Discharge and entrepreneurship in the preventive restructuring directive

The European Council adopted the Preventive Restructuring Directive (2019/1023/EU) on June 20, 2019, which must be transposed by July 17, 2021, subject to a possible extension of a maximum of 1 year for countries encountering particular difficulties in the implementation. The Directive signals a paradigm shift in EU policy on insolvency from the traditional focus on cross‐border issues. The new Directive puts insolvency squarely at the heart of internal market regulation, following the EU's policy since the Great Recession of 2008 of promoting and strengthening the economy. Since 2016, the European Commission has issued several documents to facilitate insolvency procedures, leading to the recently adopted Preventive Restructuring Directive. Besides restructuring, the Directive promotes the discharge of pre‐insolvency debt for entrepreneurs. The Directive does not require that discharge be extended to other natural persons but recommends it. This article discusses the relationship between entrepreneurs and non‐entrepreneurs in an insolvency situation and concludes that a fair interpretation of the new Directive requires that the situation of the ordinary person with liability for business debt be closely scrutinised.     

Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

The European Union Draft Directive on a Preventive Restructuring Framework and Second Chance (the ‘Draft Directive’) provides rules for adopting reorganisation plans in order to avoid insolvency. The Draft Directive also provides rules on the related problem of interim financing. According to the Draft Directive, interim financing should be encouraged and not be made subject to claw back unless parties have committed fraud or acted in bad faith. The Draft Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Draft Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing reducing the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross‐collateralisation and aggressive loan‐to‐own strategies under the guise of interim financing. There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Draft Directive into a fully fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Draft Directive to cases of new security against new money necessary and used for the continuation of the business. Copyright © 2018 The Authors International Insolvency Review published by INSOL International and John Wiley & Sons Ltd.     

Rethinking priority: The dawn of the relative priority rule and the new “best interests of creditors” test in the European Union

This article identifies one aspect of the cross‐class cram‐down from the EU Directive on restructuring and insolvency that has not drawn wide attention to date. In addition to giving EU Member States the option of a “relative priority rule,” the European legislator has introduced a new “best interest of creditors” test, which does not—like in Chapter 11 of the US Bankruptcy Code—use the value that a party could expect in a hypothetical liquidation as a comparator but refers to the “next‐best‐alternative scenario.” First, this article addresses the concepts of the absolute and relative priority rule from the Directive and explores the motives for introducing the relative priority rule. In particular, a demand for more flexibility in restructuring negotiations, the call for an instrument to overcome structural hold‐out positions of preferential (priority) creditors in some Member States, as well as a trend in Europe to break with the “traditional laws of insolvency law” of law and economics seem to have inspired the legislator in drawing up the relative priority rule. This article then deals with the new “best interest” test and examines its interaction with the relative priority rule. It is shown that the concept of combining the new “best interest” test with the relative priority rule is coherent in theory. However, this article remains skeptical as to whether this interaction can succeed in practice, as the new “best interest” test is likely to add another stress point to the negotiations of restructuring plans.     

Recognition of Debt Restructuring and Resolution Measures under the European Union Regulatory Framework

Under the proposed Bank Recovery and Resolution Directive (BRRD), member states will be required to provide for bail‐in powers to restructure failing financial institutions. At this moment, the Dutch, French, UK and German legislator already provide public authorities with resolution powers. In order to be effective in debt restructuring of failing (non‐)financial institutions, the measures taken by the resolution authorities need to be enforceable (before all courts) and effective in the entire European Union. Given the fact that not all the firm's debt is issued in the home jurisdiction, the question of recognition is critically important. In regard of non‐financial firms, the Dutch, UK, French and German jurisdictions provide for court proceedings to impose a collective settlement reached by the debtor and the majority of its creditors binding on the opposing minority. Out‐of‐insolvency plans approved by the court are recognised under the Brussels I Regulation. If the EU Insolvency Regulation reform proposal is adopted, these court‐approved debt restructuring plans in insolvency situations will be subject to the recognition regime of this regulation. Credit institutions, insurance undertakings, investment undertakings holding funds or securities for third parties and collective investment undertakings are excluded from the scope of the Insolvency Regulation whereas the scope of application of the Reorganisation and Winding Up Directive is limited to credit institutions. The regime under the future BRRD and the Single Resolution Mechanism is limited to credit institutions. National (private international) law determines the recognition of resolution measures taken by the authorities of another member state. Copyright © 2014 INSOL International and John Wiley & Sons, Ltd     

