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We look at the new Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures (the Restructuring and Second Chance Directive) and how it will harmonise restructuring, insolvency and discharge procedures across all Member States, including its potential effect on the UK.
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The European Commission is introducing 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 6 June 2019, the European Council adopted 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) 72 (the Restructuring and Second Chance Directive).
The Restructuring and Second Chance Directive will enter into force 20 days after being published in the Official Journal (OJ) and Member States must implement provisions to comply with most provisions within two years from when it enters force (ie depending on OJ publication date—June/July 2021—see art 34, Restructuring and Second Chance Directive)(although the requirements of Title IV of the Restructuring and Second Chance 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 the timing of the UK's exit following a triggering of art 50 TEU. Note that under the terms of the last draft withdrawal agreement (Nov 2018), the transitional period would end on 31 December 2020, or such other date as extended under art 132. Accordingly, if the withdrawal agreement is approved in this format without any extension to the transition period, the UK would not need to comply with this Restructuring and Second Chance Directive.
However, the UK government had already launched its own consultation on modifying corporate insolvency, with many of the proposals echoing the principles behind the Restructuring and Second Chance Directive and the implementation of any such changes may well proceed regardless to ensure that the UK remains competitive.
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 competitivenes.
The main objective is to reduce difference between national laws and enhance the rescue culture. The EU also provided some compelling evidence in the Fact Sheet and Explanatory Memorandum accompanying the directive, including:
The aim of the Restructuring and Second Chance Directive is to provide legal certainty to cross border investors and companies operating across the EU. The current differences in legal frameworks among 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 after the earlier EU Recommendation in 2014 failed to gain sufficient traction. 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 Restructuring and Second Chance Directive is a key deliverable under the European Commission's wider Capital Markets Union Action Plan and the Single Market Strategy. The Restructuring and Second Chance Directive states that it is intended to complement 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 Restructuring and Second Chance Directive requires Member States to ensure their restructuring procedures comply with various minimum principles. The three key elements are:
The rules observe the following key principles:
Importantly, the Restructuring and Second Chance 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 (Restructuring and Second Chance Directive, art 8(2)).
For now, it is a question of waiting and seeing what the outcome on Brexit is.
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 Restructuring and Second Chance Directive will bind all remaining Member States meaning that we should see greater harmonisation and consistency in this area. The Restructuring and Second Chance Directive also comments that it should reduce forum shopping from individual debtors moving to jurisdictions where the discharge period is shorter (see Restructuring and Second Chance 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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