The European Commission (EC) has issued a recommendation "on a new approach to business failure and insolvency" dated 12 March 2014 (the "Recommendation"). Insolvency laws across the European Union (EU) vary greatly from Member State to Member State in the procedures available to debtors in financial difficulty. These differences across the community the EC considers serve as disincentives for businesses and cross-border investments. The Recommendation is aimed at harmonising and encouraging greater coherence among national insolvency laws, enabling companies to restructure at an early stage to avoid insolvency and maximise returns to creditors, employees, owners and the wider economy. The Recommendation is also aimed at giving honest bankrupt entrepreneurs a second chance, by making provisions for a full discharge of debts after a maximum period of time. The timetable for change is short, just one year.
A lengthy and deliberate process laid the foundation for the Recommendation. In November 2011, the European Parliament adopted a Resolution1 that included recommendations for synchronising aspects of national insolvency laws. In October 2012, the EC produced a Communication2 in which it undertook to modernise insolvency rules to assist with the survival of businesses and present second chances to entrepreneurs. This was followed by another EC Communication3 in December 2012, which highlighted areas of difference among national insolvency laws that may hamper the establishment of an efficient internal market. Then, in January 2013, the EC adopted the Entrepreneurship 2020 Action Plan4 by which Member States are invited to, amongst other things, reduce the discharge time and debt settlement for honest entrepreneurs after bankruptcy to a maximum of three years and offer support services to businesses for early restructuring.
HIGHLIGHTS OF THE RECOMMENDATION5
The Recommendation provides a high level overarching wish list. Some of the key points include:
- Flexibility in restructuring procedures and an increase in the importance of keeping costs to a minimum;
- Access to a framework which allows the debtor to commence restructuring early on with the objective of preventing insolvency;
- Limited court involvement in the restructuring process enabling the debtor to restructure without the need to formally open court proceedings. While restructuring plans adopted by a majority of creditors and restructurings with new financing should be confirmed by the courts, the restructuring process should be conducted out of court as much as possible;
- Appointment of a mediator or supervisor by the court made on a case by case rather than compulsory basis, thereby enabling the debtor to maintain control of the company's management;
- The right for a debtor to request that a court grant a temporary stay of individual enforcement actions lodged by creditors, which stay should not interfere with the performance of continuing contracts and should have a duration that strikes a fair balance between the interests of the debtor and creditors. The EC recommends that the duration of a stay should not exceed four months, although this period can be renewed for up to a maximum of twelve months in total;
- Restructuring plan decisions made by a majority of the creditors within classes composed of creditors who have the same interests, for example, secured and unsecured creditors form different classes;
- New financing, such as new loans and the selling of certain assets by the debtor, which have been agreed to in the restructuring plan and confirmed by the courts not declared void, voidable or unenforceable as improper transactions;
- Limited negative effects of bankruptcy on honest entrepreneurs in order to give them a second chance. Entrepreneurs should be discharged from their debts which were subject to bankruptcy after no later than three years.
Member States are invited to implement the principles set out in the Recommendation by 12 March 2015 and the EC will assess the implementation of the Recommendation in Member States by 12 September 2015. Under Article 288 of the Treaty on European Union, a Recommendation is non-binding and therefore there is no change in EU law until a regulation or directive is adopted. However, the Recommendation is an expression of political will and influence, and where Recommendations are not enacted by member states within a given time-frame, policy warnings and enforcement through incentives and sanctions may be used.
The Recommendation can be seen from two angles. On the one hand it may be seen merely as an aspirational recommendation and a politically expedient way to try and deal with the issues, while there is not yet enough support shared across the member states to publish a legally binding directive or regulation. However, on the other hand, the Recommendation, along with the recent changes to French and Spanish insolvency laws could indicate that momentum is building for harmonization across EU Member States. It may be seen as evidence that there is some creative thinking by the EC going on and that a directive may soon follow.
1 European Parliament Resolution of 15 November 2011 with recommendations to the Commission on insolvency proceedings in the context of EU company law, P7_TA (211) 0484.
2 COM (2012) 573 final.
3 COM (2012) 742 final.
4 COM (2012) 795 final.
5 Exclusions from the scope of the Recommendation include insurance undertakings, credit institutions, investment firms and collective investment undertakings, central counterparties, central securities depositories and other strictly supervised enterprises.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved