Security over Collateral. ROMANIA Nestor Nestor Diculescu Kingston Petersen

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1 Security over Collateral ROMANIA Nestor Nestor Diculescu Kingston Petersen CONTACT INFORMATION Costin Teodorovici Nestor Nestor Diculescu Kingston Petersen Bucharest Business Park, 1A, Bucuresti Ploiesti National Road, 1st District Bucharest, Romania Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Under Romanian law, creditors may use different types of securities, depending on the type of assets secured. Immovable assets may be encumbered with a mortgage, regulated by the Romanian Civil Code of The mortgage cannot be granted over future property, except for mortgages established as security for a mortgage loan according to Law 190/1999 on mortgage loans. Public property cannot make the object of mortgage agreements. The common form of security granted over movable property is a security interest in movable property (also known as a pledge ). Security interests in movable property are governed by Title VI of Law no. 99/1999 (Security Interests Law). Any movable assets, tangible or intangible, present or future, may be encumbered. Security interests confer to the secured creditor the right to satisfy its claim by realization of the encumbered assets, with priority to any unsecured creditor, as well as other secured creditors having a lower priority rank. Privileges are preferential rights of payment recognized by the law to certain unsecured creditors (e.g. the state s privilege for the recovery of its claim, the seller's privilege in respect of the purchase price, financier s privilege for the relevant asset s acquisition finance, constructor s privilege for construction works price, etc.). Since it is provided by the law, no formality is required in order to establish a privilege. Subject to the

2 satisfaction of the perfection formalities, privileges outrank any other security (including any previous movable security or mortgage) 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? Under Romanian law, the creation, perfection and enforcement of security interests are governed by the law of the place where the asset is situated at the date of conclusion of the security agreement (lex rei sitae) (Law no. 105/1992 regarding international private law relationships). If the assets are located in Romania, the requirements for creating and perfecting the security are assessed under Romanian law, irrespective of the choice of law in the security document. However, in the case of intangible movable assets (i.e. IP rights, receivables etc.), the law applicable to the validity, perfection and rank of priority of the security is that of the debtor s location on the date the security interest was created (lex loci debitori) (Security Interest Law). In principle, a choice-of-forum clause may be enforced under Romanian law. However, in the case of security granted over an immovable situated in Romania, the Romanian courts shall have an exclusive competence to solve any dispute concerning that immovable. Moreover, the enforcement of all types of security (ncluding movable security interests) in Romania is governed by the Romanian law and the Romanian courts are exclusively competent (even in case the security itself is governed by a foreign law). The current market practice is that, whenever a security is created over assets located in Romania (or the enforcement procedures should be carried in Romania), the security agreement be expressed to be governed by Romanian law, while the Romanian courts would be competent to solve any disputes in respect thereof. Moreover, as a general principle of Romanian private international law (as confirmed by a relatively recent decision of the Romanian High Court of Justice), it has been interpreted that there has to be a sufficiently strong link between the chosen law/forum and the contract itself. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? A security interest in movable property may be granted over a universality of movable assets, including a company's fond de commerce (goodwill). The security agreement must specify the characteristics of the universality, up to the date of establishment of the security. In addition to registration with the Electronic Archive, a security over fonds de commerce (goodwill) must also be registered with the Romanian Trade Registry in order for it to be perfected.

