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Freshfields Transactions

| 4 minutes read

The EU restructuring directive: so nearly there!

On 28 March 2019 the European Parliament adopted a Directive on insolvency, restructuring and second chance (the Directive). This project has had a long tail, following a Commission Recommendation issued in 2014 and, after that had no impact, a draft Directive in November 2016. This draft Directive is now about come to fruition. It has three main aims

1. to ensure that member states have a preventive restructuring framework – which includes a restructuring plan;

2. to ensure that entrepreneurs have a second chance through an effective debt discharge mechanism; and

3. to ensure that Member States put in place measures to raise the efficiency of restructuring, insolvency and discharge of debt procedures more widely.

The Directive’s objectives are to contribute to the proper functioning of the internal market and to remove obstacles to the exercise of fundamental freedoms. It aims to ensure that viable enterprises and entrepreneurs in financial difficulties have access to effective national preventive restructuring frameworks which enable them to continue operating.

What’s next?

The Directive needs to be formally adopted by the European Council, which is expected to happen at the Council meeting on 6/7 June 2019. Following this, the Directive will be published in the Official Journal of the EU and will enter into force 20 days later. Member States will then have two years to implement the Directive (plus an additional year if they encounter particular difficulties during implementation), so we are looking at an implementation date of June/July 2021 or, in special cases 2022.

What are the key features of the restructuring framework? 

Where there is a likelihood of insolvency (but importantly where the debtor is not yet insolvent as defined by national law), Member States must provide debtors with access to a preventive restructuring framework that enables them to restructure, with a view to preventing insolvency and ensuring their viability.

The preventive restructuring framework is available on application by the debtor but Member States may permit creditors’ and employees’ representatives to apply with the agreement of the debtor.

Some key features of the restructuring framework include:

  • Debtor in control: The debtor is to be left in control of its assets and the day-to-day operation of the business (apart from a few instances where an insolvency practitioner will need to be appointed).

  • Moratorium: The debtor should be able to apply to court for a moratorium against enforcement (including secured claims and preferential creditors, except for employees’ claims unless payment of these is guaranteed for the duration of the preventive proceeding). The initial period of the stay is limited to four months but Member States may permit courts to extend it to a total duration of not more than 12 months. There should be certain safeguards in place (possible exclusions and conditions for lifting the stay).

  • Suspension on filing obligation: Any mandatory insolvency filing rules for directors will be suspended during the period of the stay. Creditors will also be suspended from initiating insolvency proceedings. Member States may however specify that such suspension will not apply where the debtor is cashflow insolvent, provided that a court can still decide to keep the stay in place if it is not in the general interest of creditors to open insolvency proceedings.

  • Continued performance of essential executory contracts: Creditors to whom the stay applies and who have claims that at the start of the preventive restructuring framework had not been paid will be prevented from withholding performance, terminating or otherwise modifying essential executory contracts solely because the debts had not been paid.

  • Prohibition of ipso facto clauses: The debtor will also benefit from a more general protection against ipso facto clauses – so that suppliers with contractual rights to terminate the supply contract solely based on the insolvency will not be able to invoke such rights.

  • Restructuring plan: The debtor will have a right to submit a restructuring plan. It will be up to Member States to decide whether and when creditors and insolvency officeholders will also have the right to submit a plan. Where creditors with different interests are involved, they will be treated in separate classes. Secured creditors will be treated separately from unsecured creditors and employees will be treated in a class separate from other creditors.

  • Protection of new and interim financing: New and interim financing as well as other transactions concluded in close connection with a restructuring plan are protected in a restructuring.


    The Directive was clearly influenced by Chapter 11, although, as with any piece of legislation that requires the buy-in of 28 Member States who all have different insolvency laws, the final text is considerably weaker than the initial proposals.

    Much will depend on how Member States implement the restructuring plan regime. The Directive provides for a framework with a range of options only. The new mechanisms should work better for European businesses than a Chapter 11, especially for small and medium size businesses. The costs of a Chapter 11 restructuring can be substantial, which is particularly problematic for smaller businesses (as US commentators have noted).

    In the UK and the Netherlands, domestic legislative insolvency reform is already taking into account the changes required by the Directive. In Germany, the effects of the Directive will arguably have the most effect. The reason is that Germany is one of the few remaining jurisdictions in the EU that does not provide for a preventive restructuring proceeding. In Spain and Bulgaria, many features of the Directive already form part of domestic insolvency law although some further changes will be required to be Directive compliant. The same is true for Croatia, Poland and Slovenia, where only moderate reforms to existing local regimes will be necessary. Looking further East, transposing the Directive into Austrian, Czech and Romanian law will require a number of significant changes to the existing local regimes.

    If fully embraced (and in particular, if not all “watering down options” are taken up by Member States) the Directive will move Europe closer to the Chapter 11 model.

    For more detail on the Directive and how it affects Member States please click here.


europe, restructuring and insolvency, hot topics usa