Law Firm Services Timisoara, Romania

Corporate Benefit: Between a Rock and a Hard Place

By Alina Iozsa, Hategan Attorneys

The issue of corporate benefit arises primarily in the case of establishing security for a third-party obligation in banking transactions. We have often encountered instances when foreign parent companies require their Romanian subsidiaries to grant security for banking transactions and conclude corresponding security agreements over their assets according to Romanian law, also known as upstream security.

Corporate Benefit in Upstream Security

In this context, the corporate benefit of the Romanian subsidiary becomes a primary concern in the respective financial transaction, because it determines the validity of the security and implicitly affects the loan structure. The proper documentation of the corporate benefit is an aspect which should be taken into consideration at the very beginning of the banking transaction in order to ensure that security can indeed be granted as planned.

Legal Background and Consequences

According to Romanian legislation (Article 1 of the Companies Law 30/1991), the scope of the limited liability company is to obtain profit. Any activities that do not generate this outcome might be challenged due to a lack of a corporate benefit as they contravene the special purpose of the company instated by the law and, hence, they generate the liability of the decision-makers. The legal consequences of violating such rules might be the invalidation of the guarantee and the liability of the shareholders and/or administrators – (i) general civil liability, (ii) liability for the insolvency of the subsidiary, if the case, and (iii) under certain circumstances, criminal. In addition, a transaction should also have a just cause. If no such cause exists (for companies, this is generally to be translated as the merits of the transaction), the transaction might be declared null and void based on any of these grounds.

Principles for Determining the Corporate Benefit

Two general principles in establishing the corporate benefit for the subsidiary are acknowledged in practice:

  1. Proportionality between the granted security and the obtained benefit;
  2. Appraisal of the benefit on a standalone basis, since group guarantees are not regulated under Romanian law.

There are no criteria provided by the law for assessing the corporate benefit derived for the subsidiary from a transaction and thus the appraisal shall be done on a case-tocase basis by the court of law, should any interested party raise any issues regarding the corporate benefit. There are strategies for generating corporate benefit: the practice of including all the companies in the group as borrowers in the banking transaction, a fee for the granted security or transferring part of the proceeds to the security grantor. However, these might not hold in court at closer scrutiny if they are only artificially created and consequently, the two aforementioned principles are not met. The input should always match the output.

Quantifying Benefits

It is undeniable that on a group level, there are synergies which create added value and represent indirect benefits for the Romanian subsidiary. These might include the good standing of the parent company, which also extends to the subsidiary, access of the subsidiary to the group’s clients and know-how, preferential financing and contracting conditions, access to services on the group level, technology, marketing, etc. Since there are no established criteria for determining their value, it is therefore diffcult to quantify such benefits and make a direct connection to the granted security. Instead, a direct benefit implies that the subsidiary receives proceeds directly out of the banking transaction. Due to their vague nature, indirect benefits must be very well documented in order to have a chance to stand in court, since the Romanian court is predisposed to acknowledge only the direct benefits. In our opinion, this matter requires additional legal amendments, in order for the applicable law to reflect the realities of group transactions, by including specific criteria for determining indirect corporate benefit.

No Validation Option

Although permitted in some jurisdictions, in Romania the granted security cannot be validated by the shareholders. Even if all the corporate approvals are in place, the security agreement can still be invalidated and the liability of the decisionmakers (in this case the liability shall be transferred to the shareholders) might be triggered in case there is no “adequate” corporate benefit. As already stated, the adequacy shall be determined on a case-to-case basis, considering the circumstances in which the company granting security found itself (e.g. good financial standing as opposed to insolvability or high degree of indebtedness, volume and value of the benefits deriving from the upstream security, etc.). Such an appraisal of the existing benefit shall be performed, in case this issue is raised in the insolvency, by the insolvency judge.

Conclusion

In the absence of a clear legal definition, criteria, and relevant case law, establishing the corporate benefit is no easy task. The safe approach would be to calculate only the proceeds (direct benefit). However, this often does not do justice to the full resulting commercial benefit. In this case, depending on the context of the transaction, additional benefit in the form of indirect advantages could be considered and documented. There is unfortunately no predefined roadmap in Romania for navigating this issue. For a valid corporate benefit to be indeed generated, it is required that the security grantor benefits directly and independently from the transaction and in the amount of the granted security. How this principle is achieved remains, nevertheless, at the appraisal of the security grantor and the group.


Alina Iozsa

Alina Iozsa

GGI member firm
Hategan Attorneys
Law Firm Services
Timisoara, Romania
T: +40 256 430 454
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Hategan Attorneys is an independent law firm specialising in commercial legal advice. Founded in 2004, the office has a dynamic and experienced team that provides an integrated range of legal services to meet the needs of a wide range of companies, individuals, and organisations.

Alina Iozsa has advised a wide range of complex real estate projects, provided innovative solutions for implementing clients’ business plans and the envisaged structure concerning the real estate component. Alina has successfully advised projects in the industrial, public procurement, construction, agricultural, residential, and energy sector, being a recognised real estate specialist on the real estate market in the Western part of Romania.


Published: Real Estate Newsletter, No. 13, Summer 2021 l Photo: dudlajzov - stock.adobe.com

 

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