Body of EU insolvency law growing. In Europe, before the present century, insolvency law was mainly organised nationally. If there was a rare international case, disputes had to be solved by applying a country’s private international law. For cross-border insolvency cases, the law was underdeveloped or based on themes other than insolvency. Until the end of last century insolvency proceedings were also simple: national laws covered mainly liquidation proceedings. Now, over 20 years later, a larger part of Europe is organised economically under the European Union and the legislative emphasis is gradually shifting towards EU-led legislation. We’re also seeing enormous growth in the variety of proceedings, occupying a broad scale between flat liquidation and skinny restructuring where the proceedings just affect a debtors’ financial obligations. Overall, in the EU, the number of these types of insolvency and restructuring proceedings has risen to some 125 (and counting).
Focus on EU legislator. The EU took a lead with its intention to facilitate the functioning of insolvency proceedings across the Union. The first step it took was to provide for a system regulating cross-border insolvency. Back then, harmonisation of national insolvency laws was seen as too difficult. This year the EU will celebrate the 20th birthday of its regulated cross-border insolvency law, the original European Insolvency Regulation (EIR 2000, No. 1346/2000), which came into force in 2002. That Regulation was renewed and amended by the Insolvency Regulation (Recast) (EIR 2015, No. 2015/848). The EIR 2015, which is close to three times longer than the original one, came into force in 2017. Since the second decade of this century, the EU has finally taken on the aim of harmonising the laws of its member states on insolvency and restructuring. It took some eight years before, in 2019, the Preventive restructuring Directive (PRD, No. 2019/1023) was published. All member states have implemented the PRD or are in the process of doing so before July 2022. In the PRD’s wake, the EU Commission has also revived its Capital Markets Union (CMU) 2.0 Action Plan, which was published in September 2020. The plan indicates that 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. In the third quarter of 2022 a new Directive and/or Recommendation may be expected for targeted aspects for corporate insolvency too.
Zipper-ing two sets. The two new instruments, the EIR 2015 and PRD, have been welded together with the PRD’s invitation to member states to provide for national preventive restructuring procedures that are fully compatible with the EIR 2015 and can be added to its Annex A for cross-border recognition and enforceability. To be notified under Annex A, for example, a procedure must fulfil a condition that it is public. The PRD, however, does not require such preventive procedures to be listed on Annex A. If member states decide to provide for a different procedural design, the PRD is silent. Will the aspired cross-border effectiveness of the procedure be served by the Brussels Regulation? Or will the Brussels Regulation’s “bankruptcy exception” at Article 1(2) apply: “This Regulation shall not apply to: (b) bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”. The PRD only provides for a limited stay in case of a recent COMI shift. The only clear and effective option for member states to ensure preventative procedures can be recognised in other member states, is to maintain or introduce procedures that fulfil the conditions of Annex A of the EIR 2015. As per February 2022, around half of EU member states have implemented the PRD or modernised their existing procedures as a consequence of ongoing legislative changes to provide for a rescue culture in order to meet the requirements of the PRD. The latest group joining being: Croatia, Germany, Greece, Hungary, Italy, Netherlands, Poland, Portugal, Slovak Republic and Spain.
Just two questions. Focussing on these types of proceeding, two questions arise. First, is the EIR 2015 actually a beneficial instrument for preventive restructuring proceedings? As commonly known, its application rests on the COMI jurisdiction test, but also allows for a wider use of secondary insolvency (liquidation) proceedings very much based on territoriality. The EIR 2015, like its predecessor, is founded on notions of liquidation from the last century and contains provisions tailor-made for traditional, fully collective, asset-oriented insolvency proceedings. The query is whether the EIR 2015 is helpful for preventive restructurings where things like mandatory publicity, applicable law provisions, parallel proceedings and group coordination are concerned. Thinking about it, in all its core topics of international jurisdiction, applicable law, recognition and parallel proceedings, the EIR 2015 may not perfectly suit preventive restructurings. Second, what to do with those restructuring proceedings that will not be listed under Annex A? Evidently, for non-public, “private” restructurings, the EIR does not work – and from some 150 cases started under the WHOA in the Netherlands since 1 January 2021, a large majority are private restructurings. Can parties resort to the Brussels Regulation? What about the “bankruptcy exception”? Will member states draft national private international rules? Whatever way is chosen, the aspired cross-border effect of a restructuring results in an erosion of the EIR 2015 resulting in a fragmented legal framework for the European internal market. In all, the present development regarding restructuring eats away the effectiveness of the EIR 2015.
