On June 26, 2019, the Official Journal of the European Union published a directive of the European Parliament and of the Council of the European Union aimed at harmonizing Member State restructuring and insolvency laws (the Directive). The Directive was approved by the Parliament and the Council on March 28, 2019 and June 6, 2019 respectively, and it entered into force on July 16, 2019. The stated objective of the Directive is to foster “free movement of capital and freedom of establishment” by harmonizing and establishing substantive minimum standards of insolvency laws in EU member states (the Member States). Recognizing that neither the individual efforts of Member States to reform insolvency laws nor the existing regulation of cross-border insolvency proceedings has been sufficient to meet these objectives, Article 34 of the Directive requires Member States to adopt and publish compliant laws and regulations by July 17, 2021.
These rules cover:
Title II Restructuring Framework
Title II of the Directive requires Member States to adopt preventive restructuring frameworks to allow debtors to restructure and maintain the viability of their businesses. Notably, the Directive demands provisions regarding:
The Directive allows Member States some discretion and flexibility in developing their restructuring framework while ensuring consistency among certain key features of the Member States’ insolvency laws. Consequently, multiple variations of the Directive-compliant insolvency laws will likely be adopted by Member States across Europe in the next two years.
Comparison to Chapter 11
The Directive’s restructuring framework shares many similarities with Chapter 11. However, there are some notable, high-level differences between Chapter 11 and the Directive’s restructuring framework. For example, the Directive’s framework is generally more streamlined than the Chapter 11 reorganization because it minimizes judicial intervention, which in turn could reduce costs. The Directive, however, does not provide for debt financing on a super-priority basis as does Chapter 11, an absence that some view as a weakness. Finally, it is worth repeating that the Directive provides Member States with a fair amount of discretion, and thus the degree of parallels to Chapter 11 will depend on the insolvency laws enacted by individual Member States.
To harmonize the varying national insolvency laws in its Member States, the EU approved a new Directive introducing minimum standards for a preventive restructuring framework. Unlike previous attempts at reforming insolvency laws in Europe, which have focused on national efforts of individual Member States or regulation of cross-border insolvency proceedings, the new Directive requires Member States to enact laws and regulations providing debtors and creditors with minimum rights and remedies in preventive restructuring procedures. The Directive has similarities to Chapter 11, but the extent of overlap remains to be seen, dependent on the national laws enacted by Member States.