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.
Facilitating negotiation
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.
Content of restructuring plan
The restructuring plan must include, inter alia, the following:
- Information on the debtor’s assets and liabilities at the time of submission of the restructuring plan, and a description of the financial situation of the debtor and of the causes and extent of the difficulties of the debtor.
- Information on the affected parties and their claims or interests covered by the restructuring plan, as well as, where applicable, the classes into which the affected parties have been grouped for the purpose of adopting the restructuring plan.
- Where applicable, details of the parties who are not affected by the restructuring plan, together with a description of the reasons why it is proposed not to affect them.
- The terms of the restructuring plan (including any proposed restructuring measures, the proposed duration of the restructuring measures and the overall consequences as regards employment, such as dismissals, short-term working arrangements or similar) and any new financing anticipated as part of the restructuring plan.
- A statement of reasons why the restructuring plan has a reasonable prospect of preventing the insolvency of the debtor and ensuring the viability of the business.
Adoption and confirmation of restructuring plan
Only parties who are affected by the plan shall have a right to vote on the adoption of the plan. Member states may decide on whether equity holders, creditors that rank behind unsecured creditors and parties related to the debtor should be excluded from voting. Affected parties shall be divided into separate classes, each reflecting a sufficient commonality of interests. Member states may provide that in cases where the debtor is an SME, affected parties will not be allocated to separate classes.
A restructuring plan shall be adopted by the affected parties, provided that a majority in the amount of their claims (or interests), set by the member states at a maximum of 75 per cent, is obtained in each class. The member states shall also determine whether, in addition, a majority in the number of affected parties needs to be obtained in each class.
Certain restructuring plans need to be confirmed by a judicial or administrative authority in order to become binding. This includes plans which affect dissenting parties, provide for new financing or involve a reduction of the workforce by more than 25 per cent. Once confirmed, these plans will be binding on all affected parties, including those who did not vote in favor.
If one or more classes of affected parties do not vote for the restructuring plan, it may still be confirmed by a legal or judicial authority (‘cross-class cram-down’), provided that certain conditions are met. These include the approval of the plan by (i) a majority of the voting classes of affected parties, which must include one class of secured creditors or creditors senior to ordinary unsecured creditors, or, failing that, (ii) one class of affected parties who are not equity holders or similar. The plan must ensure that dissenting voting classes of affected creditors are treated at least as favorably as any other class of the same rank and more favorably than any junior class (the ‘relative priority rule’). Finally, no party may receive more than the full amount of their claims.
Safe harbor
The Directive provides that financial assistance provided by a creditor (i) during the stay of individual enforcement actions while the stakeholders negotiate a restructuring plan (‘interim financing’) and (ii) in order to implement the restructuring plan (‘new financing’), is in each case adequately protected. As a minimum, new or interim financing may not be unwound, and lenders shall not incur liability in a subsequent insolvency of the debtor, on the ground that such financing is detrimental to the general body of creditors. The member states may require that protection is contingent on certain formal approvals.
The Directive provides for similar protection for other restructuring-related transactions, which may not be unwound in a subsequent insolvency of the debtor on the ground that they are detrimental to the general body of creditors.
Second chance for entrepreneurs
The Directive requires member states to ensure that insolvent entrepreneurs have access to at least one procedure that could lead to a full discharge of debt. The period after which insolvent entrepreneurs are to be fully discharged from their debts shall be no more than three years. National law may provide that the entrepreneur will have to comply with certain obligations before any discharge of debt is obtained, such as, for example, a partial repayment of the debt.
Any disqualifications preventing entrepreneurs from taking up or pursuing a trade, business, craft or profession on the sole ground that they are insolvent under national law need to be discontinued when the entrepreneurs have obtained a discharge of their debts. It would not serve the aim of the Directive to allow entrepreneurs a second chance if they were prevented from earning a livelihood after their debts are fully discharged.
Access to the discharge of debt will be denied or restricted where the entrepreneur acted dishonestly or in bad faith with respect to stakeholders. Furthermore, member states are given a broad range of circumstances in which they can restrict or deny access to the discharge of debt. Examples include:
- the violation of obligations under a repayment plan or any other obligation aimed at safeguarding the interests of creditors;
- abusive applications for the discharge of debt; and
- a further application for a discharge of debt within a specified period after the entrepreneur has already been granted a full discharge of debt.
Similarly, member states may exclude specific categories of debt from discharge, such as secured debts or debts arising from criminal penalties or tortious liability.
Finally, the Directive recognizes that entrepreneurs would not effectively benefit from a second chance if they had to go through separate procedures with different access conditions to discharge their professional debt and any personal debt incurred outside of the exercise of their profession. Therefore, member states are required to ensure that in cases where the professional debts of entrepreneurs cannot be reasonably separated from personal debts, both categories of debt will be discharged in the same procedure. Where these categories of debt can be separated, member states may provide that they are discharged in the same, or in separate but coordinated, procedures.
Improving efficiency of procedures
The Directive requires member states to ensure that the efficiency of procedures concerning restructuring, insolvency and the discharge of debt is improved. In particular, members of the judicial and administrative authorities who deal with such procedures must receive suitable training and have the necessary expertise to carry out their responsibilities.
The same applies to practitioners appointed by judicial or administrative authorities under such a procedure. The process of their appointment, removal and resignation must be clear, transparent and fair. Consideration must be given to a practitioner’s experience and expertise, as well as to the specific features of a case, when deciding on the person to be appointed. Appropriate oversight and regulatory mechanisms must be put in place to ensure that the work of practitioners is effectively supervised. In addition, the remuneration of practitioners must be governed by rules that are consistent with the objective of an efficient resolution of procedures.
Finally, member states are required to ensure that the parties to procedures concerning restructuring, insolvency and the discharge of debt, the practitioners and the judicial or administrative authorities are all able to perform by electronic means of communication at least certain key actions such as the filing of claims, submission of restructuring or repayment plans, and notification of creditors.
Conclusion
The degree of harmonization achieved by an EU directive is dependent on the way it is enacted into the national laws of the member states. The Directive allows member states a high degree of flexibility when implementing its rules. In consequence, it sets only minimum standards for preventive restructuring frameworks, the discharge of debt and (of limited scope) insolvency proceedings which need to be adhered to throughout the EU. This is a prudent approach in view of the highly diverse nature of restructuring and insolvency proceedings and the different stages of development of insolvency regimes in the various member states.
Clearly, the most important substantive change introduced by the Directive is the establishment of a preventive restructuring framework in each member state. Once implemented in the member states, this may offer stakeholders and restructuring professionals an interesting choice of restructuring regimes, particularly in cross-border cases.
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Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on Restructuring and Insolvency).
Client Alert 2019-188
