European Insolvency Law: Towards a Colossus with Feet of Clay?

In the last decade, EU Insolvency Law has been dynamic: to take only the general rules, the Regulation (EU) 2015/848 of 20 May 2015 on Insolvency proceedings (Recast) was followed by the Directive (EU) 2019/1023 of 20 June 2019 on Restructuring and Insolvency, and by a proposal for a directive harmonising certain aspects of insolvency law of 7 December 2022, currently under discussion, as part of enhancing the Capital Markets Union (adde, Enrico Letta’s and Mario Draghi’s recent reports). Beyond the interest they have generated from an academic point of view, these efforts towards greater unification or harmonisation of relevant rules in order to promote the internal market have brought, or may yet bring, about significant changes with regard to national or cross-border insolvency proceedings (the precise effect varying, of course, depending on the type and content of the legal instrument, and acknowledging that some of the European provisions have been inspired by national legislations and lessons from the practice, so that to this extent, those provisions may reflect, rather than require some change in, a national position).

Anyway, legal certainty is needed, and while flexibility is helpful (and probably inevitable to reach a compromise for the adoption of EU legislation in the first place), it should not serve as an excuse for a lack of clarity that may harm the objectives set, such as, in concrete terms, the ability to deal with financial difficulties of the debtor in a quick and efficient manner. In this regard, having a thorough look at provisions already in force from time to time may be useful. The European Union will soon have the opportunity to improve the legal framework if need be: review clauses in the above-mentioned Regulation and Directive provide that, respectively, in June 2027 and July 2026 at the latest, the Commission will present reports on the application of those texts with, possibly, a proposal for adaptation. On the basis of recent research into EU Insolvency Law (A. Tehrani, Droit européen de l’insolvabilité, Bruylant, 2024) and the relevant European case law published since then (up to the end of November 2024), I argue that there is room for further clarification of current legislation and that thinking more deeply about the reasons that explain or help explain the existing lack of clarity may valuably inform the approach to producing greater certainty in these areas.

On the one hand, studying the Insolvency Regulation (Recast) and the Directive on Restructuring and Insolvency shows that there is significant room for further clarification. The concept of insolvency itself, not precisely and consistently defined at the European level, raises some difficulties and, even if this is conceivable in method, finding that some national proceedings (such as the French Sauvegarde Accélérée) can be listed in the Regulation annex A and therefore characterised as ‘insolvency proceedings’ for the purposes of this Regulation whilst they can also be used to implement the Directive as a type of ‘preventive procedures’ (hopefully to avoid insolvency), may be conceptually confusing. Another example is the blurred definition of the concept of ‘judgment opening insolvency proceedings’ in the Regulation (giving rise, for example, to discussions in some cases about whether there is a need to wait for a decision to confirm the opening of insolvency proceedings), while the ability to identify the relevant decisions clearly is crucial to the overall scheme of the Regulation, especially as it triggers automatic recognition in other Member States. More broadly, it is often not easy to know precisely how the provisions should come into play or be properly implemented. For instance, in the Regulation, taking article 7 and article 9 as to set-off, there are several uncertainties related, inter alia, to the scope of the lex fori concursus, the type(s) of set-off governed by article 9 or the time when the creditor’s claim should arise. Similarly, in the Directive, the meaning of some provisions may be difficult to grasp, and the fact that the implementation will have led the Member States to take options and sometimes eliminate some of the uncertainties is not a reason to leave things as they are in the European source. This is the case with the often not clear enough article 12 about equity holders, which has created significant uncertainty, in particular in relation to the fundamental question of the circumstances in which they may be deprived of their voting rights,  bearing in mind article 9.3 and recital 57. Another illustration is the somewhat uncertain concept of ‘the next best alternative scenario’, in the definition of the best-interest-of-creditors test, noting that, when implementing the Directive into their national law, some Member States, such as Spain, seem to have chosen to leave this alternative aside (while keeping of course the required test, with reference to the treatment of creditors in the event of liquidation).

On the other hand, thinking about the reasons that explain or could explain the lack of clarity may help in preparing future pieces of legislation, whether to revise existing provisions or to adopt new ones. Without claiming to be exhaustive, and aiming to formulate my proposals in as constructive a way as possible, I suggest, first, that greater coordination between these EU instruments is needed. In this respect, despite the need to amend some of its provisions, the Insolvency III proposed directive (version of 2022) goes in the right direction to the extent that, in seeking to avoid a ‘silo approach’, it looks at some of the provisions of the Regulation and Directive (see eg, definitions of insolvency practitioner and entrepreneur; adde, art. 20 about the liquidation phase or art. 23 about the stay of individual enforcement actions). However, while the explanatory memorandum of this proposal states that the Insolvency Regulation (Recast) ‘has no impact on the content of national insolvency law’ and ‘does not address the divergences across the Member States’ insolvency laws’, it must not be forgotten that the Regulation contains substantive provisions of private international law (eg art. 21.2, with the important decision of the CJEU, 18 Apr. 2024, C-772/22, Air Berlin notably providing some food for thought about avoidance actions, the interest of which incidentally goes beyond the Regulation, as shown by the proposed Insolvency III Directive). Second, amongst the generally helpful recitals of the Regulation and of the Directive, taken seriously by the Court of Justice of the European Union (see eg CJEU, 7 Nov.  2024, C‑289/23, AEAT v A), some should be amended to provide more details or context and hence, help to ensure a better grasp of some concepts or articles that are not self-explanatory, sometimes because they come from national legislations and are therefore difficult to understand for lawyers and authorities of other Member States. Third, in reviewing existing legislation, well-known controversies or uncertainties, such as the ones mentioned in the previous paragraph (but there are many others), sometimes already emerging from writings about older texts (see, for instance, the invaluable Virgós/Schmit Report), ought to be seriously and accurately dealt with. 

The further development of European insolvency law is an exciting prospect but also a challenge, as the quality of the law is essential for the regulatory objectives to be achieved. This challenge can be met as the body of European legislation or proposals in this field remains relatively manageable to date. In other words, there is still time to ensure that, should European insolvency law become a colossus one day, it does not have feet of clay.

Adrien Tehrani is a Professor of Law at the University of Montpellier.