New restructuring tools in Europe Keeping up with the competition
29 October 2021
29 October 2021
When the European Directive on preventive restructuring frameworks 1 was published by the EU on 26 June 2019, there was excitement within the insolvency community that the EU might finally have taken its first step towards harmonisation of substantive insolvency law across Europe, which was thought to be essential to the success of the Capital Markets Union. Indeed, Ashurst warned in an update back in 2018 (see here) that the UK should take heed of this project to ensure that the UK remained competitive post-Brexit.
The Directive was, in part, a reaction to the forum shopping taking place as a result of the low jurisdictional thresholds required to launch a scheme of arrangement in the UK, as evidenced by increasing numbers of EU corporates that came to the UK in the 2010s to seek a restructuring solution. However, the Directive was also responding to (and identifying) a lack of pre-insolvency proceedings in the restructuring regimes of many EU member states.
Since the UK has now left the EU it is not obliged to implement the Directive, but it did nevertheless expand its existing toolbox by introducing the new restructuring plan last year (see here). Whilst the restructuring plan is not wholly compliant with the Directive, it is quite closely aligned to it. So this month Ashurst's UK and European offices provide a whistle stop tour of how the Directive is being implemented in the key Ashurst EU jurisdictions to see how the new restructuring tools measure up.
In the UK, the Corporate Insolvency and Governance Act 2020 (which introduced the restructuring plan to the UK toolbox) came into force on 26 June 2020. The Netherlands 2 and Germany were next to bring their processes to the statute books in January 2021, followed by France, whose newly modified accelerated safeguard proceedings became available on 1 October 2021. The implementation deadline for the Directive was July 2021, but many member states have taken advantage of the option to take an additional 12 months to implement. For example, Italy and Spain have postponed implementation until 17 July 2022.
Notwithstanding the stated aim of the Directive to harmonise substantive insolvency law, this has to be interpreted loosely because the end product does not behave identically as a restructuring tool in each member state. Indeed, a recent IMF working paper stated that there are theoretically 143 different ways the Directive can be implemented.3
The COVID-19 crisis appears to have accelerated the drive to implement the Directive, and the need to facilitate rescues rather than insolvency has become of global importance. The key elements of the Directive, namely (a) providing access to preventive proceedings including a stay on creditor action; (b) a cross-class cram down mechanism; and (c) safe harbour provisions for new and interim finance, have meant there has been significant change across the EU. The cross-class cram down tool, which draws inspiration from the US Chapter 11 procedure, has seemingly created a new European landscape and philosophy for how restructurings are done.
Germany has implemented the Directive with a new act called "Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen" (or the "StaRUG" for short). At the core of the new changes is the restructuring plan – an arrangement between the debtor and its stakeholders which can be imposed on dissenting creditors if the relevant criteria are satisfied and it is approved by the court. The plan cannot, however, affect the claims of employees (including pensions) and there is no ability to terminate bilateral contracts (although the StaRUG does allow for the alteration of individual terms of certain (financing) agreements of the debtor with its creditors).
Importantly, the restructuring plan is binding upon all creditors and shareholders (including dissenting classes) if (a) members of dissenting classes are not in a worse position under the plan than without the restructuring plan; (b) members of dissenting classes have an economic stake under the restructuring plan; and (c) the majority of the voting classes have consented with the required majority (75% by value of each class). Like the Netherlands, Germany has adopted a dual track approach to recognition. Where the debtor chooses public proceedings, COMI is the threshold test meaning that the proceedings can be brought within the European Insolvency Regulation ("EIR") and be given automatic recognition across all EU Member States when the EIR Annex A is updated (17 July 2022 at the earliest) to include the new proceedings within its scope. In the case of non-public proceedings, there is no automatic recognition. The Netherlands also has a foot in both camps – a COMI option (to enable the debtor to take advantage of the EU wide recognition afforded by the EIR once the Dutch procedure has been added to the EIR Annex A) or the 'sufficient connection' test option which, as with the English scheme or plan, relies upon other means, such as private international law, for recognition in other jurisdictions.