Tripping the Light Fantastic: A Comparative Analysis of the European Commission's Proposals for New and Interim Financing of Insolvent Businesses

The European Commission published a Draft Directive in November 2016, with the aim of ensuring that all Member States have in place an effective mechanism for dealing with viable, but financially distressed, businesses. The Draft Directive includes provisions designed to encourage financing for the debtor company, both interim financing to ‘keep the lights on’ for a brief period while the debtor negotiates with its creditors for a resolution to its financial distress, and, where possible, to finance implementation of a restructuring plan, called ‘new financing’ in the Draft Directive. Creating such a financing regime is a complex and difficult issue, as the law's intervention in this area often involves constraints on the rights of existing creditors, requiring that a careful balance is maintained between existing creditors' rights and the rights of the interim financier. This article examines the underlying policy rationale and benefits of having new and interim financing available to financially distressed debtor companies and discusses the risks involved. It examines the EU Commission's proposals in light of the experience of jurisdictions that have already tackled these issues, notably the USA and Canada, or have developed a market‐based solution to this problem, such as the UK. While the European Commission's wish to include such measures in its restructuring proposals is laudable, the measures as drafted raise concerns, particularly regarding risks associated with priority for the grantors of such finance. The authors suggest that there are four fundamental aspects of such financing on which the Directive could give guidance to Member States, namely, effective notice to pre‐filing creditors, thresholds for the debtor to qualify, a menu of relevant criteria to balance benefit and prejudice, and a role for the court in resolving disputes, ensuring fairness to stakeholders, and serving as an accountability check on interim financing arrangements, all aimed at maintaining the integrity of the insolvency process. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.     

A theory of relativity in restructuring developed with the Coase Theorem

This article addresses a key topic in restructuring law, namely the alternative legislative rules for setting priorities for payments and rights among stakeholders in a statutory restructuring programme. The EU Member States have now implemented the Restructuring Directive (2019/1023), which gives two options for the priority rules and the outcomes of the new laws seem to vary significantly. As this legislation is important also for the efficiency of the capital markets, it is good to investigate the potential impacts the new legislative structures may bring for the process. In the article the author argues, by using the Coase Theorem, a leading theory in law and economics, that wider powers for a court to consider the interests of all parties in restructuring could be a preferable legislative solution to restructuring law. It would protect generally the creation of a restructuring surplus, as an individual class would be unable to use its rights as a tool for gaining further benefits. Relativity would stimulate the bargaining of property rights in the process and would follow the Coase Theorem, according to which bargaining between individuals or groups related to property rights will lead to an optimal and efficient outcome.     

The effectiveness and efficiency of corporate insolvency law—part two

Little empirical research has been done in the Netherlands (or internationally) into the effect of corporate insolvency proceedings. The Dutch legislature has made several attempts in the past decades to revise the current Dutch Bankruptcy Act (Faillissementswet) of 1893, while almost nothing is known about the effectiveness and efficiency of the Dutch corporate insolvency law. I have studied the effectiveness of the current Dutch insolvency law and of European Directive 2001/23/EC which is incorporated in this law, on the basis of theoretical and large‐scale empirical research. The study concerned all 4167 of the corporate insolvencies that ended in 2004. In the first part of this Article (International Insolvency Review, Volume 17, 3, Winter 2008, pp. 189–209), the research results showed that the Dutch Bankruptcy Act achieved the goals set on it only to a limited degree and that the informal restructuring procedure is of great social importance. In this second part, I concentrate on the conditions imposed by European Directive 2001/23/EC on the European national legislatures to protect employees' rights: automatic transfer of employment contracts in the event of transfers as part of insolvency proceedings, together with measures to prevent misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in this European Directive. The study shows that, in the Netherlands, not applying automatic transfer of employment contracts when an undertaking or business is transferred as part of an insolvency proceeding does not result in large‐scale misuse of insolvency law. It appears that automatic transfer of employment contracts outside insolvency proceedings can actually impede the informal restructuring of financially unsound companies. These surprising results are interesting for corporate insolvency proceedings worldwide. Copyright © 2009 John Wiley & Sons, Ltd.     

The European Union preventive restructuring framework: A hole in one?

While traditionally (Continental) Europe has not been known for an in particular debtor‐ or restructuring‐friendly insolvency practice, in recent decades, important reforms were implemented that would foster restructurings in Europe. In this article, we comparatively look a the status quo of insolvency and restructuring practice in five different European countries (Denmark, France, Germany, Netherlands, UK). We place our observations into the context of the preventive restructuring directive, to be implemented within the next two years after its publication on 26 June 2019. The directive leaves quite some room implementation, from a watered‐down restructuring tool with high access threshold to a pre‐insolvency debtor‐friendly US‐style restructuring procedure.     

