Europe's Answer to Chapter 11?
On 22 November 2016, the European Commission published a draft directive on insolvency, restructuring and second chance (the ‘Proposals’).
What are the Proposals? The Proposals have three main parts:
- a preventive restructuring framework;
- a second chance for entrepreneurs; and
- measures to raise the efficiency of restructuring, insolvency and second chance more generally.
The objective is to reduce barriers to the free flow of capital stemming from differences in member states’ restructuring and insolvency laws. Member states will need to ensure that their national preventive restructuring procedures comply with certain minimum principles.
The Proposals flow from the 2014 Recommendation issued by the Commission on restructuring and second chance. That had no legal status and very few member states took action. The Proposal is to complement the EU Regulation on Insolvency Proceedings and its recast (which comes into effect in June 2017).
What are they not? The Proposals are not (yet) law. They are the Commission’s draft of a law. The directive is subject to the co-decision procedure. This means that the Council (ie the member states) and the European Parliament will both look at the Proposals and make the amendments they deem necessary. We can therefore expect some dialogue and some changes to this draft before anything becomes final. Once the draft is final, member states will have 2 years to implement the measures required.
What is the preventive restructuring framework? The idea is that each member state has common, core elements for a preventive restructuring framework to give effective access to procedures facilitating restructuring plans. Key features are:
- The debtor is to be left in possession of its assets and affairs and a supervisor or mediator may be appointed but should not be as a matter of course in each case.
- The debtor should be able to apply to court to stay individual enforcement actions. This is subject to certain safeguards (duration and conditions for lifting the stay). Any mandatory insolvency filing rules should be disapplied during the period of the stay. The debtor should also be able to count on the continued performance of contracts with suppliers (provided that the debtor fulfils its obligations under such contracts).
- Creditors are to be divided into classes to adopt the plan. As a minimum, secured creditors should be treated separately from unsecured creditors. Cross-class cram down is to be available if the plan is confirmed by the court.
- Shareholders should not be able to obstruct a restructuring and member states may need to modify company law provisions.
- Member states are to impose specific duties on directors to incentivise them to pursue an early restructuring where the business is viable.
- The law should ensure a minimum protection for new financing necessary to implement a restructuring and/or granted in connection with a restructuring.
What are the measures to increase the efficiency of restructuring and insolvency? These are to apply to member states’ insolvency laws more generally, not just to an early restructuring framework. In short, member states must have competent and well trained courts and insolvency professionals.
Is this Europe’s answer to Chapter 11? It is notable that EU officials have acknowledged the influence of Chapter 11 on the Proposals. The Proposals only give guidance and much will depend on how the EU member states implement the restructuring plan regime. The new mechanisms should work better for European businesses than US Chapter 11, especially for small and medium size businesses. The costs of a Chapter 11 restructuring can be substantial and this is particularly problematic for smaller businesses (as US commentators have noted). If fully embraced by member states, the Proposals would move Europe closer to the Chapter 11 model.
How does this affect the UK? The timing of the Proposals and then the implementation period of 2 years means that it is likely to overlap to a significant degree with the timing of the Article 50 notice and eventual Brexit. Whether the UK chooses to implement the Proposals anyway remains to be seen. The UK is currently undergoing its own consultation on the corporate insolvency framework – and many of the concepts contained in the domestic consultation are the same as those set out in the Proposals.
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