Background

The EU-Commission is planning a European wide pre-insolvency (preventive) restructuring procedure in order to harmonise pre-insolvency proceedings within the EU, thus strengthening the EU domestic and capital markets, bringing clarity to cross-border transactions, and preventing forum-shopping.

At the end of 2016, the European Parliament issued a proposed directive (COM (2016)723/30/EU) in this regard (Directive Proposal).

The introduction of a German scheme of arrangement similar to an English scheme of arrangement seems a possible consequence of the implementation of the Directive Proposal.

Main aspects of the Directive Proposal

The Directive Proposal has four main focus points:

  • Preservation of jobs through a uniform, timely restructuring
  • Second chance for entities through settlement of debt, thereby reducing unnecessary liquidations of viable companies
  • Increasing efficiency of insolvency, restructuring and discharge proceedings while decreasing the costs of distressed companies
  • Bringing clarity to insolvency/restructuring/discharge proceedings.

Implementation

The Directive Proposal has been drafted as a harmonised minimum legal framework in the area of restructuring and second chance for entrepreneurs. It contains certain measures that have to be implemented. Consequently, member states will have to adapt existing restructuring procedures or create new instruments that adhere to the requirements of the Directive Proposal.

Main content of the Directive Proposal 

The main provisions of the Directive Proposal are:

  • Access to early warning tools that should improve the chances of a successful restructuring. What is meant by ‘tools’ is not defined, possibly an obligation to install risk management and auditing procedures. An opt-out is provided for large entities
  • Introduction of preventive restructuring frameworks, meaning that member states should ensure that debtors in financial difficulties have access to such a framework that enables them to – where there is a likelihood of insolvency – restructure their debts or businesses, restore their viability and avoid insolvency
  • Member states should put in place provisions limiting the involvement of judicial or administrative authority to where this is necessary and proportionate. If necessary and not disadvantageous to individual creditors, the debtor can apply for a moratorium for at least four months (can be extended to max. 12 months). The moratorium should, among other matters, result in a termination ban of agreements that are necessary for the continuation of the entity. If the plan is not approved unanimously, the plan can be enforced by majority vote with court approval. An important aspect is that the management stays in control of the entity during the proceedings
  • In case the restructuring fails even though the plan was approved by court, the Directive Proposal contains certain restructuring privileges (i.e. exemption of restructuring credits and certain actions from claw-back in later insolvency proceedings, exemption from certain liability)
  • Second chance for entrepreneurs by way of residual debt discharge. The general discharge period is three years, but longer periods can be agreed and certain liabilities can be excluded by the member states (i.e. secured claims)
  • The Directive Proposal includes measures to oblige member states to train judges, administrators and mediators and to ensure the necessary expertise and specialisation of the courts. Clear and transparent selection, control and oversight mechanisms should be implemented for practitioners.