On March 2019, The European Parliament and the Council of the European Union have adopted a Proposal for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures in order to complement the Directive 2012/30/EU. The new modifications for the Directive contemplated since 2016 has brought concerns and the controversial matters that it would likely cause. The Member States must implement the potential new rules within 2 years from the date of entry into force.
The main object of the Proposal is to protect the interests of debtors, creditors and interested parties and to secure the viability of micro-, small- and medium enterprises in European Union.
The underlying reasons of the Proposal for the Directive are in the differences of the insolvency procedures in national legislations of the Member States. The Proposal focuses on the excessive length of the restructuring of the enterprise, which is likely to cause additional costs for the debtors, creditors, and the parties affected.
The Article 3 established in the Proposal refers to the obligation of the Member States to guarantee an early warning tool for the likelihood of insolvency and the need of the debtor to act without delay. This is how EU is aiming to achieve the efficiency by the earlier stage of insolvency procedure, which is usually considered as exceptional for the more stagnant characteristics of the insolvency proceedings. The efficiency of the insolvency procedures contribute the assessment of the risks of job losses and losses of the creditors.
The main aim of the Proposal is to ensure the enterprises in financial difficulties to have access to the preventive restructuring frameworks in order to preserve the viability particularly in the micro- small- and medium enterprises.
The harmonization of the national legislation allows a “second chance” given to the entrepreneurs in every Member State for the equivalent possibility of discharging the debts in order to preserve the jobs, which are in a crucial role in the functioning of the internal market.
During the preventive restructuring plans, the debtors who have accessed the procedure shall have at least a partial control of the assets and operation of the business. The Article 9 of the Proposal emphasizes the priority of the debtor to have an access to a preventive restructuring framework without prejudice to other solutions to avoid insolvency. The affected parties have a right to vote on the adoption of a restructuring plan.
However, as stated in the Article 11 of the cross-class cram-down, the Member States shall ensure that a judicial or administrative authority can confirm the restructuring plan. This can be confirmed nonetheless that the affected parties have not voted in favor of it. Under this significant article, when none of the affected parties are voting in favor of the restructuring plan, it can be sufficient to confirm the plan once it has the support of any impaired parties not considered as equity-holders or any interest-keeping representative. This group is upon the valuation of the debtor.
The Article 11 of the new Directive also concludes a concerning rule, the so-called Relative Priority Rule. As stated in the paragraph 1(c), the restructuring plan is binding upon dissenting voting classes where “… it ensures that dissenting voting class of affected creditors are treated at least as favorable as any other class of the same rank and more favorably than any junior class; …”.
The Relative Priority Rule certainly causes several consequences. The Rule denotes that the dissenting voting classes of affected creditors are treated only at least as favorably as any other class of the same rank and more favorably than any junior class. In other words, the Proposal could allow that the payment of the creditors’ debts are not prior to the shareholders’ receivables in the insolvency. The absolute element, which requires the full satisfaction of payment for the creditors over the lower classes, is no more obligatory but only possible to provide in the legislation of the Member States. Therefore, the new modification signifies that the Relative Priority Rule makes it possible to circumvent the obligation of completely fulfilling the creditors’ debts before the others. This puts the legal rights of the creditors at stake.
It is reasonable to emphasize that the Relative Priority Rule of the US legislation has inspired the Relative Priority Rule in EU. However, the European rule is lacking of the same characteristics with the other one in US, because of the subordination of the Absolute Priority Rule in the Proposal. The Member States may provide full satisfaction of the affected creditors but it may no longer have an obligatory impact.
The preference of the treatment of different class of creditors can impair the legal rights of creditors by the cram-down. Therefore, the implementation is likely to cause concerns since the significance and execution of the Proposal is reasonably obscure. The lack of actual protection of creditors in the Proposal are also a matter of concern.
The Proposal has gained critiques relating to the aim of harmonizing the legislation of Member States because of the flexibility of choice of the proceedings. This is problematic especially in cases when the insolvency has an international element. The measures for prevention of the abuse and opportunistic use of the new aspects of the Proposal are left to the Member States, which also causes contingency.
The Proposal for the Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures has an impact in private law, company law and insolvency law. Particularly in Spain, the objects of the Proposal will improve more efficient insolvency proceedings with lower costs and with less time. The amendments enable the debtors to have full discharge of debt within shorter period. However, regarding the other elements of the directive, it is uncertain whether its aim of harmonization of the national legislations can be fulfilled due to its ambiguous statements of the preventive restructure frameworks. This inevitably has a major effect in the cases of cross-border insolvency procedures. The Proposal can probably cause the need of a new approach to the insolvency proceedings in the international law field.
In Lleytons, we have an extensive experience of the Insolvency and Cross-border Insolvency in advising on pre-bankruptcy situations, administrators’ liability, and defense of creditors’ right and in particular the challenge and recognition of credits. We are able to help with the preparation of the composition agreement with the company’s creditors, collective dismissals, advice on the liquidation stage, recognition and enforcement of judgment in foreign insolvency proceeding and enforcement of guarantees.