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European Commission proposes a new approach to restructuring – Proposal for a new EU Directive on pre-insolvency proceedings

In the context of current differences between EU’s Member States’ insolvency legal frameworks which leads, among others, to a reduced predictability regarding the outcome of insolvency in different EU jurisdictions and a very low success rate for cross-border restructurings, the European Commission has launched on 22 November 2016 a proposal for a new EU Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU (the “Proposal“).  

The initiative aims at increasing the likelihood of viable enterprises facing financial difficulties to restructure early on so as to prevent bankruptcy by creating a legal framework that would help remove the stigma of insolvency which, most of the times, proves to be an impediment to the implementation of a successful restructuring plan. Though the Proposal does not apply to consumer insolvency, Member States are invited to extend the application of the discharge principles also to natural persons who are not entrepreneurs, i.e. consumers.

The Proposal includes a set of new concepts which may translate into benefits for employees, investors, banks, creditors and entrepreneurs alike. The driving principles under the Proposal are:

  1. a greater convergence in insolvency law and restructuring proceedings across Member States, which would make it easier to assess and manage credit/investment risk;
  2. preventing the insolvency of a viable company will help preserving jobs and would help remove the stigma of insolvency which, most of the times, proves to be an impediment to the implementation of a successful restructuring plan;
  3. the procedure allows the business owner to remain in control of its assets and operation of its business, without the appointment of an administrator;
  1. new and interim financing arrangements will benefit of a higher protection – i.e., such arrangements will fall outside of the scope of avoidance actions. The Member States are asked to ensure that the new/interim financing arrangements rank senior to the claims of, at least, ordinary unsecured creditors;
  2. any creditor affected by the restructuring plan (including affected employees) will have the right to vote the plan and, when insolvency is not likely to occur, shareholders and equity holders with interest in the debtor will also have voting rights. On the contrary, if the prospects show a likely insolvency, the latter category will not benefit of voting rights with respect to the restructuring plan. Member States may freely set out the majority necessary to adopt a restructuring plan, but without exceeding 75% in the amount of claims or interest in each class;
  3. viable companies facing financial difficulties may enjoy a 4 (four) months “breathing time” from enforcement proceedings; this period may be extended, under certain terms, to up to 12 (twelve) months; and
  4. over-indebted entrepreneurs will benefit of a second chance via discharge of debt after a maximum period of 3 (three) years with the possibility for the Member States to adopt proper safeguard measures to prevent abusive behaviour. The discharge of entrepreneurial, and possibly private, debt will also help remove the loans that cannot be paid anyhow from the relevant credit institutions’ balance sheets.

To the extent a directive is adopted, the Member States will have to transpose it into their national law and each Member State will have to ensure access to early warning tools to detect financial difficulties at an early stage and to allow the taking of appropriate measures in due time. In addition, the implementation of the Proposal would most likely require specialized judiciary and administrative authorities that understand the underlying financial and economic drivers for the implementation thereof. Considering the key underlying principle, the approval and transposition may get to be a rocky road which may corrode on existing and more streamlined restructuring process in some of the Member States.