State of emergency. GEO No 37/2020 and the granting of credit facilities

I. Considerations regarding the provisions of Government Emergency Ordinance No 37/2020

1.1. Context

In the context of the exceptional circumstances we are facing, the negative effects caused by the limitation or interruption of socio-economic activities, the severe lack of liquidity faced by small and medium-sized enterprises and the lack of income in the case of individuals, Government Emergency Ordinance No. 37/2020 was adopted on the granting of certain facilities for loans issued by credit institutions and non-bank financial institutions to certain categories of debtors, published in the Official Journal of Romania on March 30th 2020 (hereinafter "GEO No 37/2020" or "the Ordinance").

Subsequently, on April 6th 2020, the Methodological Norms for the application of the Ordinance were also adopted, explaining and detailing the conditions of application of the above-mentioned normative act.

1.2. Subject matter of the regulation

The Ordinance regulates the suspension of the payment obligations of overdue instalments on loans granted to borrowers by creditors until the date of entry into force of 

the Ordinance (i.e. 30.03.2020). In the notion of "instalments" the legislator includes: capital instalments, interest and commissions. Therefore, the suspension of the payment obligation applies to all these elements.

The payment obligation is suspended at the request of the debtor for a period of up to 9 months, not exceeding 31.12.2020.

For the purposes of GEO No. 37/2020, the terms "creditor" and "debtor" have the following meanings:

Creditor:

- Credit institutions (defined according to GEO No. 99/2006);

- non-bank financial institutions (defined according to Law No. 93/2009);

- branches of foreign credit institutions and non-bank financial institutions operating in Romania;

Debtor:

- natural persons;

- authorized natural persons, sole proprietorships and family businesses (regulated according to GEO no. 44/2008);

- liberal professions and those practicing under special laws, irrespective of the form in which the profession is practiced;

- legal persons from credit and leasing contracts, with the exception of credit institutions defined according to GEO No. 99/2006;

1.3. Conditions for application

In order to apply for suspension of payment of instalments due under GEO No 37/2020, several cumulative conditions must be met:

- The credit contract has not matured and the creditor has not declared the early maturity of the agreement prior to the entry into force of the Ordinance (i.e. up to and including 29.03.2020);

- The credit contract  does not record arrears at the date of the establishment of the state of emergency in Romania (i.e. 16.03.2020) or the debtors have paid these arrears up to the date of the request for suspension of the payment obligation; attention: the reference date on which there must be no overdue instalments is 16.03.2020. If there are instalments whose maturity occurred after 16.03.2020, the debtor meets the conditions of the Law, and can apply for the benefit of the suspension of instalments.

- The debtor's income has been directly or indirectly affected by the situation generated by the COVID-19 pandemic, as follows: (i) they interrupt(ed) their economic activity in whole or in part as a result of decisions issued by the competent public authorities during the period of the decreed state of emergency and hold an emergency certificate issued by the Ministry of Economy, Energy and Business Environment or (ii) they hold the emergency certificate attesting to the decrease in income or receipts by at least 25% in March 2020 in relation to the average of January and February 2020;

- The debtors, with the exception of natural persons, are not in insolvency at the date of the application for suspension of loan repayment;

1.4. Procedure

- Step 1. In order to benefit from the suspension of repayments of instalments, interest and fees, borrowers shall send a request to this effect to the creditors in writing or by electronic mail to the contact details specified in the credit contract or by another remote communication channel offered by the creditor.

The request may be sent to creditors within 45 days from the date of entry into force of the Ordinance (i.e. 30.03.2020) and shall expire on 15.05.2020.

If the debtor is unable to submit the request in one of the ways described above, he/she may submit it orally by telephone on a dedicated telephone number which will be made public by each creditor on its website.

The debtor will be able to choose the period for which he/she wishes to suspend payment of the instalments due by making a request for a period of between 1 (one) month and 9 (nine) months - without exceeding 31 December 2020.

- Step 2. The creditor will examine the request and approve it under the conditions set out in the implementing rules of GEO no. 37/2020. 

