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2021-03-doc5 First book on European preventive restructuring

In 2011, in a European publication, I wrote ‘The H-word is out!’. Certain words in conversation (between insolvency experts) were surely not to be used 10 years ago. One of them was, indeed, ‘harmonisation’. There were zillion obstacles against the idea that insolvency national legal systems can be harmonised. It was a typically political Pavlov reaction. Harmonisation of insolvency laws at that time certainly did not come out of the blue, as a total surprise. In the EU there had been general trends of convergence in corporate law issues since the 70s. Already since the early 2000s several Member States were in the process of convergence of their insolvency law frameworks (often inspired by US’s Chapter 11). In the EU Insolvency Regulation (since 2002, now the EIR 2015) one sees convergence in private international law re insolvencies, even ‘creeping harmonisation’, in the form of uniform rules on some 10 themes, including cross-border exercising creditors’ rights, the right to lodge claims, insolvency publication and registration and cross-border coordination in restructuring and insolvency cases for insolvency practitioners and courts. These matters therefore are uniformly regulated in all Member States. Finally, the reform mania is global by restructuring rules introduced in e.g. Australia, Japan and India.

European Restructuring Directive 2019-1023

Now, 10 years later, harmonisation has entered the EU arena (with the European Restructuring Directive 2019-1023, and – leaving aside any predictions on where the European restructuring and insolvency market go to as a result of significant and far-reaching impact of COVID-19 on national insolvency legislations – by the European Commission further steps have been announced.

The EU restructuring model adopted in the Directive is US Chapter 11 inspired, with some of its own particularities. The finely-woven fabric brings together several key principles: (i) a flexible preventive court-sanctioned process, (ii) for the benefit of the debtor will be a time-limited ‘breathing space’ (or: stay) from enforcement actions in order to facilitate negotiations and successful restructuring, (iii) a debtor-in-possession (DIP) governance, (iv) the classification of creditors based on similarity of rights (or interests) for the purposes of voting, (v) the ability to effect a cramdown of dissenting creditors, (vi) special protection for new financing to increase the chances of a successful restructuring, and (vii) the exclusion of certain categories of claims, most prominently – rather European –  existing and future claims of existing and former workers. In the book European Preventive Restructuring, edited by Christoph Paulus and Reinhard Dammann, an article-by-article commentary is provided on the contents of the Directive, which formally has the title ‘…  on preventive restructuring frameworks, on discharge of debts and disqualification, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt’. The Directive has no less than 101 (!) recitals and 36 articles and has to be transposed into national legislation by 26 June 2021. The woven fabric in the Directive has as threads (also): the obligatory making available of early warning systems, the obligatory creation of an insolvency avoidance mechanism, the determination of certain insolvency related officers’ duties, the uniformisation of discharge rules among member states and measures to increase the national insolvency laws’ efficiency.

Commentary  

A team of European-wide recognised, experienced insolvency law experts, some of whom had been involved in the drafting process of the Directive, do analyse the Directive article by article. They have their background in 8 European countries, which enriches views and literature chosen. The authors focus not only on the officials tasked in the national surroundings with drafting the national statutes but also on the wider implications which, one way or the other, will be national law. It is the first book of this kind that can assist – will a reader be an academic or a legislator – in a good understanding of the themes and the provisions of the Directive. Helpful in that regard is the reference to a selection of (recent) sources. The authors, in this way, offer background and guidance for future interpretation. For a second edition, which I certainly recommend, on my list would be to expand literature to a wider circle of pan-European sources, to include – obvious – a countries’ most salient court cases in which interpretations have been given to (be it national rules, but based on) articles of the Directive. With such a strong group of well-informed authors I would welcome some more information/explanation of the many recitals. It is a not well-known habit – meticulous comparing draft texts – that the European Commission puts dribs and drabs of text into the recitals, related to themes or suggestions that where not adopted by the Member States. It would be a welcome addition to get some views behind the curtains.

Implementing the Directive

The implementation date is nearing, 17 July 2021 (Article 34). There is, however, a little mouse hole: Member States that encounter particular difficulties in implementing the Directive shall be able to benefit from an extension of a maximum of one year. They shall notify to the Commission the need to make use of this option to extend the implementation period by 17 January 2021. I have not heard of or seen any of such requests for extension. The commentary to Article 35 (Paulus) thinks – rightly – that the process leading to the Directive has been public since 2014, so where the ever around cultural stigma of insolvency cannot be solved in one year (can they ever?), the only difficulties one can imagine can be political such as elections or constitutional concerns. With 12 months of being engaged with COVID-19 legislations and dealing with some 70 options the Directive provides, a Member State may indeed have some timing problems, at the same time disclosing the understaffing of a legislative department.

The Netherlands

In the Netherlands as of 1 January 2021 the WHOA (Wet homologatie onderhands akkoord) has been enacted, which includes the so-called ‘Dutch scheme’. Does it implement the Directive? At a later stage in the legislative process, a limited number of additional amendments to the legislative proposal were made to align the WHOA with the text of Directive 2019/1023. The Explanatory Memorandum also explains in more detail how this is expressed in the WHOA. A separate legislative proposal will be drawn up for the implementation of Directive 2019/1023 itself. The Explanatory Memorandum of that bill will include a transposition table which will also indicate how the WHOA corresponds to the first part of Directive 2019/1023. In the WHOA in particular, articles 4, 5, 6, 7, 8 and 10 have percolated, with parts of art. 2 (Definitions). During the parliamentary debate on the WHOA proposal, the Minister for Legal Protection also freely admitted the worrying state of the proceeding of postponement of payment (surseance van betaling). The intention is to have it revived in a separate bill which will be drawn up for the implementation of the Directive.

As to the timing, I even haven’t seen a public consultation yet. The Dutch cabinet tendered its resignation and is outgoing since mid January. The cabinet is however still in office and deals with current affairs as usual, but controversial or sensitive subjects are left to the next cabinet. ‘Insolvency’ is not on the list of sensitive matters. Dutch elections are 15, 16 and 17 March 2021. For me: tomorrow.

Rescue culture

Although the Directive does not use the term, the European Commission presented the Directive as an important step to build a rescue culture. The article-by-article commentary, thus, serves also the purposes of practitioners and judges in the field of restructuring. This surely means that legislation itself may not only be an appropriate policy response. It should trigger the insolvency market (lawyers, accountants, courts, lenders, and indeed politicians) to act as vectors of this culture. What the book also demonstrates is it is necessary to develop a much broader expertise in matters of insolvency law, company law or general contract law and also to develop know how concerning such matters as financial restructuring, accounting, and generally doing business. A key point in any system should be that an insolvency practitioner or restructuring expert is receiving the confidence and respect from all stakeholders. Without that, any system is due to fail. Therefore, changes in substantial rules, including rules or practices in pre-insolvency stages are just as many challenges for any practitioner to keep pace with these developments. The book is not only an important herald in the insolvency and restructuring market, but should be used too as a tool to play a decisive role in introducing this rescue culture.

Paulus / Dammann, European Preventive Restructuring (Directive (EU) 2019/1023), Article-by-Article Commentary, Hart-Beck-Nomos, 2021. ISBN 978-3-406-75350-3

 Note: this book I received free of charge from the publisher with the request to announce it or to review it on my blog at www.bobwessels.nl.