Council flexes its muscles

Insolvency Bitesize - November 2018

The European Council has agreed its position on the proposed EU directive on business insolvency reform (often referred to as the EU insolvency law harmonisation project), which while keeping all the main elements of the 2016 Commission proposed directive affords member states greater choice in how it is implemented.

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).
Although there are substantial differences between the Commission, Council and European Parliament in approach, we understand that the aim is for trilogue discussions to result in an agreed position by early 2019 in time for the European elections. Member states would then likely have 2/3 years to implement.