On 22 November 2016, the European Commission announced a draft directive on insolvency, restructuring and second chance in the EU in the form of the EU Business Restructuring Directive (the “Proposed Directive“) which can be read here. The Proposed Directive proposes reforms to EU law in the following three areas: (i) introducing common principles on the use of early restructuring frameworks; (ii) introducing rules to provide a second chance for entrepreneurs and (iii) introducing targeted measures to Member States’ insolvency and restructuring laws to improve the efficiency of procedures and the level of specialist judicial knowledge and expertise.
The Proposed Directive adopts many of the recommendations and reforms contained in the February 2016 report co-authored by Weil and Frontier Economics for the Association of Financial Markets in Europe (“AFME“) regarding the potential economic gains from reforming insolvency law in Europe which can be read here. Weil was delighted to work with AFME on this report and to be at the forefront of the important policy agenda of reforming European restructuring and insolvency law. Weil also looks forward to continuing to be involved in the policy debates surrounding the Proposed Directive as it progresses through the EU legislative process.
Further details of the Proposed Directive can be found below. The Proposed Directive is not yet EU law, and it still requires the approval of the EU council and parliament to become effective. Once approved, Member States will have two years to implement the Proposed Directive. Recognising that the UK’s future relationship with the EU is unclear and that the UK is currently undertaking an independent review of its insolvency laws it remains to be seen what effect, if any, the Proposed Directive will have on UK law.
Preventative Restructuring Framework
A key policy aim of the Proposed Directive is to seek to reduce the number of formal insolvency filings in the EU and thereby reduce the level of insolvency related losses. Proposed reforms in this area include:
- Allowing debtors to remain in possession of their business and assets and limiting the circumstances in which a supervisor or mediator can be appointed.
- Allowing debtors to apply for a limited stay to prevent creditor enforcement action.
- Providing for creditors to be divided into separate classes when approving a restructuring plan and permitting cross-class cramdown with court sanction.
- Restricting shareholders from blocking restructurings. The European Commission noted that in some Members States shareholders can obstruct the implementation of a restructuring plan, even in circumstances in which the shareholders do not have an economic interest in the debtor.
- Allowing debtors to seek debtor in possession financing. The European Commission noted the potential importance of debtor in possession financing in facilitating restructurings and rescuing viable debtors.
Second Chance for Entrepreneurs
The European Commission found that one of the most significant barriers of entry to would-be-entrepreneurs is the risk and long term effects of failure. To combat this barrier, the proposed directive includes the following reforms:
- Over-indebted entrepreneurs should have the ability to fully discharge debt. The Proposed Directive includes a provision for a full discharge of debt within three years.
- Shortened disqualification orders. Where entrepreneurs have been disqualified on grounds of over indebtedness, the law should shorten any disqualification order to effectively grant an entrepreneur a ‘second chance’.
The Proposed Directive also contains provisions to improve the efficiency of Member States’ insolvency laws. These provisions principally relate to:
- Introducing further training for insolvency practitioners and enhanced codes of conduct. Member States should ensure that insolvency practitioners receive adequate training and that sufficient standards exist in respect of remuneration and appointment.
- Introducing specialist insolvency courts and judges with responsibility for restructuring and insolvency cases.