The legal responses of Canada and Poland to international bankruptcy and insolvency with a focus on cross‐border insolvency law

This article discusses and compares the respective legal responses of Canada and Poland to international bankruptcy and insolvency with a focus on cross‐border insolvency law. Specifically, the issues addressed herein concern jurisdiction, recognition of foreign bankruptcy proceedings, and co‐operation with foreign courts and foreign administrators. Notwithstanding some real differences between Canadian and Polish international insolvency proceedings, both legal regimes may be compared, since both countries have adopted many of the principles contained in the UNICTRAL Model Law on Cross‐Border Insolvency. The major impetus behind the changes established by Canada in its bankruptcy and insolvency laws have been the economic realities produced by the North American Free Trade Agreement. Likewise, Poland's accession to the European Union (EU) has been a major catalyst for revising the Polish Insolvency and Restructuring Act. Part II of the said act is entirely devoted to international insolvencies. However, following Poland's adherence to the EU, those sections of the Polish Insolvency and Restructuring Act that deal with international or cross‐border insolvencies will be severely limited or constrained in scope. The article indicates that Poland, the EU and Canada are taking the necessary steps to meet the needs of debtors who would like to restructure in an international setting. Copyright © 2006 John Wiley & Sons, Ltd.     

The priorities dilemma in the EU preventive restructuring directive: Absolute or relative priority rule?

The EU Directive on Preventive Restructuring Frameworks gives the EU Member States (“MSs”) the choice between implementing two fairness rules in cross‐class cram‐down: the US‐style absolute priority rule (“APR”) or the newly conceived relative priority rule (“RPR”). This article argues that there is no good reason for the MSs to implement the RPR in domestic law. While the APR effectively protects the rights of the dissenting classes to get what they are entitled to, the RPR increases moral hazard and opportunism. Also, it might make debt investments in the EU unattractive. On top of that, this article shows that the RPR lacks a clear theoretical justification. One of the main reasons why the RPR was introduced in the Directive alongside the APR is that the RPR was thought to provide a solution to some of the APR's problems. This article considers three of those problems (i.e., the “valuation problem”, the “hold‐out problem” and the “problem of the relevant shareholders”) and explains the reasons why the RPR is not an appropriate solution for these. Among these three problems, the most troublesome one, from the perspective of the EU, is that the APR makes it difficult to award value to the equity of SMEs (the “problem of the relevant shareholders”). This article argues that using the RPR to deal with this problem would incentivize the shareholders to behave opportunistically and to orchestrate the restructuring. Instead of the RPR, this article suggests two alternative techniques which MSs can enact to better address the issue: the new value exception “in kind” and the disposable income method.     

Natural person ltd.: Towards a unified discharge regime for entrepreneurs and consumers

Personal insolvency proceedings are increasingly fulfilling an economic function, aimed at the rehabilitation of the debtor. The idea of the fresh start and second chance, including an early discharge of residual debts, is an important illustration thereof. Despite the fact that this evolution is noted in all personal insolvency procedures, both with regard to entrepreneurs and consumers, debt discharge used to be easier to justify and more readily granted to entrepreneurs (traders) than to non-entrepreneurs. Clear examples of the discomfort legislators seem to have with discharging unpaid debts of consumers are the EU Member States that differentiate between commercial and consumer insolvency procedures. In addition, the narrative of promoting entrepreneurship is now driving EU insolvency reforms. That (narrow) focus leads Directive 2019/1023/EU to make the same distinction between insolvent individual entrepreneurs and other natural persons, offering the former a full discharge of debt after a reasonable period of time, while providing no mandatory discharge principles for the latter. This means that not all natural persons are equal when it comes to the possibility of having a second chance, despite compelling evidence that shorter discharge periods lead to more productive individuals. The question therefore arises as to whether EU Member States should run separate discharge systems for entrepreneurs and consumers, and whether this is justified in relation to its purpose. Focusing on natural persons in an insolvency context, this article argues that the objectives of providing a fresh start and second chance, by promoting debt discharge, are as relevant for consumer debtors as they are for entrepreneurs.     

