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EU Restructuring Directive
Timing and Objectives
An EU directive aimed at harmonizing Member State restructuring and insolvency laws (the “Directive”) was published in the Official Journal on June 26, 2019 and entered into force on July 16, 2019. Member States are required to adopt and publish compliant laws and regulations by July 17, 2021.
The Directive is a key deliverable under the European Commission's Capital Markets Union Action Plan and is intended to complement the Recast Regulation on Insolvency 848/2015. Its objectives are to contribute to the proper functioning of the internal market and to remove obstacles to the exercise of fundamental freedoms. Many Member States already have restructuring tools and many features of the Directive already form part of domestic insolvency law in Ireland. It is anticipated that it will have its biggest effect in Germany, as Germany is one of the few remaining jurisdictions in the EU that does not provide for a preventative restructuring proceeding.
The three key elements of the Directive are:
- common principles on the use of early restructuring frameworks;
- rules to allow entrepreneurs to benefit from a second chance. Individual debtors will be fully discharged from their debt after three years; and
- targeted measures for Member States to increase the efficiency of insolvency, restructuring and discharge procedures, intended to reduce the excessive length and costs of procedures in many Member States.
The Directive provides for a framework with a range of options to ensure:
- Debtors will have access to early warning tools, such as accounting and monitoring duties for the debtor or their management as well as reporting duties under loan agreements, which can detect a failing business and encourage restructuring at an early stage.
- Debtors will benefit from a breathing space of four months (extendable up to 12 months) to facilitate negotiations and a successful restructuring. During this period, directors will be relieved from any duties to file for insolvency proceedings.
- The length of proceedings will be shortened with court involvement limited to specific cases where necessary to protect the interests of stakeholders.
- A restructuring plan that is not approved by every voting class may become binding on dissenting voting classes if the plan, among other things, has been approved by a majority of the voting classes, provided that at least one of those classes is a secured creditors class or is senior to the ordinary unsecured creditors class. Dissenting creditors are to be paid in full before more junior classes can receive any distribution or keep any interest under the restructuring plan. Shareholders are not permitted to obstruct a restructuring.
- New financing will not be subject to attack as an antecedent transaction and will benefit from security ranking higher than existing unsecured creditors.
- Employees will enjoy full labour law protection in accordance with existing EU legislation; Member States may decide to place workers in a separate class to vote on a restructuring.
- Increased use of specialised practitioners, judges and courts will be encouraged, as will increased use of technology, such as online claims filing and notifications to creditors.
- Debtors shall have the right to remain totally, or at least partially, in possession of their assets and the operation of their business. If necessary, the judicial or administrative authority will have discretionary power to appoint a practitioner to assist the debtor in negotiating and drafting a restructuring plan.
- Debtors shall have the right to submit restructuring plans, regardless of which party initiates the restructuring procedure. Member States may also provide creditors and appointed restructuring practitioners the right to submit restructuring plans.