EU Restructuring Directive to offer lifeline to ailing companies

On June 26, 2019, the Directive (EU) 2019/1023 of the European Parliament and of the Council of June 20, 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and of measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (the “EU Restructuring Directive”), were formally published in the Official Journal of the European Union.

To date, EU legislation in the area of corporate insolvency and restructuring has been limited mainly to cross-border recognition and cooperation, whereas according to the EU Restructuring Directive, by July 17, 2021, all EU Member States must transpose its provisions in their respective insolvency and restructuring laws with the aim of harmonizing the future landscape of the European restructuring market.

The EU Restructuring Directive makes it mandatory for Member States to offer a “preventive restructuring framework” for companies facing financial difficulties, with a view to preventing insolvency and ensuring the viability of the company. Distressed companies will be given an early chance to access a restructuring procedure while being protected against individual enforcement actions. Moreover, the Directive provides for new financing to have special priority in case the restructuring fails, and the company goes into a subsequent insolvency proceeding.

Current status of EU Restructuring Directive’s transposition into Member States’ legislation

Some Member States are already well progressed towards the implementation of the Directive in their national insolvency frameworks, while others have requested for an extension of the initial deadline.

For instance, the Netherlands is the first Member State in the EU proposing new legislation for the implementation of the Restructuring Directive. The procedure provided through the WHOA (de Wet homologatie onderhands akkoord) is meant to be swift, flexible and efficient, and in a large part is based on elements of both the US chapter 11 and the UK scheme of arrangement. A debtor can propose a plan to its creditors and shareholders if it can reasonably be assumed that the debtor will not be able to continue paying its debts as they fall due. Under the WHOA, SMEs will have to approve the proposal of a plan by a ‘restructuring expert’, as well as submitting the adopted plan to the Court for confirmation in case the plan will possibly be forced upon a dissenting class of creditors.

Greece has also adopted a new integrated insolvency framework, enacted by the Law for the Settlement of Debts and Provision of a Second Chance, adopted in October 2020. The new Law introduces a unified code for the restructuring and bankruptcy of individual and corporate debt for the first time in the country’s history. It offers a set of complementary procedures and tools to prevent insolvency at an early stage by allowing both businesses and consumers to access Out-Of-Court (“OCW”) proceedings. This type of proceeding is not subject to any judicial review or intervention; they are confidential, based on an electronic platform enabling debtors to request a debt haircut or payments rescheduling from financial institutions.

A country currently in the process of transposing the Restructuring Directive is Romania. Here the draft bill for amending the current Romanian legislation on preventive and insolvency proceedings had been under public consultation until April 9, 2021, after which transposition must be concluded within the set July 17, 2021 deadline.

As per publicly-available information, other countries, such as Italy, Poland and Belgium have asked the European Commission for an extension until next year to implement the Directive

Cyprus will transpose the EU Restructuring Directive by June 2022

Cyprus was granted an extension of 11 months by the European Commission, for the transposition of the EU Restructuring Directive into national legislation. The bills prepared in this respect are currently under discussion and evaluation of relevant authorities, having a final deadline for implementation in June 2022.

Early-warning mechanisms, digitalisation of insolvency proceedings, and continuous specialised training for professionals are some of the most important changes to ensure a proper and effective transposition of the EU Restructuring Directive.

Benefits of the EU Restructuring Directive

According to public data, at a European level, 600 companies enter liquidation procedures every day and 200,000 companies exit the economy every year, leaving 1.7 m people without jobs.

Therefore, having streamlined preventive restructuring procedures in place will encourage both debtors and creditors to apply for an early restructuring process, rather than waiting until it is too late to save a business.

This approach will enhance many businesses’ survival chances, while safeguarding their value and improving the overall results of the economy.

The transposition of the EU Restructuring Directive is also a part of the European Commission’s 2020 NPL Action Plan.

According to the Commission’s Communication: “the enhancement of preventive restructuring frameworks would ensure that action is taken before enterprises default on their loans, thereby helping to reduce the risk of loans becoming non-performing in cyclical downturns, and mitigating the adverse impact on the financial sector.

“At the same time, non-viable businesses with no prospect of survival should be liquidated as quickly as possible.”