EU Commission proposes European rules on business insolvency in new Restructuring Directive

Friday 29 November 2016

On 22 November, the EU Commission proposed the ‘EU Restructuring Directive’ (‘Directive’), which introduces minimum harmonization rules with regards to restructuring procedures in the EU. The Directive aims to harmonize the substantive insolvency laws of the Member States, and is a separate measure from cross-border insolvency procedures (which is covered by the ‘Insolvency Directive’). The Directive’s main objective is for all Member States to have in place key principles on effective preventive restructuring and second chance frameworks, and measures to make all types of insolvency procedures more efficient by reducing their length and associated costs and improving their quality.

Key elements of the Directive
More specifically, the EU Restructuring Directive focuses on three key elements: 
1. Preventive restructuring frameworks 
The Directive introduces common principles on the use of early restructuring frameworks when there is a likelihood of insolvency, which aims to help companies to continue their activity and preserve jobs. This includes rules related to:

  • a debtor’s right to remain totally or at least partially in control of his/her assets and the day-to- day operation of the business during restructuring procedures;
  • a debtor’s right to benefit from a stay of individual enforcement actions to successfully achieve the negotiations of a restructuring plan and the consequences thereof;
  • creditors and shareholders right to vote on the adoption of restructuring plans;
  • the requirements regarding confirmation of restructuring plans;
  • the conditions to protect new and interim financing to support the restructuring process of the company while negotiations are ongoing; and
  • a director’s duties during negotiations on a preventive restructuring plan when there is a likelihood of insolvency.

2. Second chance for entrepreneurs
The Directive also introduces procedures that allow entrepreneurs to benefit from a second chance, including an entrepreneur’s right to be fully discharged of his/her debts after a certain period.

3. Measures to increase the efficiency of points (1) and (2) as well as of insolvency procedures
Finally, the Directive introduces new measures to increase the efficiency of the points discussed above, as well as of insolvency procedures. This will reduce the excessive length and costs of procedures in many Member States, which results in legal uncertainty for creditors and investors and low recovery rates of unpaid debts.

The EU Restructuring Directive will now be discussed between the Member States in the European Parliament and the European Council. It remains to be seen what changes are to be made to the Directive, but if adopted, implementation should be made within 2 years after the Directive enters into force. Although Member States are likely to transpose the Directive differently into their own domestic laws, the Directive does signify a step in the right direction towards a more harmonized framework within the EU. 

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