3 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: The types of assets listed below are, under Romanian law, considered to be movable assets according to their nature (but may also be seen as immovables in certain cases, as detailed below) and the common form of security which can be granted over such assets is the security interest in movable property provided by the Security Interests Law. Such security interest may be created by agreement between the parties concluded in written form. The security agreement must specify the maximum value of the secured obligation and the secured assets (the assets may be described individually or in broad terms, such as: all present and future movable assets of the debtor ). The common perfection formalities include registration of the security with the Electronic Archive, but additional registration requirements may apply (depending on the type of the secured assets). Registrations with the Electronic Archive are subject to the payment of registration fees, ranging from about 20 EUR (for amending existing registrations) to 40 EUR (for new registrations). Additional fees need to be paid for the registration with other registries (as applicable). (a) Aircraft; Under Romanian law, aircrafts can be encumbered with a security interest in movable property. Security agreements over aircraft are governed by Security Interest Law and Ordinance 29/1997 regarding the Air Code. Security interests over aircrafts are perfected by registration with the relevant registries where the aircrafts are registered. This is deemed to be constructive notice of the security interest to third parties. (b) Bank Accounts; Bank accounts may be subject to a security interest in movable property. In order to be valid, the security agreement must specify the identification details of the pledged bank accounts and the maximum value of the secured obligation. Perfection of the security agreement is achieved by registration with the Electronic Archive. In addition to such registration, a notice must be served on the account bank, together with a copy of the security agreement, for the purpose of enforcement. It is customary for creditors to request the security grantor to provide such a notice to the account banks as a condition precedent to funding in order to facilitate the enforcement. When the security is enforced, the pledged accounts are blocked, so that no further outgoing payments are allowed (but incoming cash flow is not affected). (c) Animals, Crops (in ground and severed) and Timber; According to the Romanian Civil Code, animals attached to farming, in ground crops and standing timber are considered to be immovable assets by destination and may be subject to a mortgage, but only together with the main mortgaged immovable. A

4 mortgage may be created only by agreement between the parties in the form of a notarised deed. The mortgage agreement must at least identify the main property mortgaged and the fact that the related movables (such as farm animals) are also mortgaged, as well as the maximum secured amount. Mortgages must be registered with the Land Book, in order to be enforceable against third parties and ensure priority over other creditors. In case the attached movables (immovables by destination ) are also mortgaged, the mortgage has to be registered also with the Electronic Archive. Severed crops, as well as farm animals and timber are movable assets by their nature and may distinctly be subject to a security interest in movable property. According to Security Interest Law, security interests in movable property must be registered with the Electronic Archive in order to be enforceable against third parties. (d) Equipment; Under the Security Interests Law, equipment may be subject to a movable security interest, as described in the first paragraph above. (e) Intellectual Property; The common form of security granted over intellectual property (IP rights) is the security interest in movable property. Security over IP rights may be created by a written agreement between the parties, in the form of a private deed. Perfection of security granted over patent rights, trademarks and industrial designs is achieved by registration with the Electronic Archive and the State Office for Inventions and Trademarks. Security interests granted over copyrights are perfected by registration with the Electronic Archive. Please note that procedures involving registrations or amendments to existing registrations with registries kept by the State Office for Inventions and Trademarks may prove lengthy, and terms of about 45 days should reasonably be considered. (f) Inventory; The common form of security granted over inventory is the security interest in movable property under the Security Interests Law. The common requirements for the validity and perfection of security interests stated in the first paragraph apply. (g) Leases; One person s rights deemed to have economical value and are assignable according to Romanian law, arising from, or in relation with lease agreements (and actually of any type of contracts) may be subject to a security interest in movable property, as such rights are deemed by the law as intangible movable assets. Security interests granted over such rights may be created by agreement between the parties, in the form of a private deed. Perfection of the security agreement is achieved by registration with the Electronic Archive. However, due to certain unclear legal provisions, contradictory opinions have been expressed as to the legal treatment of such security interest, i.e. a regular security interest, or an assignment of rights by way of security). The consent of

