Harmonising EU Insolvency: perspectives from France, Germany and the Netherlands
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The European Commission has proposed a new directive harmonising certain aspects of insolvency law. Proposals on clawback, pre-packs and directors' duties (among others) will be of interest to companies, directors, investors and insolvency practitioners. Our insolvency experts in France, Germany and the Netherlands provide their initial reactions.
- This page provides a summary of the current position and key parts of the proposals, with initial reactions from our insolvency experts in France, Germany and the Netherlands.
- Our Restructuring Across Borders website has guides on existing restructuring and insolvency procedures in 50 jurisdictions around the world.
- The full text of the proposed Insolvency Directive is here.
- If you have any questions about the proposals or any of the restructuring and insolvency tools already available in Europe (or globally) please get in touch.
How did we get here – the current position
A raft of new reforms are on the horizon for EU Member States, and the European Commission has turned its sights to formal insolvency proceedings. On 7 December 2022, the Commission published its proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law (COMM (2022) 702) (the Insolvency Directive). This follows recent efforts to introduce minimum standards among EU Member States for pre-insolvency proceedings and the introduction of compromise proceedings such as the Dutch WHOA and German StaRUG.
In the Commission's explanatory memorandum, they note that a lack of a unified insolvency regime in the EU creates obstacles to cross-border investment and free movement of capital. The proposed Insolvency Directive is designed to achieve at least a degree of harmonisation and increased convergence in targeted areas of non-bank corporate insolvency law – with the goal of making the outcomes of insolvency proceedings more predictable – and is a key part of the Commission's Capital Markets Union Action Plan.
The Insolvency Directive seeks to harmonise three key areas of insolvency law:
- The recovery of assets from the liquidated insolvency estate.
- The efficiency of insolvency proceedings.
- The predictable and fair distribution of recovered value among creditors.
The Insolvency Directive is the Commission's third attempt to harmonise the insolvency and restructuring market by enhancing the efficiency and predictably of insolvency proceedings throughout the EU. If passed, the Insolvency Directive will represent an important development in EU insolvency law and fill a notable legislative gap. The existing 2015 Recast European Insolvency Regulation (2015/848) only governs the jurisdiction, applicable law and enforcement of cross-border insolvency proceedings, while the 2019 directive on preventative restructuring frameworks focuses on pre-insolvency proceedings and the discharge of debts by insolvent entrepreneurs.
Key parts of the proposed Insolvency Directive
The Insolvency Directive sets out three grounds for transaction avoidance that enables the insolvent estate to clawback wrongfully disposed assets:
- Creditor preferences. These refer to legal acts benefitting or preferring a creditor that were carried out either within three months before the filing of insolvency proceedings (if the debtor was unable to pay its debts at the time) or after the filing. Where the act involved satisfying a creditor claim "in the owed manner" (for example, making a payment on the specified and pre-agreed maturity date), it also requires that the debtor knew or should have known at the time of the transaction that the debtor was unable to pay its debts or that insolvency proceedings had been filed for.
- Legal acts at an undervalue. This refers to transactions taking place within one year prior to an insolvency filing, where the transaction in question involves no or manifestly inadequate consideration.
- Fraudulent actions. This involves the debtor intentionally causing detriment to its general body of creditors, where the relevant act took place four years prior to the insolvency filing and the other party knew of the debtor's intention.
If an act falls under one of the three grounds mentioned above, it will be void and unenforceable against the insolvent estate and the benefiting party must provide compensation. These rights are also enforceable against successors of the benefiting party in certain circumstances.
The Insolvency Directive provides a framework for pre-packs – the preparation of the sale of a debtor's business prior to the formal opening of insolvency proceedings. This process is structured in two phases: the 'preparation phase', which aims at finding an appropriate buyer, and the 'liquidation phase', which involves approving and executing the sale following the commencement of an insolvency process.
In contrast to pre-packs in some jurisdictions, the Insolvency Directive provides that in the preparation phase the debtor (assuming the debtor is insolvent or suffers from a likelihood of insolvency) will benefit from a stay of individual enforcement actions. The debtor retains control of its business and assets, and can request that the court appoint a monitor. The monitor plays a key role in overseeing the sales process, ensuring its fairness and competitiveness, and recommending the purchaser. The monitor's role extends well beyond the preparation phase; he or she becomes the insolvency practitioner in the liquidation phase and the monitor's opinion that certain safeguards have been met during the sales process is one of the key conditions for the court to authorise the sale.
The pre-pack part of the Insolvency Directive also contains provisions that help facilitate a sale and safeguard creditors from abusive practices. For example, there are provisions that permit the assignment of certain contracts without needing counterparty consent, that impose restrictions on closely related purchasers, that permit interim financing, and that provide for the protection of creditor interests.
