The EU will help more companies survive    

Each year, 200,000 companies are subject to bankruptcy proceedings within the EU. Now, the European Commission will ensure that more companies survive. The Commission has therefore presented a draft directive which is to ensure that member state companies can overcome financial problems by way of a low-cost and fast procedure to obtain an arrangement with the creditors.

Already in 2014, the Commission  recommended the implementation of rules which ensured that companies had could restructure their business and avoid bankruptcy proceedings. However, this recommendation was not followed to the extent requested, and the Commission therefore believes that it is now necessary to present a draft directive.  The draft was presented on 22 November 2016, and the Commission has never before tried to harmonise the member states' insolvency legislation. If the directive is adopted, it will also be implemented in Denmark.

The Commissions concludes that:
 

  • ignorance of insolvency procedures and concern about prolonged procedures make investors unwilling to invest in companies in other member states, which prevent the free movement of capital;
  • the creditors will obtain higher dividends if the company is restructured instead of being declared bankrupt;
  • it prevents entrepreneurship when taking too long to obtain debt rescheduling;
  • the longer the insolvency procedures take, the more dividends to the creditors will drop.

THE DRAFT DIRECTIVE

The draft consists of three elements:

1. That companies can obtain restructuring at a much earlier date thereby avoiding bankruptcy (preventive restructuring)

2. That entrepreneurs can obtain debt rescheduling 

3. Enhancing the efficiency of national bankruptcy procedures. 

The draft only provides minimum requirement in relation to the framework. The draft does not harmonise the core principles of insolvency legislation, but provides the member states with the opportunity of drafting national rules with the effect that these take into consideration the objects stated in the draft, but based on national insolvency rules and principles.

1. PREVENTIVE RESTRUCTURING

A company must be able to obtain an arrangement with its creditors before the final collapse, when it is too late. The framework must include:

  • Only debtors can start the procedure, which does not necessarily required a court's involvement.
  • Debtors keep the right to enter into commitments, meaning that the management can continue acting.
  • It is only necessary in special situation to appoint a restructuring administrator to supervise the procedure.
  • At the request of a debtor, the court can decide that all or a few creditors are prevented from applying for enforcement of their claims for four months, which period can be extended to 12 months as a maximum.
  • The restructuring proposal must be adopted by the creditors, and a majority of the creditors may force the proposal with binding effect on the creditors who voted against it. 
  • The creditors are categorised based on their rights,characteristics, etc. Small supplier may for instance be granted the same class, connected persons the same class and financial creditors the same class. To adopt a proposal, a majority in each creditor class must vote in favour thereof. However, a proposal may also be adopted notwithstanding not all classes having a majority, but only some, provided that the court also approves the proposal.
  • The court is only required to approve the proposal if there are creditors which cannot accept an adopted proposal, or if the proposal implies that new debt is incurred to finance the proposal.

2. DEBT RESCHEDULING FOR ENTREPRENEURS

Unlucky - but not dishonest - entrepreneurs must be able to have their debt deleted after a maximum of three years. 

If a bankruptcy restriction order has been issued against the management of a bankrupt company, the period of the bankruptcy restriction order cannot exceed the debt rescheduling period.

3. ENHANCING THE EFFICIENCY OF NATIONAL BANKRUPTCY PROCEDURES

The member states must ensure that the courts, other authorities and persons working with restructuring, insolvency, etc. are further trained and specialised. 

Appointment, supervision and payment of restructuring administrators and trustees must take place in accordance with clear and transparent national rules.

THE DRAFT DIRECTIVE'S IMPLICATIONS FOR DENMARK 

The Bankruptcy Act's rules on restructuring, which came into force on 1 April 2011, partly fulfil the draft's requirements. But the Danish rules do not fulfil the requirements on the following:

  • Initiation of restructuring proceedings provides that the debtor is insolvent.
  • In Denmark, a restructuring administrator and a restructuring accountant are always appointed.
  • Initiation of restructuring proceedings automatically implies that all pursuit of individuals ceases.
  • The bankruptcy court must always approve a restructuring proposal, which has been adopted by the creditors.
  • Distribution of the creditors into classes is not known in Danish law; in Denmark, all creditors with the same claims are placed side by side.
  • In Denmark, debtors with unpaid debt after a bankruptcy may obtain debt rescheduling after only three years as opposed to five years in relation to ordinary debt rescheduling.

Sometimes, a bankruptcy restriction order may not expire until after debt rescheduling has been notified. But the draft provides the opportunity that a debtor which has been in bad faith and/or dishonest will not be granted debt rescheduling. This will typically be in the event of a bankruptcy restriction order.

As regards the enhancing of the efficiency of national bankruptcy procedures, the present regulation in Denmark very much fulfils the draft's requirements.

NEGOTIATIONS WILL TAKE AT LEAST THREE YEARS

The Commission has started the negotiations with the European Council and the European Parliament concerning the adoption of the directive. This will be a lengthy process, and the directive is not expected adopted until in three years at the earliest.

RISK THAT ATTEMPTS WILL BE MADE TO SAFE HOPELESS CASES

If the directive is adopted as proposed, there will be quite wide limits as to each member state's implementation and consequently, there may be a risk that the rules of each member state will not achieve the desired uniformity.

The Commission seems to assume that all companies should be restructured instead of being wound up in connection with a bankruptcy. In our opinion, this is not necessarily the case. Many companies are not viable and should therefore be wound up. The very wide limits, which the Commission would like debtors to get to prepare a proposal to the creditors, may therefore result in a number of attempts being initiated to try saving companies which cannot or should not be saved. Also, when there is no requirement for the appointment of a restructuring administrator, there is no impartial person to tell the debtor that the situation is hopeless.

contacts

Piya Mukherjee

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