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A restructuring revolution? The EU Restructuring Directive

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A restructuring revolution? The EU Restructuring Directive

With the EU Restructuring Directive set to be adopted by both the European Council and European Parliament on 5 June 2019, Associate Director - Product Development, Sinead McIntosh outlines its implications and how it hopes to create a common framework for the European restructuring market.

With 1.7 million EU residents losing their jobs every year due to company bankruptcy, wholesale change regarding insolvency and the access to preventative restructuring frameworks has been needed for some time. As recognised by Josef Moser, Austria's Minister for Justice, the EU needs "robust insolvency rules in place across the EU to reduce the number of bankruptcies, and ensure that reputable entrepreneurs are offered a second chance."

Introducing a common framework

The introduction of the EU Restructuring Directive (the "Directive") on 5 June will attempt to address this issue by introducing minimum standards for preventative insolvency proceedings across the EU. It is hoped to remove obstacles to the free movement of capital, which result from differences between Member States' national laws and procedures on preventative restructuring, insolvency and discharge of debt and disqualifications. The Directive will attempt to remove these impediments by targeting three key areas:

  • Establishing common principles on preventative restructuring frameworks in each EU Member State.
  • Allowing entrepreneurs to benefit from a second chance.
  • Increasing the efficiency of Member State's restructuring, insolvency and discharge procedures.

The amendment to Directive 2012/30/EU on restructuring and insolvency requires each Member State to implement the Directive into their respective national legislation and ensure that their restructuring and insolvency procedures comply with the minimum standards before 5 June 2021. The effectiveness of the Directive therefore depends on the way it is enacted by each Member State. Inevitably, there will be slightly different versions of the Directive across the EU; although differences should be less pronounced if the minimum standards requirements are adhered to.

Restructuring the landscape

The Directive has the potential to initiate considerable change in the EU restructuring landscape, and it is expected that Member States will attempt to promote the most efficient and attractive restructuring framework.

If the Directive is implemented effectively, potential benefits include:

  • Quicker cross border procedures, allowing debt to pass quickly from banks to funds
  • Permitted enforcement against dissenting creditors
  • Lower costs for both the company and creditors
  • Reputable entrepreneurs will receive a second chance to succeed
  • More harmonious procedures
  • No or minimal court involvement
  • Low or no publicity
  • Higher levels of recovery
  • Reduce the number of non-performing loans through early intervention

Providing distressed businesses with more opportunities to restructure at an early stage, the Directive will give debtors a second chance and should prevent formal insolvencies where there are viable alternatives. Ultimately, the Directive holds the potential to enable companies to retain the knowledge and skills of employees through avoiding bankruptcy and insolvency, maximising value to creditors.

Together, stronger

Although the Directive casts a promising light on EU-based restructuring, the freedom given to Member States to interpret and transpose the Directive into their local legislation could eclipse its potential. If Member States are slow to implement the Directive, the flow of capital and preservation of businesses will suffer a considerable blow - exactly the opposite of what the Directive aims to achieve. Similarly, due to the open-ended nature of the Directive, a number of banks have expressed their doubts about the effectiveness of the Directive in increasing recovery rates, suggesting it may in fact prolong the inevitable.

Whilst the intentions and objectives of the Directive have been viewed positively by most participants, its success depends on a number of key external factors. Firstly, all Member States need to adopt the Directive in a consistent and timely manner; otherwise, the benefits of a truly unified cross-border regime will be lost. Secondly, it is vital that banks buy-in to the proposed regime. Without support from the banks, viable businesses experiencing financial difficulty will, quite simply, not get the chance to utilise the new regime to restructure early and continue trading.

It will be interesting to see how the Directive's principles are put into practice. Interested parties need to follow the implementation of the Directive in relevant Member States and establish whether it is truly harmonising and provides for a single, cohesive regime.

From a scheme of arrangement to a replacement trustee – whether it’s a question of insolvency, restructuring or default – our work as a replacement or successor trustee is founded on the principle that each transaction has a single point of contact who is accessible, experienced and solution-focused. You can find out more about our restructuring services here or contact Alan below.

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