Radu Rizoiu – The Right Way or the Easy Way: Structuring Romanian Security in Syndicated Lending

For all that mater, (European) syndicated lending happens in London. This means that the English law will govern (most of) the transaction triggering the use of common law principles. In many cases the borrowers or the guarantors are on the Continent, i.e. located in civil law jurisdictions. More often then before, in these murky times of the liquidity crisis, the borrowers are located in Eastern Europe.

The “European Tigers” are in great need of financing and, most important, the amount of the financing they need is rarely more then EUR 100 million. These amounts are still available on the market at a reasonable price. A totally new market for small and medium sized syndications has emerged.

Romania is such a civil law jurisdiction, its legal system being greatly inspired on the French one with Romanian Civil Code being a copy of the 1804 Napoleon Civil Code. However, in terms of the regulation of security interests in personal property, Romania took a different approach, enacting at the end of the ’90s a law that pays tribute to the US regulations, namely Article 9 of the Uniform Commercial Code.

This time however, the approach was different – the source was not merely copied, but simplified and adapted to fit within the civil law system. Consequently, there are some (important) differences between the Romanian regulation and the US one. One of such differences greatly interferes with the smooth structuring of the security package associated to any syndicated lending.

First of all, it is important to be pointed out that the Romanian law does not recognize the common law concept of trust. Despite EU integration and different form the recent changes brought to the laws in Italy and France for the recognition of such a legal figure, Romanian law passed no law to implement a trust-like institution. Moreover, Romania is not a party to the Hague Trust Convention. Therefore, the Romanian judges shall treat the trust by making appeal to similar civil law concepts, the main one being the law of agency.

There are two types of agency regulated under Romanian law: the mandate and the ‘mandate without representation’. In a mandate relationship, the agent is acting in the name and on behalf of the principal, being only an extension of the legal personality of the principal. The acts the agent concludes are considered the acts of the principal itself.

In case of the ‘mandate without representation’, third parties perceive the agent is acting independently and no direct relation is borne between the third party and the principal. However, the agent has a contractual obligation to deliver towards the principal.

The standard structure of a cross-border syndicated lending requires the syndicate of banks to appoint inter alia a security agent to handle the security in different jurisdictions. In general, under the Rome Convention, the security is subjected to the local law of the location of the collateral (lex rei sitae) and, under EC Regulation 44/2001 the enforcement should be made in the same jurisdiction (forum rei sitae).

Traditionally, the security agent acts as a trustee for the lenders. When taking the security in Romania however, the security agent cannot be considered as a trustee, because the Romanian law does not recognize the trust. It should be considered an agent.

One of the reasons for using one single security agent for the lenders is to simplify the perfection requirements. Under Romanian law, the main rule for achieving perfection is to file a security notice with the Electronic Archive of Security Interests in Personal Property (the “Archive”). The notice should mention the name and address for (each of) the secured parties. Moreover, the secured parties should be the holders of the secured claims.

Therefore, filing the security notice only in the name of the security agent is useless, since it is not the holder of the principal claim. Filing for each and every lender creates a burden of bureaucracy since any change in the syndicate should be also notified to the Archive and any filing should be joined by notarized and appostiled powers of attorney from each lender appointing the person to sign the notice.

Another way to solve this issue is the employment of a ‘parallel debt’ structure. In other words, the lenders agree to appoint in the finance documents the security agent as lender in its own right for the entire amount of the secured obligations. Of course, the security agent will commit under the intercreditor deed to make use of its powers as lender only as instructed by the majority lenders and to keep the proceeds of any enforcement in trust for the lenders.

What counts is to have the security agent acting in its own right when asked to enforce the (local) security. Such enforcement process and the distribution of proceeds from the enforcement to the (registered) secured parties is subject to mandatory legal provisions under Romanian law which can be little or no varied by contract. What happens with the proceeds once the secured party collected is not anymore of concern of the Romanian courts. This will be settled under and English law document, enforceable in English courts.

The bottom line is that it must be decided whether the easy way is chosen, i.e. perfecting the security only for the security agent (which requires a parallel debt structure to be put in place); or the right way is undertaken, i.e. each and every lender is registered with the Archive as a secured party, in addition to the security agent.

Radu Rizoiu, Senior Partner
Head of Banking and Finance Group
STOICA & Asociatii