On 22 November 2016, the EU Commission published a draft directive designed to harmonise restructuring frameworks across member states, introducing a four-month period of protection from enforcement action to facilitate a restructuring plan, preventing dissenting minority creditors and shareholders blocking restructuring plans and protecting new financing for restructured companies.
Background to further harmonisation
The EC Insolvency Regulation 2000 (EIR) determines the proper jurisdiction for a debtor's insolvency proceedings and the applicable law to be used in those proceedings. It also provides for mandatory recognition of those proceedings in other EU member states. Where a debtor’s centre of main interests is within an EU member state, the EIR recognises that EU member state as the appropriate forum for main insolvency proceedings concerning the debtor, and provides for automatic recognition of those proceedings by the courts of other member states. Any further proceedings in EU member states where the debtor has an “establishment” are secondary to those main insolvency proceedings and relate only to assets in that secondary member state.
The EIR has proved a useful tool in European cross-border restructurings and insolvencies. and it is about to be updated. In June 2017, certain changes to the EIR will come into effect which, amongst other things, introduce a mechanism for co-ordinating insolvencies within cross-border corporate groups, which is a welcome development.
Harmonisation of insolvency laws has been on the EU agenda for some time. The EU Commission’s recommendations of March 2014 on a new European approach to business failure and insolvency invited member states to put in place effective pre-insolvency procedures to help viable debtors to restructure, and reduce the period of bankruptcy for honest entrepreneurs to no more than three years.
In its action plan on building a capital markets union, published in September 2015, the EU Commission noted that the recommendations had only been implemented partially across EU member states and noted that differences in national insolvency and restructuring regimes constituted a barrier to the free flow of capital.
The EU Commission ran a consultation which ended in June 2016 with the intention of seeking stakeholders’ views on common principles and standards for national insolvency frameworks. In July 2016, the Commission hosted a conference on convergence of insolvency frameworks within the EU.
The draft directive does not, however, seek to harmonise core aspects of insolvency law, such as rules on conditions for opening insolvency proceedings, a common definition of insolvency, ranking of claims and avoidance actions – the commentary to the directive notes that such matters are intrinsically connected with other areas of national law such as tax, employment and social security law, and harmonisation would be too far-reaching. Instead, the proposals focus on adapting national insolvency procedures to enable debtors in financial difficulties to restructure their debt before insolvency.
Key restructuring proposals
The draft directive makes the following key proposals to encourage the restructuring process:
- Member states should have preventive restructuring frameworks consisting of one or more procedures or measures whereby a debtor can effectively negotiate and adopt a restructuring plan.
- The debtor should be left in possession of its assets and affairs when negotiating and implementing a restructuring plan. Mediators or supervisors (practitioners in the field of restructuring) may have a role, but such practitioners should not be appointed by a judicial or administrative authority in every case.
- The debtor should have access to a stay of individual enforcement actions to allow negotiations to take place and to fend off hold-out creditors, without the threat of insolvency proceedings and with continued performance of essential contracts. This will be granted by a judicial or administrative authority for a maximum of four months, extendable a total maximum of 12 months.
- Restructuring plans should contain minimum mandatory information.
- Restructuring plans to be adopted by affected creditors or classes of creditors. Where creditors with different interests are involved, they should also be treated in separate classes. As a minimum, secured creditors should always be treated separately from unsecured creditors. Member states may also provide that workers are treated in a class separate from other creditors.
- Shareholders and other equity-holders should not be allowed to obstruct the adoption of restructuring plans of a viable business, provided that their legitimate interests are protected.
- Provision of rules on when and how to determine value in order to ensure fair protection for dissenting parties.
- Protection from anti-avoidance laws and priority over unsecured creditors for new financing necessary to implement a restructuring plan, for interim financing incurred to ensure a business's continuity during restructuring negotiations, and for other transactions concluded in close connection with a restructuring plan.
- Obligation on member states to impose specific duties on directors in near-insolvency situations to incentivise them to pursue early restructuring when a business is viable.
The draft directive will be discussed and may be amended by the European Council and the European Parliament. Once finalised, member states will be required to implement its provisions within two years.
Although Brexit may ultimately mean that the UK is not bound to implement the directive, the UK restructuring regime already includes many of the elements found in the draft directive. In addition, as described below, the UK insolvency regime is currently the subject of a wide-ranging review which appears likely to result in further reforms which will be broadly consistent with the draft directive.
In a consultation paper published on 25 May 2016, the UK Insolvency Service sought views on whether the UK’s regime required updating in light of international principles developed by the World Bank and the United Nations Commission on International Trade Law (UNCITRAL), recent large corporate failures and an increasing European focus on providing businesses with the tools to facilitate company rescue. In summary, the Insolvency Service proposals are:
- Creation of a new three-month moratorium period for financially distressed (but viable) companies.
- Provisions to require essential suppliers to continue to supply financially distressed companies on existing terms and not use termination clauses or demand ‘ransom’ payments.
- Creation of a new “restructuring plan” enabling classes of dissenting creditors to be crammed down.
- Measures to encourage rescue finance.
A summary of the consultation responses was published on 28 September 2016. The Insolvency Service will continue to liaise with stakeholders to refine the technical detail and further consider policy options.