The Council of the European Union adopted a proposal for a Directive on restructuring and insolvency (2016/0359 (COD) on 6 June 2019. The Directive will enter into force twenty days after it is published in the Official Journal of the European Union. From that date, Member States will have two years to implement the substantive parts of the Directive in their national legislation, although a one year extension can be granted.
The Directive aims to put in place key principles for all Member States on effective preventive restructuring and second chance frameworks, alongside measures to make all types of insolvency procedures more efficient by reducing their length and associated costs and improving their quality. The Directive sets out minimum EU standards to be applied by the Member States (i.e. minimum harmonisation).
The Directive requires Member States to ensure that (i) that insolvent entrepreneurs have access to a procedure that can lead to a full discharge of debt, and (ii) certain measures are in place to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. The key feature of the Directive, however, is the introduction of a preventive restructuring framework. The main elements of this framework are discussed below.
Preventive restructuring frameworks
The Directive requires Member States to ensure that preventive restructuring frameworks are available for debtors who are in financial difficulty and likely to fall into insolvency, with a view to preventing the insolvency and ensuring the viability of the debtor. These preventive restructuring frameworks must include the following features (among others):
- Debtor in possession: debtors accessing the preventive restructuring procedures remain totally, or at least partially, in control of their assets and the day-to-day operation of the business.
- Stay of individual enforcement actions: to facilitate negotiation of a restructuring plan in a preventive restructuring framework, debtors may benefit from a stay of individual enforcement for a maximum period of twelve months (after extensions and renewals).
- Procedural aspects, contents of restructuring plans and requisite majority: Irrespective of who applies for the preventive restructuring procedure, debtors have the right to submit restructuring plans for adoption by the affected parties. The affected parties are divided into separate classes which reflect sufficient commonality of interest, based on verifiable criteria. As a minimum, creditors of secured and unsecured claims are placed in separate classes for the purposes of adopting a restructuring plan. A restructuring plan will be adopted by affected parties if a majority of the amount of their claims or interests is obtained in each class. Member States may, in addition, require that a majority in the number of affected parties is obtained in each class.The required majorities shall not be higher than 75% of the amount of claims or interests in each class or, where applicable, of the number of affected parties in each class.
- Cross-class cram-down: a restructuring plan which is not approved by the requisite majority in every voting class may become binding upon dissenting voting classes if the restructuring plan fulfils certain criteria (known as a cross-class cram-down). At least one affected class, who would receive payment in a liquidation process, must have accepted the plan for this cram-down to occur. Moreover, any dissenting voting classes of affected creditors must be treated at least as favourably as any other class of the same rank, and more favourably than any junior class (the EU Relative Priority Rule). By derogation from the EU Relative Priority Rule, Member States may provide that a dissenting voting class of affected creditors is satisfied in full by the same or equivalent means if a more junior class is to receive any payment or keep any interest under the restructuring plan (the Absolute Priority Rule).
- Protection for new financing and interim financing: the success of a restructuring plan often depends on whether financing is made available to the debtor during the restructuring process. New financing and interim financing must, therefore, be adequately protected against avoidance actions and civil, administrative or criminal liability in case of any subsequent insolvency of the debtor.
Implementation in the Netherlands
It remains to be seen how the Directive will be implemented into Dutch law.
The Dutch government is currently working on a bill to introduce a new preventing restructuring tool that could qualify as a restructuring framework within the meaning of the Directive. A draft of this bill "on the Act on the confirmation of a private restructuring plan in order to prevent bankruptcy "(wet homologatie onderhands akkoord ter voorkoming van faillissement) was subject to public consultation until 1 December 2017. This draft bill is discussed (in Dutch) in our earlier blog. The Dutch Council of State provided its advice on the bill on 27 March 2019 and 6 June 2019.
Alternatively, it has been suggested that the Directive could be implemented into Dutch law by updating the existing suspension of payment proceedings (surseance van betaling).
We appreciate the European Commission's efforts to enhance the chances to rescue viable businesses. We are, however, sceptical about the Directive's ability to shape the European insolvency land scape. The reason for this is that whilst the Directive requires Member States to introduce a restructuring framework that meets threshold mentioned in the Directive it does not preclude Member States from also implementing alternative restructuring frameworks that do not meet the EU threshold. As such, Member States will still be able to maintain or introduce competing restructuring frameworks.