Finally, the Insolvency Directive provides that the court will play an important role in approving the pre-pack. This is intended to bring the pre-pack in line with European legislation around rights of employees in case of a transfer of undertaking taking place as part of an insolvency proceeding (in particular Article 5(1) of Directive 2001/23/EC). It is not clear how this will work in jurisdictions where the court may not currently be involved in such a process or what impact that will have on the costs of the process.
In a nod to the duties already present under French, German and Austrian law, directors will be obligated to file for insolvency proceedings no later than three months after they become (or can be reasonably expected to be) aware that the company is insolvent. Failure to do so will result in liability for damages incurred by creditors.
Other sections of note
The Insolvency Directive harmonises a number of other key areas of insolvency law. It facilitates cross-border asset tracing by enabling insolvency practitioner access to beneficial ownership registers and insolvency court access to bank account information across EU Member States. The legislation also provides for simplified insolvency and liquidation procedures for microenterprises and the establishment of creditors' committees.
This is a minimum standards directive. If an EU Member State has existing insolvency laws that are stricter than the proposals, there would be no need for that EU Member State to amend its existing laws. Where the existing insolvency laws of an EU Member State do not go as far as the proposals, that EU Member State will need to amend its existing laws.
This approach may result in both grey areas, where it is not clear whether existing insolvency laws satisfy the minimum standards in the Insolvency Directive, and inconsistent application between EU Member States.
Timing for implementation
At this stage, the Insolvency Directive is only a proposal. The text of the directive may be amended before it is implemented and there is no clear timeframe yet for EU Member States to implement the Insolvency Directive if it becomes law.
Initial reactions from our insolvency experts in France, Germany and the Netherlands
France – Hector Arroyo, Partner, Paris
The Insolvency Directive may lead to a shift in the French concept of hardening periods ("période suspecte"). The French clawback regime provides that the date of insolvency marks the beginning of the hardening period, during which certain transactions are automatically void by the court or voidable by the court. By contrast, the Insolvency Directive proposes that the period during which certain transactions can be found voidable or void and unenforceable will be of variable duration, depending on the grounds used for transaction avoidance.
A directors' duty to file for insolvency and a pre-pack process already exist in France. However, the Insolvency Directive may raise questions on when a pre-pack might be available, as the proposals appear to limit the pre-pack to a liquidation process. It is unclear whether the proposed pre-pack liquidation process will complement or exclude the existing pre-pack process in France (which can be used within safeguard or receivership proceedings).
The implementation of the Insolvency Directive will most likely change the rules regarding early termination of executory contracts by an administrator and or an insolvency judge ("juge commissaire"). In particular, by contrast to the existing regime in France, the proposed rules on early termination would not apply to contracts relating to licenses of intellectual and industrial property rights.
Germany – Dr. Hauke Sattler, Counsel, Hamburg
The Insolvency Directive (anticipated to be referred to as "Insolvency III") is to be welcomed as a further step towards the harmonisation of insolvency laws in the EU.
The pre-pack process, which is already known in the UK, the Netherlands and Spain, is attracting particular interest as a new restructuring tool. It enables a sale to be negotiated in advance of insolvency proceedings, with the sale implemented shortly after the company entering insolvency proceedings. This concept will likely raise a number of questions in the context of the implementation and practical application of the directive in Germany.
Regarding avoidance actions, directors' duties and creditor protection, the proposal falls short of the expectations of the German restructuring market. The opportunity has not been taken to cut back the complex German insolvency clawback regime (with its numerous grounds for transaction avoidance and sometimes very long look back periods), to further specify directors' duties, and to strengthen the creditors' committee.
It remains to be seen how the special provisions for microenterprises (according to which, for example, the appointment of an insolvency administrator can generally be dispensed with) will impact on German insolvency practice. This sector is expected to represent a very high proportion of upcoming insolvencies in Germany.
The Netherlands – Géza Orbán, Associate, Amsterdam
The Insolvency Directive's proposal for director's duties will be of particular interest for the Netherlands. Unlike its next door neighbour Germany, the Netherlands currently does not oblige directors to file for insolvency at any given point in time. Dutch law has generally relied on its 'wrongful trading' rules, and a director's own incentives to avoid incurring personal liability, to prevent directors from engaging in unnecessary and protracted rescue attempts. If adopted, the Insolvency Directive will mark a remarkable shift in Dutch restructuring practice.
The Netherlands is also likely to keep an keen eye on the Insolvency Directive's pre-pack proposals. After two landmark judgments of the European Court of Justice calling Dutch pre-pack practice into question, and various Dutch pre-pack bills being shelved, revived and then shelved again as a result, some clarity in this respect is expected to be welcomed by the Dutch legal market.