If an investor or a shareholder wants to invest in a Romanian company and receive a subsequent profit, he will provide a loan to that company. In this respect, it may be concluded a loan agreement or prepayment agreement. But these sort of agreements do not guarantee the security of the investment. In order to secure the investment, the investor must conclude the security documents, says Radu Pavel, a lawyer specialized in commercial and security documents and Managing Partner of Pavel, Mărgărit & Associates Romanian Law Firm.
Usually, an investor, a minority or majority shareholder or a business angel has multiple possibilities to invest in a Romanian company. The usual legal way is to provide a loan to that company or to buy shares. There is also another legal way the investor may use – a prepayment agreement that involves to pay in advance for goods or services provided by that company. These investments in Romanian companies may be secured through security documents, including mortgages or guarantees. Radu Pavel, Managing Partner of the law firm Pavel, Mărgărit & Associates Romanian Law Firm, explains the juridical nature of such security and guarantee documents.
- Why a security document is useful – Many debtor companies open the insolvency proceedings, sell their assets, transfer their shares or simply the shareholders disappear. In these situations, an investor who has placed a significant investment in these companies may lose these investments, as long as the only agreement he concluded is a simple loan agreement or prepayment agreement. Of course, if these events occur, the investor may address to Court to recover his investment. However, the trial may take several years, and only afterwards the Court issues an enforceable title. There are many situations when the assets of the company are meanwhile sold, and there is nothing left to execute. This is why a simple loan agreement or prepayment agreement is not a guarantee to recover the investments. As an investor, you need to sign the security documents, before the deal is concluded, recommend the Managing Partner Radu Pavel.
- What are the security documents – The security documents are the Security Agreement, the Subsidiary Guarantees and any other documents and filing required thereunder in order to grant the investors or purchasers a first priority security interest in the assets, shares and receivables of the Romanian company.
- Types of security documents – If there is a movable asset, it can be concluded a mortgage agreement. The mortgage agreement will be registered in the Romanian Electronic Archive for Security Interests in Movable Property – AEGRM. The debtor cannot sell the asset or, if it sells it, the investment can be recovered through forged execution. If the debtor owns immovable assets, they may also be mortgaged and the mortgage is registered in the Romanian Land Book Registry, so the debtor won’t be able to sell the assets. Also, a pledge can be placed on debtor’s shares, and in case of not fulfilling his obligations, the investor may become a shareholder in the debtor company. An alternative is also to place a mortgage on the receivables. If the debtor does not comply with the obligations of the investment contract, the receivable may be recovered by the investor. In all these situations it is advisable for the Romanian law firm to make a due diligence report on the future mortgaged assets to determine their value.
- What happens if the debtor does not have enough assets to secure the loan – If a debtor company holds subsidiaries, they may guarantee the loan provided by the creditor company with their assets. “Before setting up mortgages on the assets of the subsidiaries, it must be verified, however, whether the transaction has economic essence, respectively whether the subsidiaries will benefit from it,” explains Romanian lawyer Radu Pavel, specialized in corporate law and security documents.
- Main benefits of the security documents – If the investor concludes the security documents it becomes a secured creditor. If the debtor goes into insolvency, the creditor is the first to recover its debt. However, the most important aspect of the guarantee and security documents is their enforceable character. Therefore, if the debtor does not comply with the provisions of the investment contract, the creditor will already have an enforceable title and no longer has to go to Court. The security document is similar to the loan agreement, and allows the investor to execute the assets and the guarantees, after a simple Court approval (which is obtained in maximum 2 weeks).
In the past years, Pavel, Mărgărit & Associates Romanian Law Firm has concluded several guarantee agreements and security documents for Romanian or foreign investors in Romania. “Usually, when debtor’s assets are mortgaged, the debtor becomes more conscientious. In the cases we advised, in the most situations all the investments were recovered. Also, there were situations when the security documents were enforced and guarantees were executed” said Managing Partner Radu Pavel. If you hire a Romanian lawyer specialized in guarantee agreements and security documents, the investor avoids surprising situations, explains Radu Pavel, lawyer specialized in corporate law and investments security, Managing Partner of Pavel, Mărgărit & Associates Romanian Law Firm.
Pavel, Mărgărit & Associates Romanian Law Firm is one of the top law firms in Romania, which offers legal services at the highest quality, beyond client’s expectations. The Law Firm approaches the cases with maximum professionalism and dedication. It’s ultimate goal is obtaining exceptional results and achieving the client’s objectives, in a time efficient manner. Among Pavel, Mărgărit & Associates clients are top multinationals and local companies. In 2019, the success stories of the Romanian Law Firm have brought recognition of the most prestigious international guides and publications. Thus, Pavel, Mărgărit & Associates Romanian Law Firm ranked second place in Romania in the rankings of business law firms with the most relevant expertise this year, realised by the Legal 500 publication, the most prestigious guide for law firms in the world, based in London, UK. The law firm is also recognized internationally by IFLR 1000 Financial and Corporate Guide 2019. Pavel, Mărgărit & Associates Romanian Law Firm is also the only law firm in Romania recommended by the Global Law Experts Director in London in the Dispute Resolution area of Practice. All the relevant information regarding Pavel, Mărgărit & Associates Romanian Law Firm including areas of practice and the most important deals can be found on the website www.avocatpavel.com, which is one of the most complex law firm websites in Romania.