The Preventive Restructuring Frameworks Directive (EU) 2019/1023 is finally in force. Following its implementation into EU member states’ national law, the directive will hopefully prove an effective tool for Europe’s restructuring practitioners, just as the continent’s economic outlook darkens.
Ever since the recession of 2008/09 subsided, Europe’s economy has been on an upswing in most regions, fuelled in particular by the European Central Bank’s zero interest policy. As a consequence, the restructuring market in Europe and especially Germany has been relatively quiet in recent years.
However, we expect that to change in the near future. Important indicators point to an impending economic downturn: Brexit and potential trade barriers are looming. The ECB warns of a deteriorating growth outlook. In July, the euro zone’s economic sentiment hit its lowest level in more than three years. In Germany, the manufacturing sector seems to be the hardest hit. This past June, industrial production registered its biggest annual decline since 2009.
It therefore seems like a stroke of good fortune that on 16 July 2019, the new European Directive on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (EU) 2019/1023 of 20 June 2019 has finally taken effect.
The directive aims to enable debtors across Europe to make use of a preventive restructuring framework outside of formal insolvency proceedings, facilitating a restructuring before the economic situation of the debtor deteriorates in such a way that he is obligated to file for insolvency.
In addition, the directive aims to give entrepreneurs a “second chance” through discharge of debt within three years. It also seeks to reduce the length and cost of insolvency and restructuring procedures across Europe.
Under the new regime, debtors will be allowed to continue to run their businesses and remain in possession of their assets during the restructuring. A trustee may be appointed by court, but only if deemed necessary to safeguard the interests of the parties.
Debtors will also be able to apply for a stay against enforcement from four to twelve months, during which mandatory insolvency filing rules will be suspended and creditors will be prevented from enforcing their claims or withholding performance.
A key element of the framework is the restructuring plan submitted by debtors. It must be adopted by the affected parties to become effective. The parties vote on the plan in “classes” reflecting their shared interests.
Notably, the directive introduces several tools to prevent dissenting minority creditors and shareholders from jeopardizing the restructuring: Member states may set their own majorities for approval on restructuring plans, with a maximum majority requirement of 75%. If the necessary approval threshold is not reached, a court-approved cross-class cram-down is possible under certain circumstances. Shareholders may be excluded from voting on the plan altogether.
Yet the framework also protects the interests of dissenting parties by introducing a so-called “best-interest-of-creditors test”: no dissenting creditor may be worse off under the plan than they would be under the normal national ranking of liquidation priorities.
Workers’ rights under national and EU law must not be affected by the restructuring. New financing is protected by ranking it higher than pre-existing unsecured creditors.
EU member states are required to implement the Directive by 17 July 2021. It provides more than 70 options for the member states to choose from. A lot will therefore depend on the individual member states’ visions for their national preventive framework. Since the EU’s Single Market principles make shifting a company’s seat and/or center of main interests (COMI) to other jurisdictions possible, in all likelihood we will see EU member states ‘competing’ for the most favourable restructuring regime to attract companies in need of restructuring.
The implementation of the directive will be especially beneficial to Germany, one of the few remaining jurisdictions in Europe without pre-insolvency restructuring proceedings. Rescue instruments (such as debtor-in-possession administration or the so-called protective shield procedure) do exist, but are only available to debtors once they file for insolvency.