5 the debtor would not be necessary for validation of such an assignment. Considering the inconsistencies which may result from the application of aforementioned unclear provisions, in the absence of any relevant court practice, it is market practice for the security/assignment to be perfected by fulfilling the perfection requirements applicable to each case. As such, the security/assignment would need to be registered with the Electronic Archive, but it is also highly advisable to deliver notices of assignments to the debtors of the relevant receivables and, to the extent possible, get written acknowledgements. (h) Mineral Interests, including Hydrocarbons; The most common form of security granted over mineral interests, including hydrocarbons, is the security interest in movable property. The same requirements for the validity and perfection of security interests stated at point d) apply. (i) Promissory Notes and Chattel Paper; The common form of security granted over promissory notes and chattel paper is the security interest in movable property. Security interests on negotiable titles (i.e. promissory notes, bills of exchange etc) are perfected by possession or endorsement of the negotiable titles, where possession or endorsement is necessary to validate their transfer. If so, this is deemed to be constructive notice of the security interest to third parties and registration with the Electronic Archive is not required. (j) Real Estate; The main type of security interests granted over real property is a mortgage. Mortgages may be created by agreement between the parties in the form of a notarised deed. The mortgage agreement must specify each piece of mortgaged property and the maximum secured amount. In order to be enforceable against third parties, mortgages must be registered with the Land Book. Mortgages are ranked chronologically based on when mortgage was registered with the Land Book (and the Electronic Archive, in case the mortgage should also cover the movable assets attached to the mortgaged immovable). The fee applicable for registration with the Land Book is of RON 100 (c. EUR 30) plus 0.1% of the amount of the secured obligation. (k) Receivables (credit rights under contracts or invoices); Please see item (g) above (Leases). (l) Rights under Contracts (excluding Receivables); The same considerations as stated above at point g) and k) apply. (m) Shares (in book-entry and certificate form and other securities);

6 The common form of security granted over shares is the security interests in movable property. Security interests in movable property may be granted over shares of joint stock companies and limited liability companies by entering into a security agreement in the form of a private deed. The security agreement must be registered with the shareholders registry. If the security is granted over shares of limited liability companies, it is also advisable to obtain, when executing the security agreement, the consent of the shareholders for the transfer of shares in case of enforcement of the security. This is due to the fact that, under Romanian law, the transfer of shares of a limited liability company requires the approval of shareholders representing at least three quarters of the registered capital. Although it is not clear whether this requirement also applies to the transfer of shares triggered by the enforcement of a security agreement, it is advisable to obtain the consent of the shareholders of such transfer when entering into the security agreement. Perfection of security agreements over shares is achieved by registration with the Electronic Archive. However, in case of security granted over securities publicly traded on a regulated market (e.g. the Central Depository, for securities traded on the Bucharest Stock Exchange), perfection is achieved by registration with the relevant registers. This is deemed to be constructive notice of the security interest to third parties and registration with the Electronic Archive is not required. (n) Vessels; Under Romanian law, vessels may be encumbered with a security interest in movable property, governed by the Security Interest Law. Security over vessels is created by agreement between the parties, in the form of a private deed, according to Security Interest Law. Securities over vessels are perfected by registration with the relevant registries where the vessels are registered. (o) Vehicles; Vehicles may be subject to a security interest in movable property, governed by the Security Interest Law. Security over vehicles may be created by written agreement between the parties. The security must be registered with the Electronic Archive in order to be enforceable against third parties. (p) Business as an ongoing concern. The Security Interests Law allows for security interests to be created in the universality of movable assets, as well as on the fonds de commerce attached to a business (but excluding any immovable property). A security interest over the fonds de commerce is subject, in addition to the registration with the Electronic Archive, to registration with the Trade Registry.

