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We look at the new proposed EU Directive and how it will harmonise restructuring, insolvency and discharge procedures across all Member States, including its potential effect on the UK.
The European Commission is to introduce rules on business insolvency designed to increase opportunities for companies in financial difficulties to restructure early to prevent bankruptcy and avoid dismissing staff. They are further designed to ensure entrepreneurs have the opportunity to do business post-bankruptcy.
On 22 November 2016, the European Commissioner proposed a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU (COM)(2016) 723 (the draft Harmonisation Directive).
The draft Harmonisation Directive is just at the proposal stage and must go through the European Commission's co-decision procedure, meaning further discussions and possible amendments from the European Council (comprised of Member States) and the European Parliament.
Once finalised, it will enter into force 20 days after publishing in the Official Journal (OJ) and Member States must implement provisions to comply with most provisions within two years from when it enters force (the requirements of Title IV of the draft Harmonisation Directive: training of judges and IPs, supervision and remuneration of practitioners and electronic communications, must be complied with within three years).
This will depend on when the draft Harmonisation Directive is finalised and published in the OJ and also on the timing of the UK's exit following a triggering of art 50 TEU.
Theresa May has stated that she intends to trigger art 50 TEU by 31 March 2017. Assuming art 50 TEU is triggered then, exit will occur at the earlier of either an exit agreement entering into force or two years after notice is given (unless all other EU Member States unanimously vote to extend). This means exit would occur by 31 March 2019 at the latest.
On this basis, the draft Harmonisation Directive would need to be finalised and effective before 31 March 2017 (then requiring Member States to comply within two years) in order for the UK to be required to comply whilst it is still part of the EU.
In any event, the UK government has already launched its own consultation on modifying corporate insolvency, with many of the proposals echoing the principles behind the draft Harmonisation Directive and the implementation of any such changes may well proceed regardless of whether or when the Harmonisation Directive enters force for the UK.
A well functioning insolvency framework is an essential part of a good business environment as it supports trade and investment, helps create and preserve jobs and helps economies absorb more easily the economic shocks that cause high levels of non-performing loans and unemployment. These are all stated key priorities of the European Commission.
Increasingly companies will have a cross-border dimension when you consider their client base, supply chain, scope of activities investor and capital base and very few companies are purely national. Inefficient and divergent insolvency laws make it harder for investors to assess credit risk, particularly when making cross-border investments. The EC believes that more cross-border risk sharing, stronger and more liquid capital markets and diversified sources of funding for EU businesses will deepen financial integration, lower costs of obtaining credit and increase the EU's competitiveness.
The main objective is to reduce difference between national laws and enhance the rescue culture. The EU also provides some compelling evidence in its Fact Sheet and Explanatory Memorandum, including:
The aim of the draft Harmonisation Directive is to provide legal certainty to cross border investors and companies operating across the EU. The current differences in legal frameworks amongst the Member States leads to uncertainty and additional costs for investors in assessing their risks, less developed capital markets and persisting barriers to the efficient restructuring of viable companies in the EU.
The proposal's objective is to remove these obstacles to the exercise of fundamental freedoms, such as free movement of capital and freedom of establishment. The EC decided to use a Directive to set up the framework giving Member States flexibility on how they actually implement its requirements.
The draft Harmonisation Directive is a key deliverable under the European Commission's wider Capital Markets Union Action Plan and the Single Market Strategy and follows on from the EU's earlier Recommendation in 2014 (see Practice Note: Harmonising insolvencies and restructurings across Europe). The problem with the EU Recommendation was that because it was not legally binding, few Member States took any action. The EC recognised that while it prompted some reforms, it didn't have the desired impact of consistent changes across all Member States and even those which implemented the Recommendation did so in a selective manner. The draft Harmonisation Directive states that it is intended to complement the EC Regulation on Insolvency 1346/2000 and the Recast Regulation on Insolvency 848/2015 by requiring Member States to ensure their national restructuring procedures comply with certain minimum principles of effectiveness.
Essentially the draft Harmonisation Directive requires Member States to ensure their restructuring procedures comply with various minimum principles. The three key elements are:
The draft rules observe the following key principles:
Importantly the draft Harmonisation Directive doesn't seek to harmonise core aspects of insolvency such as rules for opening insolvency proceedings, defining insolvency or the ranking of claims as it is recognised that the current diversity across Member States was too large to bridge. Various practical assistance is contemplated, included a requirement that Member States shall make model restructuring plans available online (draft Harmonisation Directive, art 8(2)).
For now, it is a question of waiting and seeing whether the draft Harmonisation Directive is finalised, published in the OJ and effective (ie 20 days after publication in the OJ) before 31 March 2017.
If the timing means that it is applicable to the UK for a period before exit from the EU, the UK must decide whether and if so how to implement its requirements.
Regardless of the impact on the UK, the Harmonisation Directive will bind all remaining Member States meaning that we should see greater harmonisation and consistency in this area. The draft Harmonisation Directive also comments that it should reduce forum shopping from individual debtors moving to jurisdictions where the discharge period is shorter (see draft Harmonisation Directive, recital 8). It remains to be seen whether it will in fact reduce forum shopping entirely as there are often other factors at play.
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First published on LexisPSL Restructuring and Insolvency
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