On 7 December 2022, the European Commission published its proposal for a directive of the European Parliament and of the Council harmonising certain aspects of insolvency law (COM(2022) 702; 2022/0408 (COD)) (the Proposal). Readers may be aware that the EU has already legislated in the area of insolvency. However, existing EU legislation only covers pre-insolvency and debt-discharge measures (captured by the recent Restructuring Directive) and rules on applicable law in cross-border insolvency cases (set out in the Insolvency Regulation). As a result, substantive national insolvency law remains widely differing across member states.
The Proposal aims at reducing forum shopping in the EU and facilitating cross-border investments. Its objective is to strengthen and to harmonise the three key areas of insolvency law in the EU:
(1) the recovery of assets;
(2) the efficiency of proceedings; and
(3) the fair distribution of the recovered assets among creditors.
What is the Proposal targeting?
The Proposal introduces, amongst others elements, a minimum set of harmonised conditions for avoidance actions and asset tracing by improving access rights of insolvency officeholders to certain information. It includes provisions on pre-pack proceedings and early-stage insolvency filing obligations for directors to avoid value losses for creditors. Further, the better representation of creditors’ interests and greater transparency about ranking of claims aims to deliver a fair and predictable distribution of assets. Lastly, the Proposal targets more procedural efficiency to reduce costs, in particular for microenterprises.
As the Proposal only introduces minimum standards, member states may maintain or adopt standards with higher creditor protection.
The Proposal addresses, amongst other elements, the following issues:
1. Avoidance actions – The Proposal introduces a minimum standard for transaction avoidance rules:
- Payments (or collateralisation) on due claims made within three months prior to an insolvency filing or thereafter shall be voidable if the creditor knew, or should have known, that the debtor was unable to pay its mature debts or has filed an insolvency petition, except when those payments are made for fair consideration.
- Transactions for no or manifestly inadequate consideration are subject to an avoidance period of one year prior to the insolvency filing.
- Intentionally detrimental acts can be declared void if they occurred within four years prior to the insolvency filing and the other party knew or should have known the debtor’s intent.
Member states are to ensure that the insolvency estate is compensated in full by the party which benefitted from the transaction, e.g., by preventing certain defences or set-off possibilities. Claims that were satisfied by the transaction that has been declared void will be revived.
2. Asset tracing – In order to be able to identify and trace assets belonging to the insolvency estate, courts, upon the officeholder’s request and on a case-by-case basis, are to be granted direct access to bank account information in all member states. Courts will have to maintain high professional standards, including confidentiality and data protection. Access to centralised bank account registries is to be monitored and checked regularly to ensure compliance. Furthermore, officeholders will have access to beneficial ownership registers and national asset registers in all EU member states.
3. Pre-pack proceedings – Usually, officeholders achieve higher recovery rates when they are able to sell the debtor’s business as a going concern. Pre-pack proceedings are generally considered to be an effective means for value recovery.
The Proposal outlines the introduction of pre-pack proceedings in all EU member states, composed of two phases:
(i) a preparation phase (finding an appropriate buyer): The pre-pack is to start with the appointment of a “monitor”. This is an expert who structures and documents the sales process. The sales process must be competitive, transparent, fair and meet market standards. The monitor will conduct a "best interest of creditors" test and recommend the best offer. During the preparation phase, a stay of individual enforcement actions is possible where the debtor is in a state of likelihood of insolvency or is insolvent (in accordance with each member state's provision); and
(ii) a liquidation phase (approval and execution of the sale and distribution of proceeds): the court is to appoint the monitor as the insolvency officeholder in the liquidation phase and authorise the sale of the debtor’s business shortly after the opening of insolvency proceedings (provided such sale meets the above requirements) ensuring that creditors and shareholders are heard within the proceedings. Alternatively to a private sale, courts may run a public auction in the liquidation phase to be initiated within two weeks of the opening of the liquidation phase. The offer selected by the monitor is to be used as initial bid in the public auction.
The Proposal also deals with the assignment or termination of executory contracts (without the consent of the counterparty) in the event of a pre-pack, as well as the acquisition of the business free of debts and liabilities, and a security release.
4. Insolvency filing obligations: 3 months – The time in which a debtor must file for insolvency varies widely across the EU. To avoid value destruction, directors are to file for insolvency in a timely manner. The Proposal currently provides a three month period at the latest upon becoming aware or being reasonably expected to have been aware of the insolvency. Directors shall be personally liable for damages if they do not comply with their filing obligations.
5. Creditors’ committees – Pursuant to the Proposal it is to be up to the general meeting of creditors to decide on the establishment of a creditors’ committee (which should consist of three to seven members). In preliminary proceedings, creditors may submit a request to the court to establish a creditors’ committee until the general meeting decides. The members of the committee shall reflect the different interests of the creditors or groups thereof and act independently of the insolvency officeholder. The committee is to ensure that, during insolvency proceedings, creditors’ interests are protected and individual creditors are involved, by having a right to be heard, supervising the insolvency officeholder, having the power to request information, and receiving notice of and being consulted on certain matters, including the sale of assets outside the ordinary course of business. Member states may also assign the power to approve specified matters in insolvency proceedings to the creditors’ committee.
Finally, the Proposal includes provisions on simplified procedural rules for microenterprises to reduce costs. Measures enhancing transparency of national insolvency laws, in particular a key information factsheet by member states concerning, inter alia, the lodging and ranking of claims, complement the package.
The Proposal will now go through the legislative process. The European Parliament and the Council are likely to suggest changes to the text of the Proposal. Once the European Parliament and the Council have adopted the final text of the proposed directive, it may enter into force. Thereafter, EU member states shall implement the directive; most often the timeframe for implementation is two years. Overall, this is one to watch, – but the end result could look quite a lot different to this initial Proposal.