By Patrick Ehret, Attorney-at-Law in Germany and Attorney-at-Law in France (AMCO), Certified Specialist in International Law and European Law in France

The EU Restructuring Directive, adopted as part of the European Union’s programme to create a Capital Markets Union, was meant to be transposed into national law of the Member States by 17 July 2021. As readers will be aware, the European requirements regarding establishment of a preventive restructuring framework were implemented in Germany with effect from 1 January 2021 by the Act on the Advancement of Restructuring and Insolvency Law (Sanierungs- und Insolvenzfortentwicklungsgesetz, SanInsFoG) and the Act on the Stabilisation and Restructuring Framework for Businesses (Unternehmensstabilisierungs- und -restrukturierungsgesetz, StaRUG) contained in the SanInsFoG. Alongside Germany, Greece and Austria also transposed the Directive on time. Also on 1 January 2021, the Netherlands enacted the Act on the Confirmation of Out-of-Court Plans (Wet Homologatie Onderhands Akkoord, or WHOA for short), which was widely acclaimed and also mentioned during the German legislative procedure, and thereby introduced a procedure for private composition agreements outside insolvency proceedings (akkoordprocedure buiten faillissement). The WHOA is not actually a transposition law, however. While it introduces preventive proceedings which are largely compliant with the Directive, it was initiated before the Directive was adopted.

To avoid infringement proceedings, many Member States made use of the option to extend the implementation period provided for in Article 34(2) of the Directive. This permits Member States that “encounter particular difficulties in implementing this Directive” to delay implementation by up to a year. Unsurprisingly, Member States generally cited the pandemic as the reason for using the extension. As well as the additional work involved in enacting ad hoc coronavirus legislation, Member States also encountered organisational problems connected with absences due to illness and changes to work processes in response to the pandemic. 7 By 17 July 2022, all Member States should have reached their “new normal” and must bring their domestic legislation into line with the Directive by then.

Efforts to transpose the Directive in the Member States are at various stages. While in Luxembourg, Romania and Lithuania, for example, bills are ready and in some cases the legislative procedure is already under way, meaning that enactment during 2021 appears likely, other countries, such as Croatia, Slovenia, the Czech Republic and Slovakia, are still preparing or holding consultations on ministerial draft bills. In Poland, a bill is expected to be presented to parliament before the end of 2021. By contrast, the French legislator was authorised by parliament to transpose the Directive by statutory order back in 2019. Although the French preventive restructuring proceedings were categorised as largely compliant with the Directive and the limited regulatory work required raised hopes of speedy transposition, integrating those proceedings into the existing legal system proved more difficult than expected. This was due on the one hand to the reform of French law governing security interests, which was happening in parallel, and on the other to the introduction of creditor classes, previously entirely unknown in French law, and of the cross-class cram-down. Regulation N° 2021-1193 of 15 September 2021 and implementing decree N° 2021-1218 of 23 September 2021 entered into force on 1 October 2021. In Italy, the Directive was transposed as part of a major reform of insolvency law which was initiated in 2015 and provisionally completed with the adoption of the codice della crisi d’impresa e dell’insolvenza on 12 January 2019. Despite some initial improvements in August ´2021, in particular the creation of the composizione negoziata per la soluzione della crisi d’impresa, which is comparable in some respects with the German rehabilitation mediation procedure, further amendment is still required, and this will need to be finished by July 2022.

The flexibility of the Directive’s requirements14 has enabled Member States to provide preventive restructuring tools in various procedural configurations, which may be complementary and perhaps used in sequence, or present alternatives to one another. The German tool of rehabilitation moderation, like the French conciliation on which it was based, can be understood and used as a stepping stone towards use of the restructuring framework or insolvency proceedings. By contrast, Greece’s new restructuring law provides for two strictly separate proceedings. The first is a fully online procedure for restructuring financial liabilities without court involvement, which can be initiated by the debtor or a creditor (excluding banks, public bodies or social security authorities) and which cannot exceed a total duration following extension of two and a half months. The consent of 60% of financial creditors (at least 40% of which must be secured creditors) – the consent of government creditors is given automatically under certain conditions – is binding on the non-consenting minority. The second is a new type of proceedings enabling debtors to restructure their liabilities – with or without disposing of parts of their business – by way of plan confirmation by the court, as long as 50% of secured creditors and 50% of affected creditors (or 60% of all creditors) consent and subject to a best interest test. The long duration of these proceedings – the period between the court hearing and the decision is six to nine months – is accompanied by a prohibition on enforcement for six months before and up to twelve months after the application is filed, as well as privileged treatment for new financing obtained in order to permit the business to continue to trade.

