Leiden Law Blog

European business rescue: looking for the best approach

European business rescue: looking for the best approach

On July 5 2013, the European Commission launched a public consultation on what is referred to as the  European approach to business failure and insolvency. The press release states that the focus is ‘…. on helping sound businesses to survive and honest entrepreneurs to get a second chance while protecting creditors’ right to get their money back.’ Although the word ‘honest’ seems to take us back to the bankruptcy laws of several European countries some five centuries ago, it may be expected that the proposals only apply in non-fraudulent cases. The European Commission is firm in its belief that procedures should be speedy and efficient, in the interest of both debtors and creditors, and should help safeguard jobs, help suppliers to keep their customers and help owners retain value in viable companies. This seems to be quite a lot of interests to mould into one system. A first step in harmonising insolvencies will be made, as ‘disparities between national insolvency laws can create legal uncertainty and an unfriendly business environment.’ The consultation addresses selected areas where the divergence of national law may create problems for the internal market. From a legal perspective the most interesting areas are:

(i) Conditions for opening insolvency proceedings, to overcome the many different criteria used in national legislations, such as insolvency, imminent insolvency, foreseeing financial difficulties, and the test to assess its presence, such as the liquidity or the balance sheet test;

(ii) National legal frameworks for restructuring plans, to understand the different conditions for successful restructuring in insolvency proceedings: the identification of the parties that can act as promoters of a plan, the involvement of creditors in its preparation and the differences for instance in the rules regarding the procedure for adopting the plan, including whether creditors are divided into classes (ordinary, preferred, secured creditors) and the required majorities for adopting the plan;

(iii) Status, power and supervision of liquidators. Where the role of a liquidator is becoming more important national legislations have different rules on the qualifications and eligibility for the appointment, licensing, regulation, supervision and professional ethics and conduct of insolvency representatives;

(iv) Directors’ duties and liability and professional disqualifications. Here the question is whether the existing rules concerning directors’ duties and liability in case of insolvency create problems in practice and if rules should be introduced at EU level to ensure that fraudulent managers who have been disqualified in one country are prevented from managing a company in another country, and

(v) Avoidance actions, overcoming the legal uncertainty arising from the various conditions under which an act of an insolvent debtor which is detrimental to their creditors can be avoided before national courts has created problems in practice.

It is interesting to see that the Commission does not pose questions which are also of utmost importance for any rescue regime. For instance, financing during rescue proceedings (post-commencement finance), the matter of (smaller) groups of companies, the influence of rescue matters on existing contracts, including IP-licenses, and – most notably – labour issues. The theme of the conditions for opening insolvency proceedings is presented in a rather conservative way, referring to all the existing different ‘insolvency’ tests. Insolvency legislation should have as a fundamental policy that speedy, inexpensive, negotiated adjustment of creditor-company relations should be favoured. It should therefore be a part of the Commission’s work to assess the conditions under which a well-prepared, negotiated deal in a form resembling a pre-pack can also be a viable instrument. The ‘test’ then would be whether the pre-packed plan is in ‘the best interest’ of all (classes of) creditors involved.

In such a scenario, the present standard that creditors always have priority above old equity (the existing shareholders) should be reconsidered. For the role of the insolvency office holder (the term ‘liquidator’ is too narrow) the Commission is of the opinion that the functioning of the single market could be hampered by all these diverse aspects. Some harmonisation in this area would support the idea of closer cooperation between the liquidators and enhance the comparability of the rules governing the exercise of the profession of liquidators. Here the argumentation has been used that supports the European Parliament’s motion of late 2011 for harmonisation in this area. INSOL Europe, Europe’s leading insolvency practitioners organisation, commissioned the Leiden Law School to carry out a study on the creation of principles and best practices for insolvency office holders. The results of the study can certainly play an influential role in the work of the Commission, as well as in the future of the insolvency profession in general.

Add a Comment

Name (required)

E-mail (required)

Please enter the word you see in the image below (required)

Your own avatar? Go to www.gravatar.com

Remember me
Notify me by e-mail about comments