The proposed directive has three elements. These are common principles on the use of early restructuring frameworks; rules to allow entrepreneurs to benefit from a second chance, as they will be fully discharged of their debt after a maximum period of three years; and targeted measures to increase the efficiency of insolvency, restructuring and discharge procedures in each member state.

The Commission said the move would increase the opportunities for companies in financial difficulties to prevent bankruptcy and avoid laying off staff, and offer entrepreneurs a second chance at doing business. It is also intended to lead to more effective and efficient insolvency procedures throughout the EU, where there are an estimated 200,000 business bankruptcies a year, resulting in 1.7 million jobs being lost.

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. The Commission wants member states to introduce flexible preventive restructuring frameworks to simplify lengthy, complex and costly court proceedings.

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, the Commission says.

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.

Frans Timmermans, European Commission first vice-president, said: ‘We want to help businesses to restructure in time, so that jobs can be saved and value preserved. We also want to support entrepreneurs who do fail to get back on their feet quicker, get out there and try again wiser.’

The directive is intended to address widespread variations in the efficiency of insolvency frameworks across EU member states. Recovery rates vary between 30 % and 90%, while the length of insolvency proceedings ranges from a few months to four years, and discharge periods for entrepreneurs are often longer than five years and can be impossible to obtain in some member states.

According to analysis released with the directive, the UK ranks as 8th among EU member states when it comes to the effectiveness of its insolvency proceedings. The average length of UK proceedings is one year, compared to the two year EU average, while the recovery rate for secured creditors is 88.6% compared to the EU average of 65%.

Insolvency and restructuring trade body R3 said the UK’s regime already meets many of the standards in the new directive, while the government is currently carrying out its own corporate insolvency reform project along similar lines.

Andrew Tate, R3 president, said: ‘There is already an increasing focus on restructuring and early intervention as part of the insolvency regime in the UK, and an EU-wide framework for this type of work will make it much easier to handle cross-border cases.

‘Of course, the introduction of the directive is complicated by Brexit. There is still no clear timetable for when the UK will leave the EU, so while we expect the government to start work to ensure the UK is compliant with the directive, we don’t know how long the directive will apply for.

‘In its Brexit negotiations, the government must ensure that certain insolvency benefits of EU membership are not lost for the UK. The loss of automatic recognition of UK insolvency practitioners’ powers across the EU – provided by the EU’s insolvency regulation – would make cross-border insolvency work much more expensive and jeopardise the return of money from the EU owed to UK creditors.’

For his part, Matt Ingram, managing director, Duff & Phelps, argued that a shift in creditor attitude was likely to be as critical as introducing new legislation.

‘One has to question whether EU policy makers alone, even with the adoption of “Chapter 11” type policies, can impose upon creditors the US tolerance of failed enterprises and reduce the stigma associated with bankruptcy.  Chapter 11 protection, like the UK insolvency procedures, engenders compromise and restructuring for the longer term good. However, the extent that creditors are inclined to play their part when faced with debt rescheduling is cultural and harder for the law makers to influence.’

The proposed EU directive will apply to entrepreneurs whether they are incorporated or not. It will apply to large, medium, small or micro-enterprises engaged in business, trade or other professional activities, but will not apply to financial institutions since these are subject to dedicated sectorial rules. The proposal will also not interfere with purely contractual restructurings based on the agreement of all parties involved which take place outside a specific restructuring procedure.

The Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU is here.