Work in progress. A vigorous response is needed if new preventive restructuring tools, presently cooking in member states’ legislative kitchens, are to be effective and have applicable cross-border effects. The European Insolvency Regulation itself, luckily, is not a static piece of text. Article 90(1) EIR 2015 (the “Review clause”) provides that no later than 27 June 2027, and every five years thereafter, the European Commission shall present to the European Parliament (EP), the Council and the European Economic and Social Committee (EESC) a report on the application of the regulation. The report shall be accompanied where necessary by a proposal for adaptation. So there is space enough to amend the regulation – but why wait until 2027 (or for any new EU law)? At least one topic for the review is certain, see recital 22: “… At the next review of this Regulation, it will be necessary to identify further measures in order to improve the preferential rights of employees at European level …”. This echo of political priority may have been a scribble in the margin and may have been taken into the recital by mistake – or maybe it should be taken seriously. Whatever, in the latter case it is odd as this intention rather belongs to the area of harmonisation.
Are men at work indeed? Article 90 of the EIR 2015, in addition, expresses the wish of the stakeholders in the review process to be informed in depth and in detail on three larger matters. One, it says the Commission shall present to the EP, the Council and the EESC no later than 27 June 2022 a report on the application of group coordination proceedings. The report shall be accompanied where necessary by a proposal for adaptation of the regulation (Article 90(2) EIR 2015). In a 2021 study, the Conference on European Restructuring and Insolvency Law (CERIL), an organisation that I chair, demonstrated that in four years after the EIR 2015 became binding, not a single significant case of a cross-border group insolvency has been handled under the rules on group coordination proceedings. Two, the Commission shall also present to the EP, the Council and the EESC, no later than 1 January 2016 (indeed 2016!), a study on cross-border issues in the area of directors’ liability and disqualification (Article 90(3) EIR 2015). I have not yet seen such a study. Three. No later than 27 June 2020, the Commission was further required to present to the EP, the Council and the EESC a study on the issue of abusive forum shopping (Article 90(2) EIR 2015). Again, I have not seen such a study on abusive forum shopping.
Regulation falling into ruin? Is the European Insolvency Regulation’s edifice deteriorating? The structure of the regulation, which allows member states to be in charge of listing proceedings in Annex A, contains a serious flaw, as I already explained in an interview with GRR back in 2017. Furthermore, it does not seem the best solution for PRD-oriented restructuring proceedings and is unavailable for national “private” restructurings. Moreover, the legislators (EU, UK, member states) have left a gap in the space for cross-border recognition of restructuring proceedings between the UK and EU that was created after Brexit, although alternatives have been presented. It has also been known for years that national procedural rules giving effect to the EIR 2015 differ substantially. The EIR 2015’s other innovation (aside from group proceedings) laid down in article 36 – the right to give an undertaking in order to avoid secondary insolvency proceedings – seems to be dead wood. If on the continent the “undertaking” has been used, it must have been only once or twice. The interconnected system of national insolvency registers, which was due to be completed in June 2021, only covers half of the member states so far. In all, it seems that corrosion has set into the building fabric of the EIR 2015 already: the regulation’s edifice contains leaks, rain and wind have free reign, some of its rooms are unused, some other rooms are unconnected, some necessary extensions are missing.
Silver jubilee ahead? If the EU wishes to celebrate the EIR’s silver jubilee in five years from now, repair men and architects should have been called in already.
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 on 22 February 2022. See globalrestructuringreview.com