Anti-Crisis Measures ? Pay on Time !

by Steven van Groningen on 1 July, 2010

More than a year ago, in the early days of the crisis, a journalist asked me what the Romanian government should do in order to combat the crisis. My answer: the State should pay its invoices, subsidies and VAT returns on time. The journalist didn’t consider my answer worth mentioning.

The truth is that since the beginning of the crisis many companies are suffering because they are not paid on time by the State. VAT returns, tax returns, subventions and invoices for work performed are paid late. Almost every week I see cases in our credit committee where a company is in difficulty because of this. In one case a company couldn’t pay its taxes on time because it was not paid by the State for the work it had performed. What happened? They were executed by the fiscal authorities.  Where possible we try to find a solution to help our clients, but there should be no need for this. There is a lot of talk about anti-crisis measures. How about paying in time ?

Taxes Should Also Be Paid On Time

Taxes should be paid and they should be paid on time. Companies that are late have to pay penalties and end up in a public register. If they don’t pay at all, the state can execute its claims or file for insolvency. This is regulated by law. Bona fide administrators (the statutory managers) will avoid this as much as they can. Last week the government published an emergency ordinance that amongst many other measures makes administrators personally liable for the unpaid taxes of their companies in case they don’t file for insolvency within 30 days of being 30 days late with paying these taxes.

Strengthening the possibilities for the state to collect tax money is a good thing but of course the effectiveness of measures should be taken into account and abuse should be avoided.

In this case the whole idea is probably to make sure that administrators pay the company’s debt to the state before entering in insolvency. This way the state creates an advantage for itself at the expense of other creditors like employees, suppliers, providers and banks that will likely have to go through insolvency.  The legal profession has already commented in the press upon the doubtful way the state circumvents the law in this case. I want to look more into the expected effectiveness of this matter.

More Cases of Insolvency

So the administrator of the company  with 30+30 days liquidity problems has the choice to file for insolvency or to use his limited money to pay taxes while not paying his suppliers and business partners, employees, banks and others that might have supported the company and likely end up in insolvency anyway. The conclusion seems to be that we will see more insolvencies. So what happens in case of insolvency, will the creditors get their money back ?

Insolvency Doesn’t Mean You’ll Get Your Money Back

When companies face liquidity problems and cannot pay on time, banks are in many cases among the larger creditors. Banks will generally avoid filing for insolvency when there are still other options open. They know it is better to work with the client to find solutions and will consider the road of insolvency only when it is clear that a company cannot be saved or is not cooperating at all. It usually takes way more time than 30 days to get to this point.

Insolvency is not a way to get your money back, it is a procedure through which the remaining assets of a company are sold and the proceeds are distributed to the creditors according to a clear procedure, taking into account the position and status of each creditor. This in case the restructuring plan doesn’t work, which seems to be the standard in Romania. In 2009 20.000 insolvency cases were opened, the expectation for 2010 is even more. The number of approved restructuring plans is less than 100. One of the reasons that so few restructuring plans are approved is the fact that the State, as one of the creditors, opposes restructuring plans that don’t show 100% recovery of their debt. It a company would be able to repay 100% why push them into insolvency in the first place ?

Forcing companies into an insolvency process that clearly doesn’t function and that companies are unlikely to ever recover from is clearly not a good practice. Even more so from the tax collection point of view. It can take literally years to restructure or liquidate a company and the creditors – including the state –  are unlikely to get their money in the end.

Administrators should not be made personally liable for not filing for insolvency when there are still reasonable other options open and a dialog with creditors exists.

Why Not Make Ministers Personally Liable Too ?

I have another proposal. Let’s make ministers and state secretaries personally liable in case their ministry is more than 30 days late with paying (VAT, subventions, invoices). After all, if a ministry is incapable of paying that means that it has not been properly administered, isn’t it ? Much the same way as an administrator who cannot pay his company’s taxes in time. Maybe that way the state will pay in time and we will have fewer companies in financial difficulties.

This is of course not a serious proposal. Ministers and state secretaries that are doing their job should not be personally liable just as administrators should not be personally liable if they are just trying to do their job.

Doing their job means making sure the state pays in time. It also means a lot of other things and introducing counter productive measures is not one of them.

{ 7 comments… read them below or add one }

Mircea Popescu July 1, 2010 at 16:28

Solid points.

I’m not exactly sure why you shy away from the idea of making ministers personally liable. I for one think it’s a brilliant idea.

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Lavinia July 4, 2010 at 15:01

Oh, so getting revenues to the budget seams to be the priority, and not cutting expenses, which in my personal opinion is the worst scenerio. How can you put presure on the one who feeds you, instead of helping him to continue feeding you?! I really think is time for Boc and his team to take a break, and may be Lucian Croitoru, or somebody else, who knows more about economics and less about people and politics, should give another try …!

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Liviu July 5, 2010 at 14:24

Interesting approach. Quite unusual for Romania, but welcome. Focus on solutions, not on just debating problems.

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bizzar July 11, 2010 at 09:22

First: In Romania the State is the worst money/funds administrator. It showed us this over and over again. The irresponsibility in managing public money is directly linked with unaccountability, that is why we see some absurd situations: the State is paying large/unjustified amounts of money for some contracts and other money just…disappear in “The System”.

Second: The idea of making administrators responsible for what they do I think it’s a good one, but the mechanism put in place to implement this responsibility could be improved – for now this is too inflexible and could do more harm than good.

Third: YES !The State should pay on time, in this regard there is a double standard: on one side – the private firms, which are required to do everything “by the book”, on the other side – the State itself and the enterprises owned by the State, for which the “rules’ are…optional.

My point of view: making ministers/any employee of the State responsible for what he does it’s a good idea, in the private sector if you don’t do your job as supposed to you are fired. And the employees in the public sector are paid by the taxes the State gets from the population/private firms, so, in a way, they should be accountable to us.
The main difference is the fact that in private firms for each and every job/employee you want/need some ways to measure the job performance/ROI provided by the employee. It should be the same with ministers – their “targets” should be made public and we should be able to see how much they’ve done from what they were supposed to do and how they did it.
For now: there is no way to tell the ministerial spending, so…it will take us some time to get where we should be. I still have hope :)

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alexandru August 3, 2010 at 14:34

Va rog sa indicati care este nr ordonantei de urgenta care impune raspunderea administratorilor in termen de 30+30 zile …..

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SvG August 3, 2010 at 17:56

Este vorba de OG privind unele masuri pentru combatere evaziunii fiscale (Nr 54/2010) Articol XI modifica OG Nr 92/2003, Art 27.(este vorba de codul de procedura fiscala) Textul modificat al Art 27 (1) c introduce element de raspundere solidare pentru administatori. Termen de 30+30 de zile vine de la Legea Insolventei.

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Vasile August 29, 2010 at 12:38

It is an interesting opinion, on a matter less debated. I fully endorse your points, but honestly, I think they are of secondary importance (e.g. except for the VAT – mainly related to exporters, the companies which receive late proceeds from the state are usually politically affiliated, and have huge margins on respective state contracts, which allow them to cover the financial expenses for the subsequent bridge loans).
What really lacks today – besides the overall efficiency of the fiscal legislation – are the fiscal stimulus measures (for start-ups). A small business is killed twice by the state bureaucracy and taxes before the competition or the market does.
And what Romania lacks badly is a strong, extended segment of SMEs, especially in the production field (we did had one in the retail / trading area, artificially grown in past years that was fast written off by the current “recession”). We need to help the creation of manufacturers from the workmanship level to large SMEs dealing with corporations – which assures also a social balance (middle class).
And in the context, your proposals are more than welcome.

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