The new EU Directive on preventive restructuring frameworks1 was published in the Official Journal of the European Union on 26 June 2019 and entered into force on 16 July 2019. The objective of the Directive is to harmonize the laws and procedures of EU member states concerning preventive restructurings, insolvency and the discharge of debt. Outside of the banking and insurance sectors, EU insolvency legislation has to date focused on regulating cross-border insolvency proceedings and addressed, in particular, issues concerning the jurisdiction of the courts, the recognition of the effects of proceedings in other member states and conflicts of laws. The Directive represents the first major step in the process of harmonizing Europe’s diverse insolvency laws. It has three main aims:
- Enterprises in each member state should have access to a preventive restructuring framework which enables them to avoid insolvency and to continue operating.
- Insolvent or over-indebted entrepreneurs should benefit from a full discharge of debt within a reasonable period of time.
- The efficiency of procedures involving restructuring, insolvency and the discharge of debt should be improved.
Member states are required to pass national laws to implement the Directive by 17 July 2021 at the latest.
Preventive restructuring framework
The Directive requires member states to ensure that, where there is a likelihood of insolvency, debtors have access to a preventive restructuring framework to allow them to avoid insolvency. National law must provide for the restructuring framework to be available on application by the debtor. It may provide that such frameworks are also available at the request of creditors and employees’ representatives, provided that the debtor agrees.
A restructuring which prevents a debtor’s insolvency, is achieved by means of a restructuring plan. The Directive provides for certain rules relating to negotiation of the plan, its content and the process of its adoption.
Negotiation of the restructuring plan is facilitated by provisions which provide for the debtor to remain in total or partial control of its assets and the day-to-day operation of its business. A restructuring practitioner only needs to be appointed where (i) a general stay of enforcement actions is granted and the judicial authority determines that the appointment of a practitioner is necessary to safeguard stakeholders’ interests; (ii) a restructuring plan needs to be confirmed by means of a cross-class cram-down; or (iii) the appointment is requested by the debtor or the majority of creditors. Otherwise, the need to appoint a practitioner is decided on a case-by-case basis, although member states may provide for additional circumstances where the appointment of a practitioner is mandatory.
Member states are required to ensure that a stay of individual enforcement actions is available for debtors if this is needed to support the negotiation of a restructuring plan. Such a stay can be general or limited, covering one or more individual creditors. Workers’ claims may, however, only be subject to a stay if national law provides that the payment of such claims is guaranteed under the preventive restructuring. Claims may be excluded from the stay where enforcement is unlikely to jeopardise the restructuring of the business or the stay would unfairly prejudice the creditors of those claims. The stay is limited to a period of four months, but member states may provide for it to be extended under certain circumstances to a period of up to 12 months. National law shall provide that the stay can be lifted under certain circumstances, in particular if it no longer fulfils the objective of supporting the negotiation of the restructuring plan. This would, for example, be the case if it becomes apparent that a blocking minority of creditors (which, under national law, could prevent the adoption of the restructuring plan) does not support the continuation of negotiations. The stay would normally suspend any mandatory requirements to file for insolvency, but member states may provide otherwise if the debtor is cash-flow insolvent.
Importantly, the Directive provides for rules preventing creditors from withholding performance, or terminating, accelerating or modifying essential executory contracts to the detriment of the debtor for debts that come into existence prior to the stay. Essential executory contracts are executory contracts which are necessary for the continuation of the day-to-day operations of the business, including supply agreements. The Directive allows for exemptions to be made with respect to netting and close-out arrangements in financial, energy and commodity markets.