7 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? The procedure applicable to enforcement of security interests can differ, depending on the type of security and the creditor's choice. Under Romanian law, duly executed agreements creating security in movable and immovable property qualify as writs of enforcement. Therefore, when an event of default occurs and the secured obligations become due, the creditors should be able to directly enforce their rights under the security agreement without following a judicial procedure for the recognition of such rights; however, some Romanian courts have taken a different position on this issue. Mortgage The enforcement of security interests in immovable property must be made through public sale of the mortgaged asset. The public sale is conducted by an official bailiff. Security interest in movable property In the event of failure to perform the secured obligations, the creditor may choose between the enforcement procedure regulated by the Romanian Civil Procedure Code and the procedure established by Security Interests Law. Under the Romanian Civil Procedure Code, security interests in movable property may be enforced by public sale of the secured asset conducted by an official bailiff, according to a procedure that is detailed and strictly regulated thereunder. Under the Security Interests Law, the creditor may take possession by peaceful means over the secured asset or the proceeds resulted from its sale, without any prior authorization or notification. However, in order to amiably take possession of the secured asset, the security agreement must include a specific provision in this respect provided by law. If the creditor cannot take possession of the secured asset in a peaceful manner, it may appeal to an enforcement body (i.e. court/bank bailiff). The creditor may sell the secured asset in a commercially reasonable manner (for example, by direct sale or public auction) or in any manner the parties have agreed on. Prior to the sale of the secured asset, the creditor must notify to the debtor and to the other creditors holding a security over the same and/or to the owner of the secured asset the intention to sell it. Security agreements governed by the law of another jurisdiction may be enforced under Romanian law, if the secured claim is due and payable. However, security agreements governed by a foreign law are not deemed to be writs of enforcement, so that a court decision should first be obtained at the court of competent jurisdiction. Depending on the chosen jurisdiction, a formal recognition procedure may need to be completed before a Romanian court prior to proceeding to the enforcement. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Neither the trust concept, nor the parallel debt concept is recognised under Romanian Law. Although there is no case law relating to this issue, and there are arguments supporting the idea that such foreign law institutions should be recognized, there is risk that a trust or a parallel debt financing structure created under the law of

8 another country would not be recognised in Romania. Therefore, it is recommended for security to be granted to all lenders. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? Under Romanian law, the judge designated to supervise the insolvency proceedings can, on application of the judicial administrator/liquidator or the creditors committee, set aside certain transactions entered into prior to the opening of insolvency proceedings, including: Transactions at undervalue, entered into up to 3 years before the opening of insolvency proceedings; The creation or perfection of security interests within the 120 days preceding the insolvency proceedings, if the secured claims were initially unsecured; Transactions entered into up to 3 years before the opening of insolvency proceedings with the intention of all parties thereto to create a disadvantage for other creditors; Transactions entered into up to 3 years before the opening of insolvency proceedings with the intention of all parties thereto to conceal the debtor s assets or to defraud other creditors; Transactions entered into by the debtor with its shareholders holding at least 20% of the share capital up to 3 years before the opening of insolvency proceedings (Law 85/2006 on insolvency proceedings). According to Security Interest Law, secured creditors can be outranked by creditors holding privileged rights in the secured assets if the privilege has been made public, either by registration with the Electronic Archive or the Land Book. In addition, certain creditors are ranked above secured creditors if their debts relate to: Taxes in relation to the secured asset; Stamp duties in relation to the secured asset; Costs relating to the sale of the relevant assets. Creditors secured with a mortgage may also outrank creditors holding a security interest in movable property over the improvements brought to the mortgaged property, if the mortgage has been registered both with the Land Book and the Electronic Archive. 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Although there is no specific legislation regarding subordination of debt, creditors may subordinate their claims by entering into a agreement between the debtor, the subordinated creditors and the senior creditor. Please note that such subordination agreements are only enforceable between the parties thereto, but are not effective againstt the syndic or the liquidator. Therefore, upon insolvent liquidation, the legal order of priority will be used, following that the subordination arrangement is privately settled between the parties.

9 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) The assignment of secured receivables triggers the automatic transfer of all ancillary rights, including security interests rights. However, the assignee must register transfer of the benefit of the security as accessory to the assignment of the main secured receivables with the relevant registries to ensure the preservation of the priority rank and the enforceability of the security against third parties. Under Romanian law, the main effect of novation is that the original secured obligations are discharged and are replaced with new obligations. Normally, such would result in the existing security also being released and re-taking security (subject to losing the initial rank and a new hardening period). However, parties are permitted to keep the existing security also for securing the new obligations, subject to including a special clause to that effect in the deed of novation. Please note the express consent of the debtor of the main secured obligation is always required upon novation. The changes in respect of the security interest resulting from the novation should also be registered with the Electronic Archive/Land Book 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? According to Romanian Law, security interests cannot be assigned independently from the main secured obligations. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? Step-in rights are not regulated under Romanian law, but the creation of such structures may be envisaged in financing transactions, on contractual basis. Such step-in rights should be consented to by the relevant contract counter-parties. There is no relevant court practice on the matter.