The Austrian legislator has added two new sub-types of restructuring proceedings: In “European restructuring proceedings”, unlike in regular restructuring proceedings, the enforcement prohibition, which can last up to six months, can cover all creditors. Those creditors can also be requested to file their claims, and the officially privileged creditor protection associations have a right to inspect the records. In “simplified” proceedings, a dissenting minority of financial creditors can – without a vote in court – be bound by court confirmation if a 75% majority of claims is achieved. Unlike in restructuring proceedings, debtors retain full control of the business, and appointment of a restructuring practitioner is not required. No prohibition on enforcement is ordered.

If the proliferation of national preventive proceedings does not exactly make for clarity as to which kinds of proceedings are available to businesses, the confusion has been compounded by the fact that before implementing the Directive several Member States introduced special and sometimes time-limited procedures to help SMEs deal with the consequences of the pandemic. In France, reorganisation proceedings aimed at illiquid or partially illiquid SMEs (fewer than 20 employees and liabilities of less than EUR 3 million) were introduced in May 2021. To access these proceedings, debtors must show in their application that

• a plan to secure the continued existence of the undertaking can be presented within three months of commencement of proceedings and
• employee claims have been and will continue to be paid.

Following a simplified claims verification step, the court can impose a debt settlement plan on creditors under which their claims will be satisfied over ten years.

On 13 July 2021, the Irish legislator approved the Small Company Administrative Rescue Process (SCARP) Bill, which will offer 98% of Irish companies a quick and inexpensive alternative to examinership. Assisted by an insolvency professional acting as a “process advisor”, an SME which is illiquid or will become so imminently but has reasonable prospect of survival can present a restructuring plan to a meeting of its creditors for a vote. The plan is accepted if at least one class of affected creditors holding more than 50% of claims by value votes in favour of the plan. Unless a creditor files an objection to the plan, proceedings can be completed within seven weeks without court involvement. Only if an objection is filed or the plan does not achieve a majority and an application is filed by the Irish restructuring practitioner will the court decide on the plan.

The Directive does not define the term “likelihood of insolvency”, and explicitly leaves it to Member States to determine the threshold for access to their preventive restructuring frameworks. The solutions introduced in the individual Member States are correspondingly diverse: In the Netherlands, access is based on whether it can reasonably be assumed that the undertaking will be unable to meet its liabilities when due. Under the Austrian Restructuring Code (Restrukturierungsordnung, ReO), insolvency is likely if the continued existence of the undertaking would be under threat without restructuring, as is the case with imminent illiquidity in particular. An undertaking’s existence is also presumed to be under threat if its equity ratio falls below 8% and the theoretical period needed to repay its debts exceeds 15 years. A legal entity which is overindebted but not illiquid can choose between restructuring and insolvency proceedings. Under previous French law, preventive restructuring procedures were available if an undertaking was experiencing legal, economic or financial difficulties or such difficulties were foreseeable, and the regulation transposing the Directive did not change this. Waiting periods before proceedings can be accessed again likewise vary widely: While a Dutch company must wait for three years following failure of its plan before it can try again, there is no such limitation in Austria, provided that the undertaking concerned is not factually insolvent and therefore obligated to file an application for insolvency. By contrast, an Austrian company which has successfully completed restructuring proceedings cannot undergo further proceedings for seven years.

The aim of a restructuring plan is to ensure the viability of the distressed company over the long term. This can be achieved in particular by changing the composition, terms or structure of the debtor’s assets and liabilities. Traditionally, a plan will provide for the deferment or reduction of liabilities or the conversion of creditor claims into share or membership rights. However, debt-to-equity swaps may, as in Austria, be dependent on the amendment of company law to accommodate them. The German legislation as initially conceived permitted reciprocal contracts which have not been fully performed by both parties to be terminated, but the corresponding provisions were removed at the committee stage. The Dutch proceedings still provide this possibility, which is regarded as beneficial for the bricks-and-mortar retail and hospitality sectors. However, this is subject to confirmation of the plan by the court and a reasonable notice period; a period of three months from confirmation is explicitly classed as adequate in every case. The Irish SCARP proceedings also allow contracts to be terminated during plan proceedings. Termination is subject to approval by the court, which is granted only if it is necessary for successful restructuring and the survival of the company. The Austrian Restructuring Code – following the German example – sees no need to depart from the principle of consent.