Insolvency proceedings from a sustainability perspective

Sustainability is a wide concept including environmental, economic, social/culture, and political dimensions. Currently, sustainability research is a rich scientific discipline producing a significant number of research papers. However, sustainability in the context of insolvency proceedings has attracted little research compared with, for example, how much attention corporate social responsibility has received in company law research. This article studies sustainability in the context of liquidation and restructuring proceedings and the preservation of different kinds of resources (natural, manufactured, human, and social capital) in insolvency procedures. The purpose of insolvency proceedings may prevent the full implementation of sustainability. In bankruptcy, the administrator must maximise the selling price for creditor satisfaction, and there are few possibilities to promote sustainability. When facing an acute environmental hazard, in the name of public interest, a bankruptcy estate with assets usually has to act unless the law stipulates that society is responsible for taking care of the problem. In restructuring proceedings, the main purpose is to continue the debtor's business. It depends on the markets how sustainable the debtor company must be to achieve profitability. If becoming a profitable company in a “green” or otherwise sustainable market requires costly efforts, creditors' interests may require the sale of the assets. The author views through sustainability lenses EU Restructuring and insolvency Directive (2019) and finds there is not much of a sustainability approach included.     

Studies in Convergence? Post‐Crisis Effects on Corporate Rescue and the Influence of Social Policy: The EU and the USA

The financial crisis and the sovereign debt crisis that it precipitated in a number of peripheral EU Member States heralded massive changes in insolvency, corporate rescue and employment protection policies. The US and the EU both suffered greatly in the wake of the crisis, but their recoveries have occurred along very different tracks. The US has managed to regain much of its position in terms of relative growth and the UK has outpaced the recoveries of those European countries that are members of the European Monetary Union. The purpose of this treatise is to explore the context of the 2007–2008 financial crisis in the US and in the EU and its impact on legal reform in corporate rescue and restructuring as well as those aspects of social policy implicated within insolvency systems (notably collective redundancy and transfers of undertakings). It will also consider whether or not the corporate rescue and employee protection systems can be seen to be converging, and whether, in view of the different socio‐economic, political and cultural aspects of the US and the EU, such convergence might be beneficial. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd.     

Harmonising European Insolvency Law: The Emerging Role of Stakeholders

In recent years, the European Commission has given increased room for stakeholder involvement in the area of insolvency and restructuring. In revising the European Insolvency Regulation in 2012–2015 and preparing the proposal for a directive on preventive restructuring frameworks 2016, the role and direct influence of stakeholders has been noteworthy. In these efforts, the Commission touched upon a field of law characterised by diverse stakeholders with strongly opposing interests. Following the active involvement of all stakeholders by the Commission, this study examines what relevant stakeholders are, what their positions are with respect to European Union insolvency legislation and what their role has been and can be in legislative processes in the area of insolvency and restructuring. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.     

Set‐off under the European insolvency regulation (and English law)

This paper addresses critically the meaning and effect of the set‐off provisions in the European Insolvency Regulation. The Regulation sets out the authority of EU Member States to open insolvency proceedings and provides that, subject to exceptions, the law of the State that opens insolvency proceedings shall apply to those proceedings. Setoff is one such exception for the opening of insolvency proceedings does not affect the rights of creditors to demand the set‐off of their claims against the insolvent debtor. Set‐off is intended to perform a guarantee type function for creditor claims. Nevertheless, the Regulation does not define what is meant by set‐off nor clarify whether set‐off rights under the law of a third country (such as English law) may be relied upon. The paper provides valuable clarification and critical analysis.     

Business Rescue in Insolvency Law in Europe: Introducing the ELI Business Rescue Report

In a European study, written under the auspices of the European Law Institute, the authors have designed elements of a legal framework that will enable the further development of coherent and functional rules for business rescue in Europe. Based on the recommendations of international organisations, such as UNCITRAL and the World Bank, as well as the insolvency laws of EU Member States, comparative research has led to a lengthy report of 10 chapters and more than 100 recommendations which are described in this article. They range from the need for professional and honest parties involved in the process (insolvency practitioners, turnaround managers, courts and company directors) to the evaluation of specific tools (such as a stay on enforcement actions of creditors and forms of available finance) and procedural safeguards to enable serious rescue efforts of viable businesses, while protecting justified interests. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.     

