In the first decade of this century, in European insolvency law the H-word was on the list of banned terminology. In 2011 the ice had been broken by the European Parliament (EP). It was assisted in its decision via a group of reports from mainly practitioners gathered in INSOL Europe, European’s largest insolvency practitioners’ group. The EP gave its go-ahead for ‘harmonization’: it was considered possible that in certain areas of insolvency law harmonization is useful and feasible, even where the creation of substantive insolvency law at EU level itself is regarded as impossible. The latter view is still held in the recitals to the European Insolvency Regulation, which replaced in 2017 the earlier version of 2002.
Since then, in the European Union, the various bodies of the EU (EP, Council, Commission) have been working to harmonise national insolvency laws. In 2012 the European Commission reacted with a proposal to give companies a ‘second chance’ via modernisation of their insolvency regimes. This thought continues to be at the forefront of the Commission’s political agenda in the aim to promote the functioning of the internal market. In 2014, a (non-binding) recommendation from the European Commission is a next step containing a new approach to business failure and insolvency. The EU Member States were, however, slow in following up enough on the Commission’s encouragement to introduce rules that enable viable companies in financial difficulties to be restructured at an early stage and to avoid formal insolvency.
Then the panels slide. In 2015, with its Action Plan for Building a Capital Markets Union (CMU Action Plan), the Commission set course for European legislation in the field of ‘early restructuring and second chance policy’. Its original main policy objective to harmonise insolvency law is downgraded to an accompanying measure to achieve another ambitious goal, namely the European Union’s Capital Market Union (CMU). The CMU has the aim of circulating investments and savings between all EU Member States so that citizens, investors and companies can benefit, wherever they are located. In 2016, that policy goal is not not fully rip to harvest. A draft Directive on preventive restructuring will be published, which has been adopted in June 2019 at the EU level as the Preventive Restructuring Directive (2019/1023), to be implemented by June 2021. Many EU Member States used the possibility to request the European Commission to extend the implementation period of the Directive until 17 July 2022.
In its core, the Directive focuses on three topics, namely:
(i) giving viable companies in financial difficulties access to a system that allows them to restructure their debts,
(ii) giving entrepreneurs (natural persons) a ‘second chance’ by waiving their debt in full; and (iii) rules to make insolvency proceedings more efficient, in particular to shorten their duration.
The Preventive Restructuring Directive necessitates drafters, especially those on the European continent and their advisors, to think hard on some core and also new themes. The main subject of the Directive has to be analysed and formulated: when a debtor is likely to become insolvent, he should be in the position to negotiate a restructuring plan with its creditors; a stay should be available to halt creditors exercising their rights; the creditors should be put in voting classes; a certain majority should adopt the plan; a court should cram down holdout creditors; specific new finance for the company should be protected; and the debtor in possession should be able to steer the whole process. It is certainly not easy to get this show on the road. With extreme legislature pressure due to the sudden need to adapt (amongst others) national insolvency legislation following the 2020 COVID-19 outbreak, it is not surprising that these EU Member States wished to have more time.
In addition, present times are rather different then some three or four years ago. Some continental legislators had already been adopting rules to accommodate new restructuring modes, not because ‘Brussels’ thought it was a good idea, rather following a global wave of legislative changes promoting business rescue over formal insolvency liquidation. Furthermore, many legislations had sudden changes in their insolvency laws to cope with the COVID-19 outbreak. These changes relate to procedural measures, director’s duties or substantial norms concerning funds and subsidies companies have received in relation to their ‘near to insolvency’ status.
A final cross-border battle is to be expected with the question which national (implemented) preventive restructuring proceedings can be given European effect, by listing these on Annex A of the Insolvency Regulation. That insolvency premier league is already unfolding. From 9 January 2022, a revised Annex A (and B, mentioning IPs) has entered into force, updating the number of listed insolvency proceedings and insolvency practitioners that fall within the scope of the EIR 2015. In this separate Regulation (2021/2260) includes amendments from Austria, Cyprus, Germany (the public StaRUG proceeding), Hungary, Italy (remarkably for certain proceedings entering into force only as per 15 or 16 May 2022), Netherlands (the public WHOA-proceeding), Lithuania and Poland. It may be a relief for many readers, that the European Insolvency Regulation does not apply anymore to the UK and the EU legislator has now removed their insolvency proceedings and practitioners from the Annexes. Without any goodbye.
The long history of enrolling the harmonisation theme in the EU, the Member States’ own strong and uncompromising views on several aspects of the theme during the process, the complexities of the many possible legislative options in the Directive itself and national legislative changes already recently made, be it related to ‘business rescue’ of the pandemic, call for an actual and comparative view on how other countries do have addressed these.
Led by two University of Leiden scholars, during the course of this year, reports will be published which allow to get clear and detailed insight in other countries’ implementation of preventive restructuring solutions, as well as the restructuring’s effects on matters of company law and general contract law. In this process, practitioners in their day-to-day practice are further developing their know-how and expertise concerning matters as financial restructuring, corporate finance and reorganising businesses. National implementations in a comparative perspective can certainly assist scholars to better understand any implemented tool but also practitioners to raise their standards of know-how. I hope to be able to write about certain matters.
While we’re on the subject, the EU’s ‘glorious’ policy theme CMU, that some six odd years ago threw a spanner in the European harmonisation wheel, has gradually lost its lustre. Nevertheless, five years down the road, the CMU politically got its booster with a new CMU Action plan, which it launched in September 2020. It certainly looks like it that the Commission is trying to get things out of the doldrums. The roles in the theatre play have been changed, where present national law seems to be designated the role of the scapegoat. The Commission states that the divergent national insolvency law is a structural obstacle to cross-border investments and thus to the creation of an internal market for capital. In particular, cross-border investors find it difficult to estimate the duration and outcome of value recovery procedures, making it difficult to properly price risk, especially for debt instruments. The harmonisation of certain targeted elements of national insolvency rules or their convergence could improve legal certainty. The Commission’s new plans are expected after the Summer 2022, perhaps again as a Directive, possibly supplemented with a Recommendation. This topic also is a matter for close consideration.
In 2022, the EU walks boldly ever onwards.
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR in January 2022. See globalrestructuringreview.com