Following a recent decision by the Romanian Supreme Court issued in 2007, Romanian secured transactions involving mortgage agreements require additional formalities to be observed when mortgagors approve the mortgage agreements. Such additional formalities are of particular interest for secured lenders since mortgage agreements that are completed without complying may now be viewed by the courts as null and void. Despite Romanian case law not being binding on other courts, the Supreme Court's case law is taken into consideration by other courts when assessing similar cases.

As we will present below, the recent decision of the Supreme Court changes the previous jurisprudence and affects the way banks and law firms will have to deal with Romanian secured transactions involving mortgage agreements. In short, for better protection of their interests, the banks should require the mortgagors, when approving the mortgage agreements, to issue notarised, authenticated resolutions (and apostiled, if issued in a country in which the official documents need to have an apostile in order to be presented in Romania).

Previous case law

Before the aforementioned decision of the Supreme Court, the interpretation shared by previous case law, legal scholars and practitioners were clearly in favour of the principle that corporate resolutions approving mortgage agreements are validly issued as private deeds if they nominate the directors who have representation powers under the mortgagor's constitutional documents as signatories.

This was explained by the fact that the acts concluded by directors with representation powers are considered by law as acts of the company itself and, therefore, there is no need for a special (i.e. notarised) form of approval issued by the respective company in order to further empower its representatives (directors) to sign mortgage agreements (and, in general, acts or deeds to be concluded under a notarised form). Such an approach would not contradict the specific legal provisions governing mandate agreements or powers of attorney. Thus, the 'symmetry of forms' principle that must be considered each time a power of attorney is issued requires that an act which has to have a special form (i.e. notarised) may only be signed by persons empowered through a power of attorney having the same special form. However, this principle is not applicable when the respective act is signed by people authorised under the law to duly represent the company. That is why Romanian Company Law clearly sets out that directors are entitled to represent the company in all the agreements and/or operations the said company intends to enter into. Basically, in this situation, the company itself signs the relevant documents, acting through one of its representatives (i.e. directors), and not through a third party which is a 'stranger' to the company.

However, if a company decides to 'outsource' the representation powers and to appoint third parties to act on its behalf in connection with certain notarised documents, then any such authorisation has to be issued in notarised form, since the 'symmetry of forms' principle comes immediately into force. Consequently, under these circumstances, the shareholders' resolution or any related power of attorney issued in relation to such a corporate resolution should have a notarised form.

Changes brought by the Supreme Court's decision

In a nutshell, the recent ruling of the Supreme Court boils down to the standpoint that the rules regarding representation (i.e. mandate agreement or powers of attorney) are applicable to acts or deeds concluded in notarised form irrespective of whether the person signing these on behalf of the company is a director vested with representation powers or a third party.

In fact, the Supreme Court's decision 'erases' any distinction previously made by legal scholars and practitioners between the situation where a company is represented by its legal, statutory representative (as established under the Romanian Company Law) and the opposite case where a 'contractual' representative is appointed through a power of attorney. Essentially, corporate resolutions approving the creation of the mortgage and nominating the signatory have to be issued under authentic form in all cases, even if the signatory is a director duly authorised by the law or by the company's by-laws to act as a representative.

In addition, such a ruling contradicts the pre-eminence that a special law, such as the Romanian Company Law, has over the norms of general application, as it is the case for mandate provisions. By stating the right of statutory directors to act in the relevant company's name and on its behalf, the Company Law establishes an exemption from the common 'symmetry of forms' principle; therefore, such principle should no longer be relevant in this respect. Only in the absence of special provisions in the Romanian Company Law (which is not the case though), does the 'symmetry of forms' principle raised by the Supreme Court's decision become applicable.

Currently, thanks to the latest change in the Romanian Supreme Court's jurisprudence, it seems the issue of whether the mortgagor's statutory representatives or other persons sign the mortgage agreement is no longer relevant. In all cases it is advisable, from a lender's perspective, for the mortgagor to issue a notarised resolution when approving the mortgage agreement. This change of approach in the jurisprudence has already been notified to Romanian notaries at the beginning of 2008, so now even the notaries have started warning the creditors
about this matter.

From a practical perspective and taking into consideration the innate dynamics of commercial relations, this change of law and practice has led to 'administrative' difficulties for mortgagors and has also resulted in certain delays when signing a secured transaction involving a Romanian mortgage. This is due to the fact that sometimes not all signatories of a resolution are in Romania at the time, so the notarisation and apostilation may take longer. Furthermore, another frequent situation encountered is when the signatories are in different countries or when the company's constitutive act allows the shareholders to vote by correspondence, so that they would have to issue separate notarised (and sometimes apostiled) resolutions in each country, provided the mortgagor's constitutional documents allow this.

In the end, and perhaps most importantly, for a duly notarised resolution, the notary should ensure that the signatories have been empowered to sign also through notarised (and apostiled, if necessary) powers of attorney, thus adding to the administrative costs and time of the transaction.

This Supreme Court decision has been widely criticised by banks, legal practitioners, legal scholars and certain Government authorities. The Romanian Ministry of Justice has recently submitted a draft law to the Romanian Parliament, with a view to fixing the implications of the latest Supreme Court decision. Based on this draft law, it should be confirmed that mortgage agreements (and other similar acts) may be approved through resolutions issued as private deeds. Also, a separate provision in the draft law comes to confirm the 'validity' of previously signed mortgage agreements (even if those mortgages were approved through resolutions issued in notarised form or as private deeds). n

Bogdan George Bibicu is a partner and Catalin Georgescu an associate at Bulboaca & Asociatii in Bucharest.