropriateness by the creditors through their bodies."