Takeaways

The European Union approved a new Directive establishing minimum standards of insolvency laws in Member States.
The Directive shares many similarities to Chapter 11 in the U.S., including provisions regarding debtors-in-possession, automatic stays, and cross-class cramdowns.
The success of the Directive in harmonizing insolvency laws in Europe will ultimately depend on the national insolvency laws enacted by individual Member States.

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: 

  1. Preventive restructuring frameworks for debtors in financial difficulties when there is a likelihood of insolvency, with the goal of preventing the debtor’s insolvency and ensuring the debtor’s viability;
  2. Procedures leading to a discharge of debt incurred by insolvent businesses; and
  3. Measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. 

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:

  • Debtor-in-possession: Debtors shall be given the right to remain totally, or at least partially, in possession of their assets and the operation of their business. If necessary, the judicial or administrative authority will have discretionary power to appoint a practitioner to assist the debtor in negotiating and drafting a restructuring plan.
  • Stay protection: Debtors shall be afforded the protection of a stay of individual enforcement actions to enable negotiation of a restructuring plan. Member States shall have the discretion to limit the scope of the stay by excluding certain creditors or categories of creditors or excluding certain claims or categories of claims. The initial duration of the stay shall be a maximum of four months; the total duration of the stay, including extensions and renewals, shall not exceed 12 months.
  • Debtor’s right to submit the restructuring plan: Debtors shall have the right to submit restructuring plans, regardless of which party initiates the restructuring procedure. Member States may also provide creditors and appointed restructuring practitioners the right to submit restructuring plans.
  • Approval process: Affected parties shall have the right to vote on the restructuring plan. Voting shall be divided by classes of creditors, which will consist of creditors with sufficient commonality of interest. At a minimum, secured and unsecured claims shall be separately classified for voting purposes.
  • Cramdown: A restructuring plan that is not approved by every voting class may become binding on dissenting voting classes if the plan, among other things, has been approved by a majority of the voting classes, provided that at least one of those classes is a secured creditors class or is senior to the ordinary unsecured creditors class. The dissenting class must be treated at least as favorably as any other class of the same rank and more favorably than any junior class; and no class may receive or keep more than the full amount of its claims.

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.

Conclusion

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.