Within 30 days of receipt of the request, the creditor will notify the borrower of all the contractual clauses that have been amended to adapt the credit agreement to the provisions of GEO No. 37/2020.

Amendments to credit contracts shall be made by operation of law, without the need to conclude additional agreements.

Following the approval of the request for suspension of payment of the instalments due, the duration of the credit contracts will also be extended. The extension will take effect from the date of communication of the request for suspension by the debtor.

The effect of the Ordinance is that the maximum credit period laid down in the financial and banking regulations may be exceeded by a period equal to the duration of the suspension of the payment obligation.

In addition, in the case of individual borrowers, if the extension of the maturity of the credit would result in the age limit set by the credit terms (which varies according to the internal policy of each creditor) being exceeded, creditors are obliged to restructure the credit in order to comply with the age limit. In other words, the instalments deferred in accordance with the provisions of GEO no. 37/2020 will be proportionally included in the instalments to be paid by the borrower after the end of the suspension, so that the credit is repaid in full by the time the borrower reaches the age limit mentioned above.

1.5. Interest and guarantee provisions

- In the case of individual debtors

In the case of mortgage loans taken out by natural persons, the interest relating to the period of suspension shall be calculated in accordance with the provisions of the credit contract and shall constitute a separate and independent claim in relation to the other obligations arising from the credit contract. In respect of the aforementioned claim, the interest shall be 0%, and the debtor shall pay this claim in 60 equal monthly instalments starting from the month immediately following the end of the suspension period.

In practice, the legislator has established that in the case of mortgage loans contracted by individuals, the interest due during the period of suspension will not accrue interest after the suspension ends.

It is important to note here that the Romanian State, through the Ministry of Public Finance, guarantees 100% of the payment of the claim made up of interest during the suspension period.

To this end, the Ministry of Public Finance is authorized to mandate the National Credit Guarantee Fund for Small and Medium-Sized Enterprises to issue letters of guarantee in the name and on behalf of the Romanian State in favor of creditors in respect of this claim (hereinafter referred to as "N.C.G.F.S.M.S.E").

If the debtor natural person does not pay the pre-estimated claim and the guarantee offered by the Romanian State is executed by the creditor, the N.C.G.F.S.M.S.E. shall draw up a debt title which shall identify the payment obligations of the natural persons benefiting from the pre-estimated letter of guarantee - debt title which shall become enforceable title under the law.

Claims resulting from the payment of guarantees held by the Romanian State in relation to debtors are budgetary claims, generate accessory tax obligations and are recovered from debtors by the competent tax bodies of the National Agency for Tax Administration according to the provisions of the Tax Procedure Code.

- In the case of other debtors

The interest owed by the other debtors with reference to the due amounts for which payment is suspended is capitalized to the balance of the credit existing at the end of the suspension period. The capital thus increased shall be paid in instalments over the period remaining to the new loan maturity after the suspension period. In practice, the interest due during the period of suspension will be included in the balance of the credit and will in turn generate interest once the suspension has been terminated and the borrowers have resumed paying their monthly instalments.

II. Considerations relating to the provisions of the Loan Repayment Suspension Act (not yet promulgated)

2.1. Context

In the same context of economic difficulties caused by the exceptional measures ordered to prevent and limit the negative consequences caused by the SARS-CoV-2 virus, the Chamber of Deputies adopted on April 3th 2020 the Law on the suspension of credit repayments (hereinafter "the Law").

2.2. Subject matter

The object of the Law is similar to that of GEO No. 37/2020 - namely, the suspension of the payment obligations of overdue instalments on loans granted to borrowers by creditors until the date of entry into force of the Law.

In this case as well, the payment obligation is suspended at the request of the debtor for a period of up to 9 months, not exceeding 31.12.2020.

