Council flexes its muscles
Insolvency Bitesize - November 2018
The Council's approach gives member states more flexibility which could see the existing fragmented approach to restructuring and insolvency procedures across the EU27 continuing to a greater extent than under the Commission’s harmonisation proposals. You can read our thoughts on the original draft directive here and here.
Key elements to the Council's approach are:
- states allowed to restrict access to any preventative restructuring process: member states would be allowed to restrict access to any new preventative restructuring process through imposing a viability test if certain conditions are met. The proposal also allows member states to make the process available on the request of creditors;
- no two stays the same: while keeping the duration proposed by the Commission (i.e. 4 months maximum for the initial duration with a 12-month extension), the Council introduces the possibility of a longer period for courts to confirm particularly complex plans, giving states the freedom to choose and allowing member states to set differing rules on creditor rights to lift any stay;
- class or no class for SMEs: member states could exempt SMEs from having to put creditors into classes under a restructuring plan process;
- dissenting creditor safeguard: before a restructuring plan is approved, the Council proposal allows member states to choose whether to safeguard dissenting creditors by reference to a best-interests test which ensures that no dissenting creditor should be worse off than in a liquidation/going concern sale (as per the Commission approach) or than in the event of the "next best alternative" were the restructuring proposal not approved;
- alternative to valuing out-of-the-money classes in cross-class cram-down: the original proposal allows for cross-class cram down but wouldn't allow "out-of-the-money" classes to push it through. Concerned that this would require valuation to determine who is in or out-of-the-money, the Council approach will also allow member states to impose cross-class cram down where a majority of classes vote in favour and at least one of those classes is a secured creditor class or a creditor class who would rank senior to unsecureds on insolvency; and
- fairness in cross-class cram down - absolute or relative priority rules: the Council adopts the Commission's absolute priority rule in a cross-class cram down (dissenting class to be paid in full before any junior class can receive a distribution), but as an alternative would allow member states to protect dissenting classes by reference to a "relative" priority rule (dissenting class to receive at least as much as any equal ranking class, determined by ranking on liquidation at national law, and more than any junior class).