Harmonisation of Insolvency Laws – a possible undertaking?

It is generally agreed that the diversity of national insolvency laws hampers cross-border business, insolvency proceedings, and restructuring efforts. Creditors who give a loan to a financially stricken debtor who is located in another state must be aware of the risk of the debtor’s insolvency which implies the application of the lex fori concursus (cf article 7 EIR). This might differ massively from the creditor’s home country’s insolvency law, which causes a lot of uncertainty for the creditor’s legal position and raises the transaction costs for loan and security agreements. Against this background, it does not come as a surprise that the European Commission strives for the harmonisation of national insolvency laws on an EU level. It has therefore reactivated the Group of experts on restructuring and insolvency law (E03362) and intends to submit a proposal for the harmonisation of insolvency law by the end of June 2022. The ‘non-exhaustive list’ of relevant features includes prerequisites for when insolvency proceedings should be commenced (including a definition of insolvency and provisions on who is entitled to file for insolvency), conditions for determining avoidance actions and effects of claw-back rights, directors’ duties related to handling imminent/actual insolvency proceedings, position of secured creditors in insolvency taking into account specific needs for the protection of other creditors (eg employees, suppliers), court capacity when it comes to expertise and necessary training of judges, and asset tracing which would be relevant, in particular in the context of avoidance actions. For anyone familiar with the field, this is an impressive catalogue and it is probably safe to say that this list cannot be solidly worked through in one year or at least might be perceived as being rather ambitious. However, is this a possible undertaking at all?

Generally speaking, I think it is. One of the areas for which more detailed thought could be given to harmonisation is transactions avoidance law. Together with my colleague Michael Veder, professor at Radboud University Nijmegen/NL, I have carried out a large-scale and in-depth research project on the harmonisation of this field of insolvency law. We were supported by an international working group composed of leading avoidance law experts from all EU Member States and the UK. We have now finished our work by presenting to the European Commission a proposal for a Model Law comprising nine sections on transactions avoidance intensively reasoned in the final report which has recently been published. The Model Law deals with general prerequisites (eg the requirement that the challengeable act caused a detriment to the general body of creditors), the objective and subjective elements of avoidance grounds (preferences, transactions at an undervalue, transactions intentionally disadvantaging creditors), and the legal consequences for the recipient of the challengeable transaction and third parties.

Our proposal has been submitted to, and discussed by, the said Expert Group which is very supportive of our ideas. The Commission has scheduled an official decision for the end of June 2022. They have the choice between proposing to the legislative bodies of the EU a Regulation, a Directive, a Recommendation, or no action at all. In this context, it might be helpful that our research project comprises impact assessments regarding the consequences for national insolvency laws in case the Model Law should become the blue print for a Directive. These impact assessments prove the feasibility of efforts to harmonise transactions avoidance laws based on the Model Law. Currently, everything points to the fact that both the Expert Group and the members of the responsible unit for civil justice of the European Commission will recommend that our Model Law be cast into a Directive. In any case, the responsible director of DG JUST, Salla Saastamoinen, Director for Civil and Commercial Justice, has already announced on 25 November 2021 at an online conference of the independent insolvency law network CERIL that the European Commission will proceed accordingly. This is remarkable, since it proves that academic research can be of significant political impact. However, the way to harmonisation is a bumpy road. Once the subject is out of the hands of academics and experts, other influences will gain weight. On verra!

The blog post Harmonisation of Insolvency Laws – a possible undertaking? was originally published at the Oxford Business Law Blog. 

Reinhard Bork holds a Chair for Civil and General Procedure Law at the University of Hamburg/DE. He is also Professor of International Insolvency Law at Radboud University Nijmegen/NL, and Senior Research Fellow, Commercial Law Centre, Harris Manchester College, Oxford.