According to the European Commission, every year in the EU, 200,000 firms go bankrupt, resulting in over 1.7 million people losing their jobs. Currently, too many viable companies in financial difficulties are steered towards liquidation rather than early restructuring. Also, too few entrepreneurs get a second chance.

In order to improve this situation, yesterday the European Commission has presented the draft EU directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures (the “Draft Directive”).

The purpose of the Draft Directive is to provide a legal framework where more viable companies can survive, legal certainty resulting from similar rules on insolvency and restructuring across the EU attracts cross-border investors and where early restructuring measures will result in increased recovery rates for creditors.

The Draft Directive provides for minimum standards within the EU member states for preventive restructuring procedures enabling debtors in financial difficulty to restructure at an early stage to avoid insolvency. These include the possibility to adopt restructuring plans by majority votes in each relevant creditor group instead of by unanimous agreement, with the possibility of a cross-class cram-down for all creditors which are already “out of the money.” Shareholders may be included as a class in this process, allowing for debt-equity-swaps as well. The procedure is supposed to be flexible without lengthy, complex and costly court proceedings, although a court involvement will be necessary to safeguard the interest of stakeholders.

Also, a stay of individual enforcement action for a time period of initially up to four months would be possible during the proceedings. New financing and interim financing will be encouraged and protected in the restructuring, and in particular will not be declared void, voidable or unenforceable.

Employees will be protected throughout the new restructuring procedures, in accordance with the existing EU legislation.

Duties of directors of struggling companies include the obligation to:-

(a) take immediate steps to minimize the loss for creditors, workers, shareholders or other stakeholders,

(b) have due regard to the interests of creditors and other stakeholders,

(c) take reasonable steps to avoid insolvency, and

(d) avoid deliberate or grossly negligent conduct that threatens the viability of the business.

In case of insolvency, entrepreneurs should be fully discharged from their debts within a maximum period of three years, which will allow entrepreneurs a second chance to restart their businesses early, reducing the number of entrepreneurs captured in a debt-trap.

There are also some administrative provisions in the Draft Directive to ensure efficiency of the procedures, including early warning tools being made available which can detect a deteriorating business. A model restructuring plan should be made available online in each member state showing the minimum requirements for such plans in the relevant jurisdiction. Also, as far as possible all procedures should move online including for cross-border situations.

The Draft Directive will now be discussed between the member states in the EU Council as well as in the European Parliament. It remains to be seen what changes will be made to the Draft Directive during this process. Once adopted, the Directive will not be directly applicable in the EU member states, unlike the EU Insolvency Regulation. Instead, each EU member state will need to implement the Directive by national legislation. According to the Draft Directive, implementation should be made within two years after the Directive enters into force, and within three years for some of the administrative measures. It may therefore not become law in the UK before the UK leaves the EU.

The Draft Directive therefore is only the starting point in a lengthy process. A lot of work will need to be done before the new rules will be applied throughout the EU. It can be expected that various EU member states will provide for different laws in their respective countries, so that there will not be a fully harmonized restructuring framework throughout the EU even after the implementation of the Directive. However, implementing the minimum standards provided for in the Draft Directive could be significant progress compared to the current position, where only very few countries have already implemented a comparable framework.