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EU adopts new rules on business insolvency

The EU is giving reputable bankrupt entrepreneurs a second chance, and making it easier for viable enterprises in financial difficulties to access preventive restructuring frameworks at an early stage to prevent insolvency.

The European Council has formally adopted the ‘Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures for entrepreneurs’. The text is a minimum harmonization directive. It introduces a set of principles along with more targeted rules in some specific cases, while allowing member states to go further when transposing the rules into national law.

The directive notes that there are differences between EU member states as regards the range of procedures available to debtors in financial difficulties in order to restructure their business. Some have a limited range of procedures that allow the restructuring of businesses only at a relatively late stage, in the context of insolvency procedures. In others, restructuring is possible at an earlier stage but, the directive says, the procedures available are not as effective as they could be, or they are very formal, in particular because they limit the use of out-of-court arrangements.

Preventive solutions are a growing trend in insolvency law that, unlike the traditional approach of liquidating a business in financial difficulties, have the aim of restoring it to a healthy state or, at least, saving those of its units which are still economically viable.

The overall objective of the directive is to reduce the most significant barriers to the free flow of capital stemming from differences in member states' restructuring and insolvency frameworks, and to enhance the rescue culture in the EU based on the principle of second chance. The new rules also aim to reduce the amount of non-performing loans (NPLs) on banks' balance sheets and to prevent the accumulation of such NPLs in the future. In doing so, the proposal aims to strike an appropriate balance between the interests of the debtors and the creditors.

The key elements of the new rules include:

  • Early warning and access to information to help debtors detect circumstances that could give rise to a likelihood of insolvency and signal to them the need to act quickly.
  • Preventive restructuring frameworks: debtors will have access to a preventive restructuring framework that enables them to restructure, with a view to preventing insolvency and ensuring their viability, thereby protecting jobs and business activity. Those frameworks may be available also at the request of creditors and employees' representatives.
  • Facilitating negotiations on preventive restructuring plans with the appointment, in certain cases, of a practitioner in the field of restructuring to help in drafting the plan.
  • Restructuring plans: the new rules foresee a number of elements that must be part of a plan, including a description of the economic situation, the affected parties and their classes, the terms of the plans, etc. 
  • Stay of individual enforcement actions: debtors may benefit from a stay of individual enforcement actions to support the negotiations of a restructuring plan in a preventive restructuring framework. The initial duration of a stay of individual enforcement actions shall be limited to a maximum period of no more than four months.
  • Discharge of debt: over-indebted entrepreneurs will have access to at least one procedure that can lead to a full discharge of their debt after a maximum period of 3 years, under the conditions set out in the directive.

This Council’s formal vote marks the end of the legislative process. The directive will now be published in the Official Journal of the European Union (OJ). Member states will have two years from the publication in the OJ to implement the new provisions. However, in duly justified cases, they can ask the Commission for an additional year for implementation.

The proposal was first presented by the European Commission on 22 November 2016. The new rules complement the 2015 Insolvency Regulation which focuses on resolving the conflicts of jurisdiction and laws in cross-border insolvency proceedings, and ensures the recognition of insolvency-related judgments across the EU.

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