On 22 November 2016, the European Commission presented a proposal for a directive harmonizing the national insolvency laws of the 28 Member States.
This ambitious harmonization initiative was born in 2011 as a result of the following findings:
- 50% of new businesses survive less than 5 years, causing 200,000 annual bankruptcies (including 25% with cross-border effects) and the destruction of 1,700,000 jobs.
- There are substantial discrepancies among the 28 national insolvency laws, which constitutes a major obstacle to the free flow of capital, and overall there is great unpredictability and inefficiency surrounding insolvency proceedings.
- Recovery rates vary between 30% and 90% in the EU.
- The credit market in Europe is being impacted by a significant volume of under-performing loans.
Harmonization would improve the predictability that investors demand and would encourage the early restructuring of viable businesses, and therefore employment.
The Commission wishes to promote a “new approach” to matters of insolvency and even a “rescue culture“.
To this end, the Commission is counting on an informed approach and flexibility. It has no ambition to harmonize the core aspects of the insolvency framework (conditions for opening insolvency proceedings, definitions of insolvency or ranking of claims): such a project would be too complex given the significant national differences and interconnections with other branches of the law.
The Commission prefers to establish common principles and a series of targeted and realistic measures, centered around 3 themes:
- Promoting early restructuring tools of viable businesses to help them continue their activity and maintain employment (while unviable businesses should be liquidated) and this through:
- early warning tools alerting debtors to the risk of insolvency
- early restructuring proceedings authorizing the restructuring and avoiding insolvency, based on simple principles:
- the debtor must remain in control of its business
- to facilitate negotiations and provide more predictability to creditors, stay of enforcement actions must be limited to 4 months renewable twice under strict conditions
- the restructuring plan must be very structured: content, modalities of adoption by creditors grouped into classes of creditors and validation by a court, possibility to impose this plan upon one or more dissenting voting classes of creditors, as well as upon refractory shareholders, methods of assessment of the enterprise value, binding effect of the plan, and remedies
- protections for new financing and other restructuring-related transactions in the case of subsequent bankruptcy (priority right, no risk of being declared void and exemption from liability)
- the duty of directors to take the required measures where there is a likelihood of insolvency in order to protect the company and its environment (creditors, workers, shareholders, stakeholders)
- Giving a second chance to honest, over-indebted entrepreneurs in order to rebound (estimated 3 million jobs created), articulated around:
- the limitation of the discharge (full discharge of debt) and disqualification (disqualification from pursuing a business) periods to a maximum of 3 years (unless a general interest calls for longer periods)
- the coordinated treatment of professional and personal debt
- Improving the efficiency of restructuring and insolvency proceedings through:
- the training and specialization of judges
- the training of insolvency practitioners, subject to a code of conduct, controls, a predictable appointment process with consultation of the debtor and the creditors, an appropriate regime of sanctions and a merit pay system. In the case of cross-border procedures, their ability to communicate and cooperate with foreign colleagues and their human resources must be taken into account to justify their appointment
- the optimization of electronic means of communication (filing of claims, filing of restructuring or repayment plans, notifications to creditors, votes and lodging of appeals)
- a national statistics tool, including an annual report to the Commission
Member States would have 2 years to implement this directive which provides for great flexibility and avoids the pitfalls of the Commission’s interfering in the well-functioning national systems in place, with an initial follow-up inspection by the Commission within 5 years and every 7 years thereafter.
With its recent reforms, France is already at the forefront of innovation in preventive restructuring frameworks and second chances. This directive, however, would lead to the following adjustments:
- the suppression of the systematic involvement of courts or court-appointed insolvency practitioners
- the reduction of the maximum duration of the “breathing space” period from 18 to 12 months
- the separation of secured and unsecured creditors into 2 separate classes to ensure that similar rights are treated equitably and that restructuring plans can be adopted without unfairly prejudicing the rights of affected parties
- the integration of the “cross-class cram-down” (removal of the unanimous agreement of all the creditors’ committees) to rule out dissenting classes of creditors
- the systematization of the company valuation to ensure better protections for creditors