EU Directives on Restructuring and Insolvency

The EU is taking steps towards harmonisation of the laws relating to financial distress in EU Member States. These efforts are intended to encourage cross border investment and improve the free flow of capital within the EU. Differences in Member States' insolvency laws make it more difficult for cross border investors as they may need to understand many different regimes.

The EU 2019/1023 Directive on Restructuring and Insolvency (Directive) required Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2022. The original deadline was 17 July 2021, but many Member States used the option to extend that deadline by one year.

A proposal for another directive (Proposed Directive) harmonising further aspects of insolvency law was made by the European Commission in December 2022.

 

The Directive

The Directive aims to promote a rescue culture in the EU. It focuses on two areas: (1) ensuring that viable enterprises and entrepreneurs in financial difficulties have access to effective preventative restructuring options; and (ii) providing for honest insolvent or over-indebted entrepreneurs to have a full discharge of their debts after a reasonable period of time.

Notable features required to be included in Member States’ national laws under the Directive include:

• An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
• A stay of initially up to four months, extendable to up to 12 months, to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
• An ability to cram down dissenting classes of creditors.
• Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
• Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

 

The Proposed Directive

The Proposed Directive would seek to harmonise further aspects of Member States' insolvency laws. It aims to make it easier to recover assets from the liquidated insolvency estate; make insolvency proceedings more efficient; and ensure a predictable and fair distribution of recovered value among creditors.

The Proposed Directive is making its way through the EU legislative process. Changes may be made during that process. It is not certain if or when the Proposed Directive will come into effect. The current intention is that Member States would have 2 years from the entry into force of the Proposed Directive to bring into force any required changes to their national laws to meet the requirements of the Proposed Directive.

Features which would be required to be included in Member States' national laws by the Proposed Directive include:

• Pre-pack proceedings. A process for pre-pack sales, including a preparation phase aimed at finding a buyer for all or part of the debtor's business; and a liquidation phase, aimed at approving and executing a sale and distributing the proceeds to creditors. The Proposed Directive provides for a practitioner known as a monitor to be appointed to oversee the process and for a moratorium to apply during the preparation phase.

• Avoidance actions. An ability for the following types of actions to be declared void and for parties benefitting from such acts to compensate the insolvency estate:
  • Actions which benefitted a creditor or group of creditors (preference transactions) which were carried out in the three months prior to, or after, the opening of insolvency proceedings. There would be exceptions and limitations to the types of actions covered. For example, actions for fair consideration would be excluded and actions which satisfied a due claim in the expected manner, would only be void if the creditor knew or should have known that the debtor was unable to pay its debts or that a request for opening insolvency proceedings had been made.
  • Actions made for no or manifestly inadequate consideration, within the year prior to the opening of insolvency proceedings.
  • Actions by which the debtor has intentionally caused a detriment to the general body of creditors, within the four years prior to, or after, the opening on insolvency proceedings, and where the other party to the act knew or should have known of the debtor's intent to cause a detriment to the general body of creditors.

• Tracing of assets. An ability for designated courts to access and search certain bank account information where necessary to identify and trace the debtor's assets and an ability for insolvency practitioners to access beneficial ownership information and national asset registers.

• Filing duty for directors. Obligations on directors to file for insolvency within 3 months of the time when the directors became aware, or could reasonably have been expected to become aware, that the entity is insolvent and for directors to have personal liability if they do not do so.

• Simplified winding up processes for microenterprises. A simplified winding up process, meeting the requirements set out in the Proposed Directive, for microenterprises.

• Creditors' committees. Provision for creditors' committees of between three and seven members to be formed and to have prescribed rights, powers and duties, including the right to be heard in insolvency proceedings and the duty to supervise the insolvency practitioner.