Harmonisation of EU insolvency laws moving closer to a common approach

On 13 December 2024, EU member states agreed on a ‘partial’ general approach to the harmonisation of insolvency law.

Two years ago, 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). A summary of the objectives and the main provisions of the Proposal can be found in our previous blog.

Several compromise proposals have been drafted since the initial draft in 2022. With each redraft, the aim was to streamline the text, clarify obligations for Member States, and bring national insolvency regimes closer together. 

The Council has now settled its position on key elements; these are set out below:

Measures to preserve the insolvency estate

• Avoidance actions: The Council agreed on provisions to prevent debtors from reducing the value that creditors can obtain following insolvency. These actions allow for a challenge of transactions made by the debtor before the start of insolvency proceedings, protecting the insolvency estate against the illegitimate removal of assets. Specifically, under the compromise wording, legal acts (i) benefitting a creditor; (ii) for no or manifestly inadequate consideration; or (iii) intentionally causing detriment to creditors (provided the other party knew or ought to have known the debtor’s intent), can be voided if perfected within three months, one year, or four years respectively before the request of insolvency, or after the request but before proceedings open. 
• Member States have called for greater flexibility in harmonising avoidance actions. The compromise text includes technical and linguistic changes to improve clarity and remove unnecessary details.
• Tracing assets belonging to the insolvency estate: Member states are required to designate courts or authorities that can access and search national centralised bank account registers and other relevant registers upon the request of an insolvency practitioner. This aims to improve access to information in relation to assets that belong or should belong to the insolvency estate.

Duties of directors in the event of insolvency 

• Directors must file for insolvency proceedings within three months of becoming aware that the company is in financial distress. Following concerns expressed by Member States that this obligation would lead to a ‘wave of premature insolvency proceedings’, the duty will now be suspended in cases where directors take measures that are aimed at preventing harm to the creditors of the insolvent company and ensuring a level of protection for the general body of creditors that is equivalent to the protection provided by the duty to file for insolvency.
• The threshold for a director to fulfil this duty has been lowered, by allowing directors to satisfy the obligation by informing the public of the company’s insolvency through a notification in the public register.

Transparency obligations 

• The Proposal imposed new obligations on Member States to produce a factsheet with practical information on the main features of their domestic laws on insolvency proceedings. This measure aims to reduce the barrier to investing in another Member State and has been broadly agreed upon by Member States in the latest compromise wording.

What provisions are not covered by the partial general approach?

The partial general approach does not address all of the provisions included in the original Proposal. Various provisions will still need to be negotiated between Member States before a final text can be put to the European Parliament. 

In particular, the compromise wording does not deal with the provisions on (i) pre-pack proceedings; (ii) winding-up of insolvent microenterprises; and (iii) creditors’ committees. We can therefore expect further negotiations between Member States in Q1 2025.

What will happen next?

Once the Council has agreed on a full general approach, the European Parliament will adopt its own position. Trilogue negotiations between the European Parliament, Council and Commission will then take place to agree on the final text. Following approval of the proposed final text by the Council and Parliament, lawyers and linguists will conduct a review of the Directive, after which the European Parliament’s plenary and Council will adopt the text and it will be published in the EU Official Journal. 

Conclusion

Overall, the Council's position is a significant step towards harmonising insolvency law across the EU, which is expected to boost the EU's competitiveness and create a more favourable investment climate.

While the timeline on the process above remains uncertain, it is possible that we will see a new directive published and in force by the end of 2025. 

The press release can be found here.