EU Insolvency Law: Momentum builds as European Parliament comments on the draft directive to harmonise certain aspects of insolvency law

In our earlier blog, "EU insolvency law: Member States move closer to harmonisation", we examined how proposals to harmonise insolvency law across the European Union are gathering pace with a draft Directive to harmonise certain aspects of insolvency law being negotiated. And the pace is, indeed, continuing. 

Those familiar with EU legislation making will be aware that the process is lengthy and involves multiple EU institutions’ input with the various EU legislative and government bodies engaged in “ping pong” before ultimately a final text is reached. 

The next step that has taken place in this initiative is that the European Parliament has published its own report (full report here), signalling another major step along the path toward a more unified EU insolvency framework. 

Whilst the European Parliament has made 78 amendments to the original text published by the EU Commission (and in doing so created several inconsistencies in the text), there has still been substantive progress.  Importantly, despite the ongoing tweaks and adjustments, there is broad agreement on the main pillars of the draft directive. 

Given that the European Parliament’s suggestions will not be the final word, we highlight a few key amendments that it is proposing. 

Key amendments and highlights

Pre-pack sales 

One of the key components of the draft Directive is the introduction of pre-packaged sales. These have been identified as a valuable tool for rescuing viable parts of distressed businesses. While the Commission’s proposal sought to set common minimum standards for such procedures, the European Parliament adds more detail to the framework. Some of the Parliament’s amendments include:

• Scope: the Parliament has clarified that pre-pack proceedings are intended for situations in which the debtor is likely to become insolvent or is insolvent in accordance with national law. 
• Valuation safeguards: 
  • Best interest of creditors test: to protect creditors in the context of a pre-pack sale the EU Parliament has modified the so-called “best-interest-of-creditors” test which is used to ensure that creditors are not worse off in a pre-pack sale than they would be if the entity were liquidated in the ordinary course. The Parliament text includes in the definition not only a comparison with a piecemeal liquidation and distribution to creditors under existing priority rules, but also with "the sale of the business, or a part thereof, as a going concern". This ensures a broader assessment of creditor outcomes in pre-pack proceedings.
  • Safeguards on abuse: when one or more groups of creditors demonstrate a credible suspicion of abuse, the court may proceed to hold a public auction. Prior to the authorisation of the sale, the insolvency practitioner has to provide the court with a report on a favourable best-interest-of-creditors test. If the sale process only produces one binding offer, that offer shall be deemed to reflect the market price, unless it can be demonstrated otherwise. 
  • Connected party sales: to address concerns about “connected party sales” where assets are sold to parties closely associated with the debtor (e.g., management or shareholders), the draft report tightens procedures. For example if the only offer is one made by a party closely related to the debtor then there should be a requirement to obtain a market valuation and the monitor (see below) has the duty to reject the offer if it does not satisfy the best-interest-of-creditors test (in the form proposed by the Parliament and set out above).
• Debtor-in-possession: clarification that during the initial phase in a prepack sale (called the “preparation phase”) the debtor will remain in control of its assets and the day-to-day operation of the business.
• Appointment and role of the monitor: the report endorses the introduction of an independent court-appointed monitor (who will be appointed as an insolvency practitioner upon commencement of the liquidation phase) entrusted with overseeing the marketing process, the selection of the purchaser, and the valuation of the business or its assets.  The monitor has to formally declare and demonstrate that (i) the sale process is competitive, transparent, fair and meets market standards, and (ii) that the best bid does not constitute a manifest breach of the best-interest-of-creditors test. 

Claw-back 

Another key component of the draft Directive is ensuring that actions taken in an attempt to restructure the debtor are not subject to strict (and often member state divergent) clawback rules which may prevent creditors from pursuing a rescue. In this regard the EU Parliament has proposed the following modifications:

• The draft Directive exempts “cash transactions” from the scope of voidable acts. The EU Parliament has now expressly included netting arrangements, including close-out netting, in financial markets, energy markets or other commodity markets, as well as legal acts supporting the operation of such arrangements in such exemption.
• Further, the payment of a third-party debt in a three-person relationship shall not be automatically considered as a legal act for manifestly inadequate consideration. 
• Also remarkable is the Parliament’s proposal to reduce the period during which legal acts intentionally detrimental to creditors may be challenged from four to three years.

Directors’ duties

There are different rules on when a director is liable to file for the company’s insolvency and what the consequences of late filing are across the 27 EU member states. This is why this area has been in focus to see what can be harmonised across all member states – a contentious issue as often directors’ duties are not only steeped in a particular jurisdiction’s tradition but also anchored in domestic corporate law. 

As highlighted in the Commission’s original proposal, there is a need to encourage directors to initiate timely restructuring efforts without fear of automatic personal liability while also protecting creditor interests and ensuring directors act responsibly. The EU Parliament has made the following proposals:

• Duty to file: There is a clear duty for directors to request the opening of insolvency proceedings within a specified timeframe. Member States will be required to set a deadline, no later than three months from when the directors became aware, or can reasonably be expected to have become aware, that the company is insolvent under national law. This obligation had already been included in the Commission proposal. 
• Derogation of the duty and accompanying safeguards: 
  • Parliament has suggested that preventive restructuring proceedings should be excluded from such strict filing obligation.
  • Parliament has also added a specific acknowledgement that in some cases, the signs of insolvency can be circumstantial and temporary and skilled directors should be given the opportunity to explore restructuring measures that could reasonably lead to the same outcome for creditors – instead of filing for insolvency. Therefore, Member States should be permitted to provide for a derogation from the obligation to commence insolvency procedures while ensuring that the rights of the creditors are equally protected. However, in situations where Parliament has indicated that directors should be exempt from a strict filing obligation, the picture is less clear. Parliament has added a possible derogation from the duty to file where directors are natural persons and liable for all debts of the company, provided such directors (i) inform the public of the company’s insolvency, or (ii) take measures to avoid damages to creditors. If Member States exercise option (ii) they shall ensure that directors are personally liable for damages caused to creditors that would not otherwise have been caused had the opening of insolvency proceedings been requested. Member states can then continue to provide that directors shall not be liable to creditors if and to the extent that the directors can demonstrate, on the basis of objective circumstances, that the measures taken could reasonably be expected to avoid damage to creditors, provided that such measures were reasonably likely to avoid such damage or secure a better outcome for creditors. However, this particular derogation possibility seems a relatively narrow exemption for directors applying only in very limited circumstances. Time will tell how this part of the Parliament’s proposals develops, in particular whether it may be applicable to larger organisations. 

Creditors’ committees

The European Parliament has made a number of amendments in this area, including:

• Not more than one creditors' committee: the possibility of setting up more than one creditors' committee has been removed.
• Number of members: The Parliament also removed the minimum and maximum number of committee members. 
• Removal of a member: 'Conflicts of interest' has been added as a reason for removing a member of the creditors' committee.
• Liability insurance expenses: liability insurance covering the liability of members of the creditors’ committee shall be paid by the insolvency estate.

What Happens Next?

With the Parliament’s position now set, trilogue negotiations between the Parliament, Council and Commission will begin. As highlighted in our previous blog, these ongoing discussions indicate strong political momentum. Final adoption could occur by early 2026, depending on the pace of compromise.