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2021-11-doc3 Capital markets Union (CMU) & Insolvency – the odd couple

Last week, on 25 November 2021, the EU Commission published a Communication with a set of intended measures, responding to a number of action points identified under its Capital Markets Union (CMU) 2.0 Action Plan. This Plan was published in September 2020. See COM(2021) 720 final. The Commission wishes to tackle problems across a broad range of capital market services to help achieve a strong and well-integrated single EU capital market.

CMU 2015. The idea to create a CMU has been introduced in the stream of the development of European insolvency law, in 2015. It rather came by surprise (a Juncker legacy) and I have been sceptical about CMU (and its meaning for insolvency) from the beginning. Its basis in the EU treaties and its goals substantially differ. See my notes from a speech early 2017 to the European Parliamentary Financial Services Forum (EPFSF) (https://bobwessels.nl/blog/2017-02-doc2-notes-for-ep-on-proposal-restructuring-directive/.  Mid 2020 I gave my feedback to the report ‘A new Vision for Europe’s capital markets’, presented as Final Report of the High Level Forum (HLF) on the Capital Markets Union (CMU). I was not particularly positive, see https://bobwessels.nl/blog/2020-06-doc4-high-level-forum-cmu-report-misses-the-mark/. My conclusion: ‘It is unfortunate and a missed chance that the HLF does not sufficiently align its proposals with the current status of European insolvency law. It is also difficult to determine whether the HLF has been able to appreciate the extremely difficult harmonization process in the area of law. The challenge for the Commission will, however, primarily be how to convert the unilaterally presented one-sided interest of investors in case of a debtor’s default in an efficient CMU into an instrument of European insolvency law, as insolvency law inherently takes into account all interests involved.’

CMU2020. Five years after its grand entry in 2015, the CMU had not succeeded. Capital markets remain very fragmented. In 2020 a revised CMU action plan was introduced (‘A capital markets union for people and business’, see COM/2020/590) and in September 2021 EC President von der Leyen emphasised the need to implement that 2020 plan. And now, last week, the Commission is ‘delivering’ by putting forward four proposals. In short these are:

1 The creation of the European single access point (ESAP), intended to serve as a common source of information on EU companies and investment products, regardless of where in the EU they are located or originated;

2 Promoting long-term investment for retail investors – targeted revision of the EU Regulation on the European long-term investment fund (ELTIF)

3 Enabling more diversified funding for companies, with a targeted revision of the AIFMD, to make it easier for EU companies to access financing by harmonising the regulatory framework for funds that issue loans; and

4 Enhancing market transparency, leading to a review of the Markets in Financial Instruments Regulation (MiFIR).

The proposals presently are under review by the EU Parliament and the Council of the EU. All of these proposals are designed to contribute to achieving the CMU objectives. Progress on other CMU actions continues. The Communication is not shy in saying that this progress is ‘… paving the way for further ambitious deliverables in 2022’.

Insolvency. At this juncture, the Commission provides:

‘3.4. Corporate insolvency: a more predictable outcome for businesses and investors

In integrated capital markets, providers of finance should have a similar level of confidence when granting credit to businesses across borders as they have in their domestic market. A key aspect of this is a high degree of legal certainty about the consequences if a company gets into financial distress. Currently, however, Member States’ insolvency laws differ markedly. Making insolvency laws more similar throughout the EU will support the integration of national capital markets. This is a long term undertaking, because insolvency laws are complex and reflect national policy choices about how best to protect vulnerable stakeholders in case of business insolvency.

The Commission will propose an initiative by Q3 2022 that will seek to harmonise targeted aspects of the corporate insolvency framework and procedures. Subject to an impact assessment, the Commission will propose a Directive. The exact scope of this Directive proposal will be subject to further discussions with Member States and the European Parliament. This Directive proposal could be complemented by a Commission Recommendation’.

Enhancing insolvency convergence. Since early this year, the Commission is developing its thoughts on ‘Enhancing the convergence of insolvency laws’. The following has been communicated:

‘To harmonise insolvency in a targeted manner, the Commission could consider aligning some features of insolvency regimes from the following non-exhaustive list, to maximise value preservation in insolvent businesses:

(i) prerequisites for when insolvency proceedings should be commenced (including a definition of insolvency and provisions on who is entitled to file for insolvency);

(ii) conditions for determining avoidance actions and effects of claw-back rights;

(iii) directors’ duties related to handling imminent/actual insolvency proceedings;

(iv) position of secured creditors in insolvency taking into account specific needs for the protection of other creditors (e.g. employees, suppliers);

(v) court capacity when it comes to expertise and necessary training of judges; and

(vi) asset tracing which would be relevant, in particular in the context of avoidance actions.

Next week I will take a venture as to which topics would be serious candidates for a future Directive, and which topics the Commission would have in mind with its suggestion to ‘complement’ that Directive with a Recommendation.