Best Practices in European Restructuring. A Theoretical and Empirical Research with Some Proposals for the Directive on Preventive Restructuring Framework

The European Commission has funded a project to study ‘semi-formal’ insolvency proceedings in four EU countries (Germany, Italy, Spain, and the UK) to collect the best empirical data available in each jurisdiction and to draw on these to crystallise best practices in the domain. The project entitled ‘Contractualised Distress Resolution in the Shadow of the Law: Effective judicial review and oversight of insolvency and pre-insolvency proceedings’ reports its preliminary results in Brussels on 5 July 2018. The event is hosted by the Centre for European Policy Studies and will be available on the CEPS YouTube channel.

Semi-formal proceedings are those with limited court involvement and limited use of distinctive insolvency measures such as the moratorium on claim enforcement. The project team has formulated harmonised guidelines for the drafting, approval, examination, confirmation and implementation of fair and efficient insolvency and pre-insolvency plans for use in such proceedings. The guidelines are addressed, variously, at lawmakers, judges, and stakeholders such as banks. One of the effects should be to facilitate effective judicial review and oversight of proceedings aiming at rescuing distressed but viable enterprises, with a particular focus on proceedings with limited court involvement.

The goals of the project and the Directive on preventive restructuring frameworks

The project was conceived before the European Commission adopted the proposal for a Directive on preventive restructuring frameworks, some variant of which looks set to be approved shortly, and fits squarely within the Directive’s context. The draft Directive seeks to facilitate out-of-court agreements between distressed businesses and their creditors. This move away from formal insolvency proceedings would open up a vast area to private ordering, with all the associated opportunities and risks. Businesses and their advisors will have access to new instruments to deal with distress and insolvency intended to enable a faster and more effective restructuring. At the same time, the reduction of court involvement and procedural formalities would likely create new risks for participants and third parties, and perhaps, even for the economy as a whole.

The introduction of this new framework would probably be marked by significant uncertainty for all actors, with the usual increased costs, including additional advice, new drafting, higher risk premia, and foregone opportunities. With the provision of guidelines, we seek to reduce the uncertainty in this ‘light touch’ area of insolvency law, which is paramount. Guidance on best practices can serve to fill the space given by contractualised distress resolution—which already exists and will likely increase with the Directive—in an adaptive and flexible manner.

As mentioned, the research is also drawn upon to provide policy recommendations for national legislators and to contribute to the strengthening of the draft Directive: the research group has developed, always on the basis of the empirical research, a list of ‘Re-drafting suggestions for the Directive’, which in some instances is too restrictive and could curb some kinds of restructurings which would be worth pursuing.

The research

The basic idea of the research was to use a bottom-up approach: gather data, both quantitative and qualitative, in order to assess what the strengths and weaknesses are of restructuring proceedings in the jurisdictions involved in the research (Italy, Spain, the UK, and Germany). This was the starting point to draft guidelines for insolvency professionals and policy recommendations for national and EU legislators.

In Italy, data was collected for over 3,000 insolvency procedures and 500 court-confirmed ‘schemes’ over a time span of eight years: data was collected from questionnaires to insolvency practitioners, court dockets, the enterprises register and confidential data from the Bank of Italy’s register of loans, to obtain the most comprehensive dataset ever compiled in Italy with regard to these procedures. In Spain, the research has covered 70 group court-confirmed schemes, including more than 400 individual schemes, which amount to almost 100% of all plans of this kind approved since inception of the law. In the UK, more than 3,000 cases were considered, comprising over 2,000 administration procedures under the Insolvency Act 1986 commenced in 2012 and, as a comparator, 1,000 receivership proceedings; notices from the London Gazette were then compared to reports filed in the Companies House’s online database. Qualitative evidence was also gathered on the now-notorious Global Restructuring Group of the Royal Bank of Scotland. In Germany, in-depth interviews with industry experts were conducted; similar qualitative empirical research was also conducted in Italy and Spain.

The final report summarises and systematises extant best practices and proposes others that, based on the empirical data, the research group recommends implementing in any restructuring framework. The report includes eight chapters, including on early warning and timely access to restructuring, the content of the restructuring plan, its fairness and its qualifying elements, the way negotiations should be carried out, how the examination and confirmation process should be structured, what its finalities should be, and how the plan should be implemented and how its implementation should be monitored. A final chapter is dedicated to special measures for M-SMEs. The report will shortly be downloadable from the Project’s website and from the SSRN.

The team

The research project is co-funded by the DG Justice of the European Commission and is led by Università degli Studi di Firenze (Project Coordinator), Humboldt-Universität zu Berlin (Partner) and Universidad Autónoma de Madrid (Partner), with the support of the Consejo General del Poder Judicial, Banca d’Italia and Entrepreneurship Lab Research Center (Associate Partners).

Lorenzo Stanghellini is a Professor (full) of Business Law at the University of Florence and a Member of the Group of Experts on restructuring and insolvency law.

Riz Mokal is a Barrister, an Honorary Professor in Laws at UCL and a Visiting Professor at the University of Florence.

Ignacio Tirado is a Professor (titular) of Corporate and Insolvency Law at the Universidad Autónoma of Madrid, a Senior Consultant at the World Bank, and a Member of the Academic Board of the European Banking Institute.

Christoph Paulus is a Professor (full) of Law at the Humboldt Universität zu Berlin, and a Member of the Group of Experts on restructuring and insolvency law.

Alessandro Danovi is an Associate Professor of Management at the University of Bergamo and the Director of the Research centre Osservatorio Crisi e Risanamento delle Imprese-OCRI.

Iacopo Donati is a Post-doctoral Fellow at the University of Florence.

Marta Flores is an Assistant Professor (Profesora Ayudante Doctora) at the Department of Commercial Law of Universidad Autónoma of Madrid.

Patrizia Riva is an Aggregate Professor of Business Administration at the Università del Piemonte Orientale and a Chartered Accountant.

Wolfgang Zenker was a Research Assistant at the law school of Humboldt-Universität zu Berlin and is now practising as a Rechtsanwalt.

Andrea Zorzi is an Aggregate Professor (tenure track) of Business Law at the University of Florence.