Harmonising EU Preventive Restructuring Law: what have the national reforms brought us?

For most European Union (‘EU’) Member States, June 2022 marked the extended implementation deadline of the EU Preventive Restructuring Directive (2019/1023) (‘PRD 2019’). This Directive introduced the first EU legislative measures with substantive, albeit minimum harmonisation of restructuring and insolvency law. Besides debt discharge for over-indebted entrepreneurs, and measures to improve efficiency of restructuring, insolvency and discharge procedures, a key part of the PRD 2019 entails the so-called preventive restructuring frameworks (‘PRFs’). With respect to PRFs, the PRD 2019 lays down a set of provisions that should enable enterprises that face financial distress to restructure their capital structure at an early stage, while continuing their business.  

Now that most EU Member States have completed their transposition of the PRD 2019 into domestic laws, it is time to evaluate the outcome. The EU legislator has set ambitious objectives. As part of its endeavour to build a Capital Markets Union (CMU), the PRD 2019 aims to contribute to reducing legal uncertainty and the costs of cross-border investments, but also to ‘enable debtors to restructure effectively at an early stage and to avoid insolvency, thus limiting the unnecessary liquidation of viable enterprises’ (Recital 2 PRD 2019). Does the PRD 2019 succeed in achieving these objectives?  The EU legislator has left considerable discretion to the Member States in transposing the PRD 2019. At a first glance, this seems commendable, as it allows national legislators to accommodate their implementation of the PRD 2019 to the domestic context. However, this also works as an impediment to harmonisation as it allows Member States to design their own, diverse PRFs, limiting the de facto convergence.

Analysing domestic reforms of preventive restructuring laws

In a collaborative project for the e-Journal HERO, we have commenced an open access paper series analysing the recent reforms in preventive restructuring laws in seven European countries. The preface is followed by papers on Austria, Denmark, France, Germany, Greece, the Netherlands and—even though after Brexit there was no duty to implement the PRD 2019—the United Kingdom.

We have completed this first series now with a synthesis analysing how the reforms in these seven jurisdictions deliver on the policy objectives of the PRD 2019.  We do so by adopting a ‘law on the books’ approach and focussing on six topics: (i) the domestic approach to reforming preventive restructuring laws, (ii), the criteria or test to access PRFs, (iii) the actors involved in PRFs, (iv) the stay of individual enforcement actions, (v), the criteria for adoption and confirmation of restructuring plans, and (vi) the jurisdiction for and recognition of court decisions relating to PRFs.

What you see is what you get

In analysing these reforms, it becomes clear that a plethora of divergent features have emerged, although they are mostly within the scope of the PRD 2019’s policy options. The minimum harmonisation requirements of the PRD 2019 have resulted in—quite literally—minimum harmonisation in Europe.

At this point, it is at least doubtful whether the EU legislator’s objective to reduce legal uncertainties in (preventive) restructuring for cross-border investments has succeeded. Although a baseline for preventive restructuring has been established, the ‘laws on the books’ show extensive differences, as is the case, for instance, with the criteria to enter a PRF, the room for involvement of practitioners, duration of a stay and standards for adopting and confirming a plan. Key concepts such as ‘insolvency’, ‘likelihood of insolvency’ as well as ‘director’ have not been harmonised, since no uniform definitions are introduced, at the same time, national legislators can choose from many divergent policy options in shaping their PRFs. This has hampered the objective to effectively address legal uncertainty for cross-border investors.

Nevertheless, we can be more optimistic about the objective to promote restructuring at an early stage and avoid unnecessary liquidation. Nearly all EU Member States now have introduced a preventive restructuring framework, sharing some core features. This may contribute to restructuring at an early stage. However, the actual success of the PRD 2019 is to be assessed by analysing ‘law in action’: are the preventive restructuring frameworks effective and efficient? Are the courts, debtors and practitioners in the field of restructuring able to deliver on the promises of the PRFs? To what extent do preventive restructuring frameworks promote entirely out-of-court private workouts in the shadow of the law?

Toward further harmonisation of EU insolvency law

We observe that the PRD 2019 has emboldened the European legislator with respect to harmonisations of restructuring and insolvency laws. No longer is this an area where substantive harmonisation must be considered unattainable due to large divergences between jurisdictions.

We are at the start of the next wave of harmonisation of EU insolvency with the recent EC Proposal for a directive to harmonise certain aspects of insolvency law (‘EC Proposal’). Recently, in a first independent review by the Conference on European Restructuring and Insolvency Law (CERIL), the EC Proposal got a positive reception. A survey drawing on over 60 responses from CERIL members as well as other experts in the field of restructuring and insolvency law throughout Europe highlighted that, although opinions differ on aspects of the EC Proposal, there is general agreement that the European Commission is moving in the right direction.

This indicates already that there is a shift in the understanding of what could be harmonised at the EU level. This legacy of the PRD 2019 may prove to be more significant and relevant than what the current state of minimum harmonisation of preventive restructuring laws suggests.

Gert-Jan Boon is a Lecturer and Researcher at Leiden University (Netherlands).

Harold Koster is Professor of Company Law at Leiden University (Netherlands).

Reinout Vriesendorp is Professor of Insolvency Law at Leiden University (Netherlands).