The European Commission would seem to have drawn Chapter 11 of the US bankruptcy code in drafting its proposal on the revision of the insolvency directive, which it will bring forward, in principle, on 19 October.
Chapter 11 is a recovery regime that allows companies in financial difficulty to restructure their business under the protection of a “stay”. This is to give companies the opportunity to avoid bankruptcy by taking charge of the situation at an early stage.
This is exactly what the European Commission is advocating. A draft directive, a copy of which has been obtained by EUROPE, says that the goals is to “give honest bankrupt entrepreneurs a second chance across the Union” and “ensure appropriate minimum safeguards throughout the EU to protect stakeholders involved in a preventive restructuring process”.
National insolvency systems vary widely from one country to another. In some member states, companies can only begin restructuring at a rather late stage. In others, while early restructuring is possible, the procedures available are not as effective as they might be. According to the Association for Financial Markets in Europe (AFME), the German, UK and Finnish systems are among the most effective, while those of Hungary, Lithuania and Malta are underperforming according to World Bank data.
Early warning system.
The Commission says that a preventive framework that aims to restore companies’ viability and avoid bankruptcy should be available as soon as insolvency appears likely. This would also avoid the costs of legal proceedings and allow the companies to continue operating. The Commission recommends establishing automatic early warning systems upon accountants, banks, clerks by using information from delayed payments to avoid directors’ inertia. A restructuring plan adopted by the majority of shareholders prescribed by national law is to be binding on all affected parties provided that the plan is confirmed by a court.
Stay.
To facilitate negotiation on the restricting plan, the Commission’s draft text says that debtors should be able to ask the court for a stay of individual enforcement actions and suspension of insolvency proceedings whose opening has been requested by creditors where such actions may adversely affect negotiations and hamper the prospects of a restructuring of the debtors’ businesses. The Commission is building on the experience of individual reforms in the member states and takes the view that the stay should be initially granted for a period of no more than 4 months, renewable for a maximum of 12 months. It would be for the member states to ensure that all types of creditors may be affected by a stay, including secured and preferential creditors.
A restructuring plan should be adopted by all types of affected parties. The Commission text makes provision, however, for a “cross-class cramdown”. Under this mechanism, which should remain optional, restructuring plans need not be approved by each type of stakeholder, depending on certain conditions, for example, if one of the affected categories, other than shareholders, has approved it.
The text also allows for companies to be granted discharge from their debt, but only for honest entrepreneurs. Indebted entrepreneurs should be completely discharged from debts, dealt with under bankruptcy procedure within a period of three years beginning at different times depending on the procedure. (Original version in French by Elodie Lamer)