In France, Ordinance 2021-1193 has very recently implemented the Directive into French law and applies to proceedings opened from 1 October 2021. In short, the French Government has introduced a new version of the accelerated safeguard process 4 by merging the existing safeguard and accelerated financial safeguard proceedings, resulting in a streamlined rescue process which allows debtors to restructure within 4 months of any conciliation proceedings. The core aspect of the changes involves the substitution of creditor committees with the constitution of classes, making it possible for creditors and shareholders to consider the proposed restructuring and apply a cross-class cram down in the event of any hold out creditors. For a safeguard plan to be approved, each class must approve it by a 2/3 majority of the votes held by its members having cast a vote. The mechanism differs from that implemented here in the UK in that it complies with the US-inspired absolute priority rule: creditors of dissenting classes must be fully repaid before any lower ranking class can receive a return. The changes represent a substantial modification to French insolvency law. However, the French could have arguably gone further. France still remains primarily debtor-friendly. Since the reforms largely modify existing proceedings rather than introduce extensive new ones, it is arguable whether this new tool changes much from a cross-border insolvency perspective.
The Directive has not yet been implemented in Spain. There is a preliminary project for amending the Spanish Insolvency Act (Anteproyecto de Ley de reforma del Texto Refundido de la Ley Concursal), with a view to implementing the Directive no later than 17 July 2022. The Directive is expected to represent a major shakeup of Spanish insolvency law, introducing shareholder and cross-class cramdown for the very first time.
Like Spain, Italy has postponed full implementation until 17 July 2022 but it has been busy introducing some amendments to the current bankruptcy framework in the meantime. The Italians already reformed their bankruptcy law in large part at the end of 2020 by Legislative Decree no. 147, which took into account various EU Commission recommendations and UNCITRAL principles on insolvency. On 24 August 2021, the Italian Cabinet issued law decree no. 118, converted into law no.147 of 21 October 2021 which, among other things, introduced a new out-of-court restructuring procedure (composizione negoziata per la soluzione della crisi di impresa) with a view to fostering an early approach to a company's financial difficulties in accordance with the key tenets of the Directive .5 The Directive will be transposed into national law by the new Italian Bankruptcy Code which will enter into force on 16 May 2022, replacing the existing Italian Bankruptcy Law.
For more information on the new changes to the Italian Bankruptcy Act, see our legal update here.
For a handy comparison of the restructuring landscape post-Directive, see the table at the end of this article.
Harmonisation of substantive insolvency law has long been a lofty goal of some within the EU, but it has been (and will continue to be) hard to achieve in practice, especially across all restructuring and insolvency proceedings. Unsurprisingly therefore, the Directive achieves only a weak form of harmonisation, because it allows so much flexibility in how Member States can implement. Furthermore, other factors add to the divergence between Member States as to how the new Directive tools will operate, including the comparative sophistication of the professionals and the market, the specialist expertise of the courts and judiciary, and the existing local law culture against which the new tools will be interpreted. Added to this is a thinly veiled competition between jurisdictions, with each Member State vying for the top spot as the jurisdiction of choice for complex multi-jurisdictional restructurings. How the European restructuring market adapts to use each restructuring plan remains to be seen as companies and stakeholders across the EU address the financial distress caused by COVID-19. It is at least clear that once implementation is over, the raft of options in cross-border cases will be truly extensive. We predict that in the short term, there may be little difference in restructuring behaviour. Big cases needing a tried and tested route will continue to seek out the best restructuring solutions in known jurisdictions. However, as and when familiarity and confidence in the local procedures grow, we might see more of a change. Much will depend on how the early significant cases fare in each jurisdiction. Watch this space.
For an easy to view pdf comparison table, you can download it here.
The information is also available in the dropdown table below.