On Tuesday 22 November 2016, the European Commission ‘Insolvency Initiative’ – part of the Capital Markets Union Action Plan and the Single Market Strategy – finally produced a tangible and remarkable result: a proposal for a restructuring directive, and the harmonization of substantive insolvency practices among European Member States.
The proposal was presented during a press release event chaired by European Commissioner Věra Jourová, in charge of Justice, Consumers and Gender Equality. Its full title is: “Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU (COM)(2016) 723 final” (hereinafter ‘Restructuring Directive’).
The proposal for a Restructuring Directive is the follow up to a the Commission’s non-binding recommendation to the Member States in March 2014 advising them to take steps towards the harmonization of key topics in EU insolvency law aimed at a new approach to business failure and insolvency.
The proposal of 22 November 2016 obliges Member States to introduce specific procedures and set up measures to ensure that their insolvency proceedings effectively promote preventive restructurings and a second chance. It is made of 47 recitals and 36 articles, and it focuses on three key objectives:
- To establish common principles on the use of early restructuring frameworks, which will help companies continue their activity and preserve jobs;
- To define common rules to allow entrepreneurs to benefit from a second chance, as they will be fully discharged of their debt after a maximum period of 3 years;
- To provide targeted measures for Member States to increase the efficiency of insolvency, restructuring and discharge procedures, to reduce the excessive length and costs of procedures in many Member States, which results in legal uncertainty for creditors and investors and low recovery rates of unpaid debts.
The Directive has three distinct main parts: preventive restructuring frameworks (Title II; articles 4 – 18), second chance for entrepreneurs (Title III; articles 19 – 23), and measures to raise the efficiency of restructuring, insolvency and second chance (Title IV; articles 24 – 27).
With the new rules:
- Debtors will have access to early warning tools, which can detect a deteriorating business, and lead to more restructuring at an early stage;
- Early restructuring mechanisms (art. 4) will be made available for all European firms, without the need for their pre-emptive relocation or forum shopping practices;
- The debtor will benefit from a time-limited ‘breathing space’ (articles 6 and 7) of a maximum of four months from the enforcement action, to prevent a race to the assets and facilitate negotiations (and restructuring) with creditors;
- Dissenting minority creditors and shareholders will no longer be able to block restructuring plans (‘cram-down‘), if their legitimate interests are sufficiently safeguarded (article 12);
- New financing will be specifically protected (articles 16 and 17);
- Honest but unfortunate debtors and entrepreneurs will have access to a full discharge of their debts after a maximum period of 3 years (article 20);
- Involvement of courts will be reduced, and the training of a specialized group of practitioners and judges will be promoted (articles 24 and 25).
Quite surprisingly, the press release focuses on the expected benefits in terms of enhanced efficiency and certainty in cross-border cases. In reality, the real goal of the directive is much more ambitious, and much more “national”. The Commission is trying to promote the establishment of a level playing field among European Member States’ practices in insolvency and restructuring processes.
How to achieve that purpose? It seems that the Expert Group established in December 2015 has taken as a non-disclosed model the English law “Scheme of Arrangements”, as regulated by the Companies Act 2006, Part 26 (ss. 895-901) and Part 27 (special rules for public companies). Despite the schemes not being a proper insolvency procedure, the success that they achieved among European companies – with many Spanish and German corporations ‘moving’ to English courts to restructure their business – pushed the European legislator to consider extending their strengths to all European countries.
It follows that success of this initiative heavily depends not only on a timely approval by European institutions, but also on two other premises; countries have to get their equivalent of the English scheme right; and they also need the experienced judges and lawyers to make it work. There is a lot of speculation, however, on whether the minimum harmonization approach followed by the Commission will be sufficient to achieve such ambitious goals. Especially considering the different legal traditions and business culture in the countries, which are required to implement the European instrument.
Nevertheless, the devil lies in the detail. First, the proposal need to be discussed and approved by the European Parliament and the Council. After it has been finalized, an implementation period of two years is proposed. Observers speculate that this could result in a Directive being agreed by about June 2017, but this prediction was made before the results of the Italian referendum, and the resignation of its prime minister, Matteo Renzi. Also, elections in France (March 2017) and Germany (September 2017), as well as possible negotiations for the ‘Brexit’, seem to suggest that this timeline is too optimistic.
On 27 January 2017 a group of international scholars, judges and practitioners will launch an exchange of ideas at the EYE building in Amsterdam. This conference is an initiative of RESOR and the Business & Law Research Centre (OO&R), Radboud University, and is organised in cooperation with INSOL Europe and the European Commission. This will be the first contribution to collective thinking on the restructuring proceedings of the future.