A Glimpse into the Future: Cross‐border Judicial Cooperation in Insolvency Cases in the European Union

After 2 years of study, discussion and consultation, in February 2015, the EU Cross‐Border Insolvency Court‐to‐Court Cooperation Principles were published. The EU Cross‐Border Insolvency Court‐to‐Court Cooperation Principles (‘EU JudgeCo Principles’) contain 26 principles. The EU JudgeCo Principles aim to strengthen efficient and effective communication between courts in EU Member States in insolvency cases with cross‐border effects. The EU JudgeCo Principles, in short, include principles on their non‐binding status and their objectives, case management of courts and the equal treatment of creditors, and principles about the judicial decisions itself, on the reasoning and for instance on providing a stay or moratorium. Several principles relate to the course of the proceedings, such as notifications and authentication of documents, and the last principles concern the outcome of judicial cooperation, for instance, cross‐border sales, assistance to a reorganisation or rules for binding creditors to an international reorganisation plan. The Principles include 18 EU Cross‐Border Insolvency Court‐to‐Court Communications Guidelines (‘EU JudgeCo Guidelines’). These EU JudgeCo Guidelines aim to facilitate communications in practice, in individual cross‐border cases. The EU JudgeCo Principles try to overcome present obstacles for courts in EU Member States such as formalistic and detailed national procedural law, concerns about a judge's impartiality, uneasiness with the use of certain legal concepts and terms, and, evidently, language. Presently, court‐to‐court communication between judges in insolvency matters in the EU, especially on the continent, is limited to only a few cases. In the near future, judicial cooperation and communication will be a cornerstone in the efficient and effective administration of insolvency cases within the EU. The EU JudgeCo Principles will then certainly serve as a significant guide. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd     

The new “alert procedures” in Italy: Regarder au‐delà du modèle français?

Italy is about to enforce the first comprehensive reform of its corporate insolvency framework since the Second World War. The new Codice della Crisi d'Impresa e dell'Insolvenza builds on international recommendations, European laws and foreign best practice. One area that has been subject to substantial influence from foreign models is preventive insolvency mechanisms, where the Italian Legislator drew from the French and English experiences, as these countries have a widely recognized reputation of excellence in this field. Nevertheless, the similarities between the Italian and the English system – particularly with reference to the Italian panel of experts in the alert procedures and the English “pre‐pack pool” in pre‐packaged administrations – have so far been overlooked in the academic literature. This article sheds some light on the degree of cross‐fertilization between the Italian panel of experts in the procedure d'allerta and the English pre‐pack pool in pre‐packaged administration. The primary purpose of this study is to investigate whether regulatory reforms are needed to support the activity of the Italian panel in promoting restructuring deals for debtors in distress.     

Universalism and the recognition of group proceedings under the UNCITRAL Model Law in Montenegro

Among the most topical insolvency issues in 2017 was the Croatian “Lex Agrokor”—a controversial “tailor‐made” law providing a unique restructuring opportunity for the largest Croatian conglomerate, the parent company of which was otherwise facing bankruptcy. Soon after the “extraordinary administration procedure” began, the appointed administrator started filing motions for the recognition of the alleged group insolvency as foreign insolvency proceedings in a number of neighbouring and other European countries, most of which have adopted the UNCITRAL Model Law on Cross‐Border Insolvency. It was an attempt to save the conglomerate's property from being seized in a disorderly fashion by various secured creditors, most noticeably, the largest Russian financial institution Sberbank, which contested these motions with varying success. This article, however, does not present an effort to comprehensively analyse the ongoing legal battle but rather adopts a broader approach to examining the Lex Agrokor to establish grounds for more general conclusions. More precisely, the purpose of this article is twofold. First, to offer strong arguments that, from the standpoint of typical insolvency legislation based on the Model Law, such as that of Montenegro, both the actual and future group proceedings initiated under the Lex Agrokor should fail to meet recognition requirements. Second, based on the preceding case study, to offer conclusions on how to further promote universal approach regarding group insolvencies by emphasizing exactly what the national laws regulating group insolvency should not feature so as to have the proceedings introduced therewith recognized in countries adopting the Model Law.     

Do regulatory changes affect the underpricing of European IPOs?

We use a sample of 3677 European IPOs during the period 1998–2012 to examine how the adoptions of corporate governance codes by Member States of the European Union (EU) have affected IPO underpricing on Member State-regulated markets, where issuers are subject to corporate governance rules instituted by Member States, relative to a control sample of IPOs on exchange-regulated markets, where issuers are exempt from Member State corporate governance codes. Using this control sample approach facilitated by the existence of second-tier, exchange-regulated markets in the EU, we find that, on average, IPO underpricing declined on Member State-regulated markets after Member States adopted corporate governance codes containing SOX-like provisions. We do not find a similar reduction in IPO underpricing on exchange-regulated markets. Our results are robust to alternative specifications, and our findings support the view that elevating corporate governance standards increases transparency and reduces information asymmetries that affect IPO valuations.