The logic of harmonisation of insolvency law in the EU
Harmonisation of restructuring and insolvency laws in the EU. Weighing its pros and cons.
In November 2016, the European Commission published its ‘Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU’. See my blog Proposal for a Restructuring Directive. The proposal has caused much discussion, see the blog Wanted: judges with experience in international commercial insolvency practice! I noticed that some were surprised: harmonisation in insolvency law in the EU? Is that possible? I think it is.
First of all, some fifty years ago a general trend in the convergence of corporate law issues took root. Some thirteen or so directives on corporate structure moulded our corporate law system. In addition, renewed rules on accounting and reporting, increased attention for rules regarding the integrity of corporate directors, elements of implemented good governance systems, are just some characteristics of 21st century commercial and corporate law in almost all well-developed European countries.
In the past decade a general trend of convergence in Member States’ insolvency law frameworks has emerged. Many European countries have come to understand that the existing legal framework did not meet the challenge to achieve economic results that are potentially better than those that might be achieved under liquidation. Thus rules have been introduced to preserve and potentially improve a company’s viable business. In recent years substantial revisions have taken place in nearly all EU states. See a comparative study conducted under the leadership of Leeds University.
Although even the more recent insolvency laws in several European countries continue to show substantial differences in underlying policy considerations, in structure and in content of these laws, in most of these jurisdictions there is an openness towards ‘corporate rescue’ procedures, as an alternative to plain liquidation procedures. In many of these countries the US Chapter 11 procedure has served as a model for legislatures. Generally, these are based on the principle of a composition or an arrangement concluded between the insolvent debtor and his creditors, which is binding upon a (given percentage) of a dissenting minority of creditors (sometimes referred to as ‘cram-down’). A characteristic feature for these types of proceedings, aimed at reorganising the debtor’s business, is the fact that attempts to restructure or reorganise enterprises can only be initiated by the debtor himself or at least not against his will. The traditional ‘post-mortem autopsy’ approach (liquidation; winding-up, the word was introduced by former Toronto bankruptcy judge Jim Farley) was slowly supplemented by instruments which allow for ‘real time action’ and domestic laws contain several proceedings which reflect different goals of a company in a rescue. Quite rightly it has been observed, that in most Member States insolvency laws have been updated ‘to fit with the new economic context: beside traditional collective insolvency proceedings decided by the court on the basis of the debtor’s insolvency, new schemes applicable to a group of main creditors (for example banks, public bodies) at a pre-insolvency stage are regarded as being more efficient for the purposes of business continuation and preservation of jobs.’ See page 1 of the Terms of Reference for the EU Group of Experts on Cross-border Insolvency.
Also the approach, compared to some 15 years ago, of Member States’ attitude regarding cross-border insolvency cases has changed dramatically. At the end of last century countries had isolated, separate, self-contained systems. As far as cross-border insolvency problems are concerned, this has turned into rules to coordinate these cases, e.g. within the EU since the adoption of the Insolvency Regulation in 2002, recast in 2015, but also by creating rules which deal with these issues in relation to non-EU countries, sometimes (indirectly) inspired by the UNCITRAL Model Law. Therefore, on several levels and in different forms several concepts and norms correspond to each other or even match.
The reality nowadays demonstrates that national civil law systems can cope with and provide protection to parties in a market in which (i) cross-border activities are facilitated and trade and investment is encouraged, (ii) when economically so many changes occur as a result of a more global, more mobile and more digital world, and (iii) where company structures are becoming more complex which makes it easy for companies to move their gains, their assets, and the choice of the Member States where revenue or gains will fall. In all matters concerning restructuring or insolvency with different proceedings pending in different states, national systems influence each other with ‘intervention’ possibilities, ‘cooperation’ (actually aligning approaches to pending proceedings), and ‘harmonisation’ or ‘uniformation’ is found in certain provisions of the EU Insolvency Regulation 2015, such as Articles 10(2) (reservation of title), 23 (return and imputation), 36 (right to give an undertaking in order to avoid secondary insolvency proceedings), 37 (right to request the opening of secondary proceedings), 40 (advance payments of costs and expenses), 41-44 (duty to cooperate and to communicate between IPs and courts), 45 (exercising creditors’ rights), 46 (stay of the process of liquidation in secondary proceedings), 48 (impact of closure of insolvency proceedings), 49 (assets remaining in the secondary proceedings), 50 (subsequent opening of the main insolvency proceedings), 51 (conversion of secondary insolvency proceedings), 53 (right to lodge claims), 54 (duty to inform creditors) and 56-77 (Ch V Insolvency proceedings of members of a group of companies). These topics are now uniformly regulated all across the EU.
Finally, since September 2015 around twenty jurisdictions have implemented significant legislative changes or have changes pending. Among these are Japan and India, countries in the Middle East and Central Africa, South Korea, Malaysia and Australia. Recently, in some ten European countries corporate insolvency regimes have been or are being amended, including Italy, Spain, Poland, France, the UK and the Netherlands, with changes being discussed or underway in Cyprus. In all these countries, the primary object of these changes is to promote corporate rehabilitation (be it restructuring or going concern sales) to serve as an alternative to the liquidation of enterprises. The main drivers of these changes are pressure on governments to take into account employment interests and not only the interests of creditors when it comes to insolvency, to intervene earlier in the process of financial distress, and save viable companies, to maximise value and allocate returns to all stakeholders, especially creditors, and indirectly, the fear of the impact of interest rates after years of very low rates. The result is to put into action the use of restructuring and insolvency laws in assisting the restructuring of the economy. The tendency is from viewing insolvency as a terminal proceeding for businesses ending in liquidation, to recognising insolvency proceedings as a gateway to potential business rescue (‘instrumentalisation’ of insolvency law). The European Commission has chosen the right basis for its proposal in Article 114 TFEU, the creation of an internal market. In the business world of trade and investment, insolvency law is a major pillar in the market economy. The view prevails that insolvency has become a calculable and acceptable risk and that business failure and market exit are an integral part of the business cycle. Many countries understand the importance of a solid insolvency system and its meaning for investors and a growing economy. To continue structuring this system in a rather similar fashion is a logical step.