Like the StaRUG, the Austrian implementing legislation makes acceptance of the plan subject to a majority of 75% of the total amount of claims, the maximum permitted under the Directive. The Austrian legislation also requires a per capita majority. Majorities are calculated by reference to creditors in attendance for each group or, if there are no creditor groups in the proceedings – as can be the case with SMEs – by reference to all affected creditors in attendance. In France and the Netherlands, by contrast, a 66% majority of total claims is sufficient, and an additional per capita majority is not required. In line with the Directive, the transposition laws in Germany, Austria and France and the WHOA in the Netherlands provide the possibility of the cross-class cram-down, meaning that a dissenting group of creditors can be voted down. To protect the interests of outvoted creditor groups, Member States must ensure that they are treated at least as favourably as other groups of equal ranking and more favourably than any more junior group. In Austria, this “relative priority rule” is transposed in Article 36 of the Restructuring Code. By contrast, the German, French and Dutch laws apply the “absolute priority rule” which requires dissenting groups to be satisfied in full before a more junior group receives any distribution under the restructuring plan. This provides greater protection, but exceptions are expressly permitted.

The Directive requires Member States to protect new or interim financing against avoidance risks in particular. Safe harbour provisions of this kind are contained in the Dutch WHOA law, the Austrian Restructuring Code and the German StaRUG. Even before the Directive entered into force, the French legislator had incorporated a fresh money privilege into the conciliation proceedings, meaning that no amendments were required in this regard. Then during transposition of the Directive, an additional “post-money privilege” – which accords preferential treatment to funds provided to the company following commencement of insolvency proceedings – was also introduced. This prevents the deferral or reduction of such liabilities under a plan. This solution was introduced permanently for the standard proceedings provided for in the sixth book of the French Commercial Code and applies to funds provided

• for continued operation of the debtor’s business, following approval by the judge supervising the proceedings,
• in connection with a plan confirmed by the court in standard proceedings or
• in connection with a plan amendment confirmed by the court.

To be recognised Europe-wide, national preventive insolvency proceedings and insolvency practitioners must be included in the Annexes to the EU Insolvency Regulation. However, according to the definition in Article 1 of the Insolvency Regulation, this is only possible for public proceedings. Because section 84 et seq. (the provisions of the StaRUG governing publication) do not enter into force until 22 July 2022, the German proceedings cannot be included yet. In Austria, only the European restructuring proceedings are suitable for inclusion. The European Commission’s Proposal31 for a regulation of the European Parliament and of the Council replacing Annexes A and B to Regulation (EU) 2015/848 on insolvency proceedings, which was published in May 2021, therefore does not affect any proceedings which originated from the Directive. In fact, the notifications submitted by Italy, Lithuania, Cyprus and Poland relate to national reform acts which contain proceedings which have not yet entered into force.

By contrast, the Netherlands notified the public version of its preventive insolvency proceedings (openbare akkoordprocedure buiten faillissement) for inclusion in Annex A while its legislative procedure was ongoing. As in the German StaRUG, debtors in the Netherlands can opt for the public or confidential variant of the akkoordprocedure at the start of the proceedings. So for a long time, it looked as though these Dutch proceedings would be the first to enjoy automatic recognition across Europe, putting the Netherlands ahead in the race to be Europe’s most attractive restructuring location. This was reckoning without the French legislator, however. When transposing the Directive, the French chose not to introduce new proceedings or even pass a new law. Instead, they merged the existing accelerated preventive restructuring proceedings, sauvegarde accélérée, with the semi-collective proceedings sauvegarde financière accélérée, which are limited to financial obligations, and brought the result into line with the Directive. The resulting restructuring framework, sauvegarde accélérée, was listed in Annex A to the EU Insolvency Regulation even before the reform, meaning that the proceedings as amended are now automatically recognised across Europe with no need for changes to the Annexes to the Insolvency Regulation – unlike with the Dutch WHOA or the German StaRUG.

Whether the inclusion of national proceedings in Annex A to the EU Insolvency Regulation will lead to a new age of forum shopping remains to be seen. For instance, the German and Austrian legislators have gone ahead and shortened the period of protection against enforcement for companies which relocate their head office less than three months before using StaRUG tools or applying for a prohibition on enforcement. Whether this was necessary, given the attractiveness of other restructuring jurisdictions, and whether this will prevent forum shopping, is questionable.

The essay is available for download here.