For the purposes of thise Act, the terms "creditor" and "debtor" have the same meaning as in GEO No. 37/2020, with a few minor exceptions:

- from the notion of "creditor",  the Mutual Benefit Societies and entities carrying out debt recovery activity are expressly excluded;

- associations and foundations are included in the notion of "debtor";

2.3. Application conditions

In order to apply for suspension of payment of instalments due under the Act, several cumulative conditions must be met:

- debtors do not register dealys in payment representing the main debit or interest in relation  to creditors for more than 90 days; this condition is not applicable to debtors who are in foreclosure proceedings, in payment order proceedings, in judicial reorganization or in any other judicial or extrajudicial proceedings tending to suspend the effects of contracts;

- debtors whose income or receipts in the month in which the application is made are at least 15% lower than the average income in the two months preceding the application; this condition does not apply to debtors who are natural persons;

2.4. Procedure

The law provides for a much simplified procedure for suspending payment of instalments on credit and/or leasing contracts.

- Step 1. In order to benefit from the suspension, debtors must submit an application to creditors in the form of a paper printout or by e-mail.

Debtors - with the exception of natural persons - will also have to send the aforementioned affidavit to creditors.

- Step 2. The creditor will notify the debtor regarding the access to the suspension facility. The extension of the contractual term is effective from the date of the communication of the request for suspension and operates through the effect of the law, without concluding additional documents.

2.5. Interest and enforcement provisions

Unlike the provisions of GEO No. 37/2020, in this case the interest due by the debtors and the related fees are not capitalised on the balance of the credit existing at the end of the suspension period.

A further distinction between the two pieces of legislation is that, in the case of this Act, once the debtors make their application, any enforcement proceedings commenced before the date of entry into force of the Act are subject to the moratorium and are suspended until 31 December 2020.

2.6. Objection of unconstitutionality raised with reference to this Act

Even if this Act has been adopted, its entry into force requires promulgation by the President of Romania.

However, it is not possible to promulgate it at this stage as a parliamentary group has lodged an objection of unconstitutionality, which is covered by Article 77 para. (3) of the Constitution - "if verification of its constitutionality has been requested, the law shall be promulgated no later than 10 days after receiving (...) the decision of the Constitutional Court confirming its constitutionality".

As such, the law cannot be promulgated by the President of Romania until the Constitutional Court has ruled on its constitutionality.

However, the deadline for debating the constitutionality of this Act has been set by the Constitutional Court for 6 May 2020.

If the objection is upheld, the law will have to be amended by re-examining the provisions declared unconstitutional and bringing them into line with the Constitutional Court's ruling.

III.   Recommendations

Initially, we would like to reiterate that the provisions of the Law are much more favourable than those of Ordinance No. 37/2020, given the interest provisions. Thus:

- in the case of GEO No. 37/2020, interest will be capitalised on the loan balance or will be set up as an independent claim;

- in the case of the Law, interest will not be capitalised but will be suspended;

However, given that:

- the deadline by which debtors may submit claims to creditors under GEO No. 37/2020 expires on 15.05.2020,

- the hearing of the Constitutional Court to examine the objection of unconstitutionality of the Law will be held on 06.05.2020,

It is risky to wait until the Law is promulgated, since: (1) there is a high chance that the provision excluding the capitalisation of interest will be declared unconstitutional; (2) there is no certainty that a decision will be rendered by the Constitutional Court by 15.05.2020.

In these conditions, we recommend the preparation of all the necessary documents in order to apply GEO No. 37/2020, and, in the event of not resolving the objection of unconstitutionality of the Law prior to 15.05.2020, the transmission of these documents to the creditor.

It is preferable to send the request to the creditor under GEO No. 37/2020 rather than waiting for the Law to be enacted, since, in the event of failure to send this request, coupled with the declaration that the provisions relating to the (non)capitalisation of interest are unconstitutional, a viable candidate shall no longer be able to benefit from the facilities for suspending instalments.

On the other hand, if the Law is subsequently enacted, there is a very good chance that the submission of the application under GEO No. 37/2020 shall not be an impediment to benefit from the more favourable effects of the Law.

Cluj-Napoca, 21 April 2020

MAXIM / Associates