Since the European Commission adopted the recommendation on restructuring and second chance in 2014, it has been working on the evaluation of its initiative and the introduction of a European legal framework. In 2015 the Capital Markets Union Action Plan included the announcement of a legislative initiative on early restructuring and second chance. Finally, on 22 November 2016, the European Commission published its proposal for a European Directive on preventive restructuring frameworks and a second chance for entrepreneurs. The proposal includes, inter alia, provisions protecting new and interim financing in restructurings.
Core elements for preventive restructuring frameworks
The main objective of the proposal is to provide a uniform European legal framework ensuring that a business experiencing financial difficulty has access to preventive restructuring proceedings as soon as possible. Further, it intends to encourage entrepreneurs to restart business activities and prevent entrepreneurs from being stigmatised when having failed with previous business activities.
The proposal aims to smooth out differences and to reach a higher degree of harmonisation in Member States' restructuring and insolvency legislations. Accompanying measures will help to improve the quality as well as reduce the length and costs of insolvency and restructuring proceedings. Considering the different national approaches, the proposed Directive only sets forth general objectives and principles, while leaving the detailed regulation to the Member States.
Title II of the proposal deals with the following core elements for preventive restructuring frameworks:
- Member States should ensure that debtors in financial difficulty have access to a restructuring framework which can consist of one or more procedures or frameworks;
- debtors accessing preventive restructuring procedures should be left in possession of their assets and affairs during the restructuring procedure. The appointment of a judicial or administrative authority should not be generally mandatory;
- debtors may benefit from a stay of individual enforcement actions if and to the extent it is necessary to support the negotiations of a restructuring plan, including a ban on the right to withhold performance or termination of contracts solely by virtue of restructuring procedures. Detailed provisions cover the (maximum) period, the extension and cancellation of such a stay and exceptions for certain claims. Additionally, the (meanwhile) insolvent debtor may refrain from filing for insolvency under certain conditions, and the opening of insolvency procedures may be deferred by a judicial or administrative authority;
- restructuring plans should include certain minimum mandatory information with model restructuring plans provided online;
- creditors should be treated in separate classes reflecting their interests, eg secured and unsecured creditors form different classes. Restructuring plans may be adopted by a majority of each class, whereas the Member States can adopt majority requirements up to 75 % for each class. In case the necessary majority is not reached, the restructuring plan may still be confirmed by a judicial or administrative authority under certain conditions. Certain restructuring plans may only become binding if they are confirmed by a judicial or administrative authority, eg restructuring plans providing for new financing or affecting the interests of dissenting creditors;
- shareholders and other equity holders should not be allowed to obstruct the adoption of restructuring plans of a viable business, provided that their legitimate interests are protected;
- creditors of new and interim financing as well as certain other transactions, should be excluded from voidance law and could be treated preferentially (see below); and
- expanded duties for directors to ensure that they initiate restructuring procedures as early as possible and to avoid insolvency proceedings.
Protection of new and interim financing in restructuring
The proposal acknowledges that the success of restructurings often depends on the availability of funds during the restructuring negotiations, in order to keep the debtor's business alive as well as funds for the final implementation of a restructuring plan.
Thus, it provides minimum protection for new and interim financing. Independent from the final success of restructuring efforts, these creditors will no longer be subject to civil, administrative and criminal liability if they provide or extend financings. In particular, such new and interim financing could no longer be declared void, voidable or unenforceable in subsequent insolvency procedures. This is based on the prerequisite that such financing is reasonably and immediately necessary for the continued operation, the survival of the debtor's business or the preservation or enhancement of the value of that business. Restructuring plans providing for new financing would further need the confirmation of a judicial or administrative authority.
Moreover, Member States may even provide incentives for lending funds to debtors in restructuring proceedings and rank new and interim financing at least senior to the claims of ordinary unsecured creditors in subsequent insolvency proceedings.
Certain restructuring-related transactions carried out during the restructuring negotiations, such as fees and costs of the restructuring procedure, worker wages and other necessary and reasonable costs, should also be exempt from voidance law.
The proposal of the European Commission is just the beginning of the (long) European legislative process which might entail substantial changes to the proposed Directive. In addition, the Member States would have to transpose the Directive and amend their own national legislation accordingly.
Part of the proposal reflects the already existing common understanding in out-of-court restructurings, such as the agreement on a stay of individual enforcement. However, a binding legal framework would not only establish a reliable and predictable basis for restructuring procedures but would also encourage new lenders to take the enhanced risk of investing in a debtor in financial difficulties. In particular, the protection and even preferential treatment of new and interim financings would considerably reduce lenders' risks in restructuring proceedings. In any case, the proposal is an important step towards a preventive restructuring framework and will at least stimulate further debate.