On 22 November 2016, the European Commission presented a set of new European rules for business insolvency which member states are to implement. These include similar restructuring approaches to those being considered in Australia, a focus on fostering entrepreneurial business conduct, and a need for the proper regulation and training of insolvency practitioners, including their proper level of remuneration.
This announcement has been awaited since 12 July 2016, when the Commission convened an interested group of international experts in Brussels to discuss various options for the EU.
My QUT colleague Associate Professor Colin Anderson and I as a Visiting Fellow at QUT attended and spoke at that meeting.
The meeting had before it a major report from the University of Leeds giving a full review of EU member states’ insolvency regimes, to which I and Professor Rosalind Mason of QUT, and other international advisers, gave input.
The EC proposal for a Directive of the European Parliament reports that in Europe half of all businesses survive less than 5 years. The number of corporate insolvencies has risen since the peak of the economic crisis in 2009 and remains high, although the trend seems now to be reversing.
In several EU States there is reported to be a tendency to steer viable enterprises in financial trouble towards liquidation rather than early restructuring. It is estimated that in the EU, 200 000 firms go bankrupt each year (or 600 a day), resulting in 1.7 million direct job losses every year. One in four of these are cross-border insolvencies involving creditors and debtors in more than one EU Member State.
The proposed Directive focuses on three key elements:
- Common principles on the use of early restructuring frameworks, to help companies continue their activity and preserve jobs.
- Rules to allow entrepreneurs to benefit from a second chance, as they will be fully discharged of their debt after a maximum period of 3 years. Currently, half of Europeans say they would not start a business because of fear of failure.
- Targeted measures for Member States to increase the efficiency of insolvency, restructuring and discharge procedures. This will reduce the excessive length and costs of procedures in many Member States, which result in legal uncertainty for creditors and investors and low recovery rates.
The new rules will observe the following key principles to ensure insolvency and restructuring frameworks are consistent and efficient throughout the EU:
- Companies in financial difficulties, especially SMEs, will have access to early warning tools to detect a deteriorating business situation and ensure restructuring at an early stage.
- Flexible preventive restructuring frameworks will simplify lengthy, complex and costly court proceedings. Where necessary, national courts must be involved to safeguard the interests of stakeholders.
- The debtor will benefit from a time-limited ”breathing space” of a maximum of four months from enforcement action in order to facilitate negotiations and successful restructuring.
- Dissenting minority creditors and shareholders will not be able to block restructuring plans but their legitimate interests will be safeguarded.
- New financing will be specifically protected increasing the chances of a successful restructuring.
- Throughout the preventive restructuring procedures, workers will enjoy full labour law protection in accordance with the existing EU legislation.
- Training, specialisation of practitioners and courts, and the use of technology (e.g. online filing of claims, notifications to creditors) will improve the efficiency and length of insolvency, restructuring and second chance procedures.
A rescue culture
The EC says that
“above all, the proposal aims to enhance the rescue culture in the EU. The rules on business restructuring and rights of shareholders will predominantly contribute to “prevention”, the rules on avoidance, insolvency practitioners and judicial or administrative authorities to ‘value recovery’ and the rules on second chance to ‘debt discharge’. Besides economic gains, there will also be positive social impacts”.
Duties of directors
Member States are to implement rules to ensure that, where there is a likelihood of insolvency, directors have these obligations:
(a) to take immediate steps to minimise the loss for creditors, workers, shareholders and other stakeholders;
(b) to have due regard to the interests of creditors and other stakeholders;
(c) to take reasonable steps to avoid insolvency; and
(d) to avoid deliberate or grossly negligent conduct that threatens the viability of the business.
Access to discharge
The period of time after which over-indebted entrepreneurs may be fully discharged from their debts is to be no longer than three years, with automatic discharge from debts applying.
This is in the context of many states having discharge periods of longer than 3 years.
But Member States may restrict access to discharge or set longer periods for obtaining a full discharge or longer disqualification periods in certain well-defined circumstances – such as where the over-indebted entrepreneur acted dishonestly or in bad faith; did not adhere to a repayment plan or other legal obligations; or acted in abuse of process or sought repeated access to discharge procedures within a certain period of time.
Interestingly, longer discharge periods may be imposed in cases where the main residence is exempt from bankruptcy.
The EC announcement says that practitioners in the field of restructuring, insolvency and second chance must be properly trained and supervised in the carrying out of their tasks; and they must be appointed in a transparent manner.
Practitioners should also adhere to voluntary codes of conduct aiming at ensuring an appropriate level of qualification and training, transparency of their duties and the rules for determining their remuneration. There should be the establishment of oversight and regulatory mechanisms which should include an appropriate and effective regime for sanctioning those who have failed in their duties. Such standards may be attained without the need in principle to create new professions or qualifications.
Practitioners’ fees should be governed by rules which incentivise a timely and efficient resolution of procedures with due regard to the complexity of the case. Appropriate procedures with built-in safeguards should be made available to ensure that any disputes about remuneration are resolved in a timely manner.
Two issues which I have emphasized as needed in Australia are included in the Directive
- The use of electronic communications – the filing of claims by creditors, notifications sent by practitioners, voting on a restructuring plan or lodging appeals.
- The need for the gathering of reliable data on the performance of these new insolvency procedures in order to monitor the implementation and application of the new Directive. Member States are required to collect and aggregate data that is “sufficiently granular” to enable an accurate assessment of how the Directive works in practice.
This will be of be of interest to us in Australia given that it represents, broadly, a similar approach to that which the government says we are to take. It bears closer reading, on which I may report in due course.