The recast EU regulation on insolvency proceedings: A new approach towards business restructuring
The guiding forces for a review of EC Regulation No. 1346/2000
The downturn in the economy, which in recent years has severely affected businesses at all levels within the European Union, has pushed many countries to review their internal legal systems on insolvency and restructuring proceedings. Indeed, the demand for adequate rules increases in times of crisis, prompting reforms where existing legislation is incomplete or unable to offer legal instruments capable of responding to changing economic conditions.
Thus, since the turn of the century, all European countries have commenced frantic changes in bankruptcy law. The law has undergone a reversal of perspective and therefore of its historical function. This inversion is seen in the idea that insolvency should not be considered a defeat but an opportunity to learn from mistakes, to improve and grow. Not surprisingly, in the “Entrepreneurship 2020 Action Plan” COM(2012) 795 of the European Commission, it is stated that: “‘second starters’ are more successful and survive longer than average start-ups; they grow faster and employ more workers. Thus, a failure in entrepreneurship should not result in a ‘life sentence’ prohibiting any future entrepreneurial activity but should be seen as an opportunity for learning and improving – a viewpoint that we already today fully accept as the basis of progress in scientific research”.
It follows, then, that in many European legal systems disruptive liquidation has been set aside in favour of restructuring schemes and procedures aimed at ensuring that businesses can be preserved as a going concern, and a Recommendation has been issued by the European Commission on 12 March 2014, inviting all Member States to adopt internal procedures more favourable to restructuring (rather than liquidating) distressed businesses. The need to review Regulation No. 1346/2000 on insolvency proceedings clearly emerged and the renovation work began in 2010, under the programme “Justice for Growth”, as set out in the Action Plan, and in 2012 a proposal was issued by the Commission.
The new EU Regulation No. 2015/848
On 20 May 2015 the new Regulation No. 2015/848 on insolvency procedures has been published, which will apply to insolvency proceedings opened since 26 June 2017 (until then, insolvency proceedings remain subject to Regulation No. 1346/2000).
The new Regulation marks an evolution: liquidation of the debtor’s assets is no longer representing, as it was still in the context of Regulation No. 1346/2000, the main aim of insolvency procedures. In this context, accordingly, the notions of insolvency, limitation of the debtor’s management powers and participation by creditors have been adapted and, with respect to the previous Regulation, significantly widened. Indeed, the new Regulation is not only applicable to procedures based on full insolvency, but also to distressed situations still allowing for a turnaround and restructuring effort to be carried out.
Moreover, insolvency procedures are now defined to include pre-insolvency situations and arrangements, which could not have fallen within the traditional definition (involving necessarily the generality of creditors and assets of the debtor, as well as limiting the debtor’s management powers). However, confidential procedures (such as the UK schemes of arrangement and the Italian reorganization plans) will remain outside of the scope of the new Regulation.
Main changes in the new Regulation
The new Regulation No. 2015/848 follows on the path of Regulation No. 1346/2000, whose main structure is preserved – based on the EU-wide effects of the main procedure opened in one of the Member States and on possible secondary procedures which can be opened in another State according to local rules – while several changes are introduced.
i) jurisdiction and forum shopping
The proposal would stick to the “centre of main interests” (so-called COMI) notion, which would be better specified as the “place where the debtor conducts its own activity steadily and in way which could be recognized by third parties” according to the principles stated by the EU Court of Justice with its latest decision in the Interedil case. To avoid forum shopping, a look-back period ranging from three to six months has been provided, when a transfer of the COMI of the debtor can be more easily disregarded by the Court, and any creditor is now entitled to challenge, on the basis of jurisdiction, the opening of the main proceeding in a specific Member State.
ii) improving secondary procedures
These will be procedures no longer limited to liquidation procedures and also the definition of “establishment” allowing the opening the same is widened. It will also be possible to avoid the opening of a secondary procedure, by an undertaking within the context of the main procedure, whereby affected creditors will be assured a treatment equal to that to which they would have been entitled in the secondary procedure: the view is that, in order to protect local interests, a secondary procedure can obstruct the efficient administration of the main proceeding. Also the conditions to open a secondary procedure have been restricted, requiring that a local establishment was operating in a three-month look-back period before the opening of the main procedure.
iii) ensuring publicity to insolvency procedures
In order to create a wider access to information on insolvency procedures, the Regulation provides that the Commission put in place a system of “interconnected” insolvency registers, accessible to the public through the web at national level and also through a European portal of electronic justice (this will be effective only from 26 June 2018 and 2019, respectively).
iv) introducing rules for group insolvencies
Regulation No. 2015/848 provides for cooperation of receivers and judges involved in the various procedures regarding the companies belonging to a group, in order to improve efficiency in handling such procedures: this would be attained by the appointment of an external coordinator on a voluntary basis, to make recommendations to the administrators. Various ways of interaction are envisaged, including the duty for administrators to share pertinent information and to cooperate in setting up a rescue or reorganization plan. The proposal would give each administrator the right to participate to the procedure of another company of the same group, in particular the right to be heard, to apply for a stay of the procedure and to propose a restructuring plan.
Nctm has a strong restructuring practice and welcomes the new rules and the new perspective of bankruptcy law.