What has been adopted?
It has been a while since the European Union’s (EU) Insolvency Directive has gained any visible progress. After years of heavy debating between Member States, the EU Commission, under Danish presidency, has finally gotten closer to harmonising EU Members under standartised rules for the insolvency proceedings.
At first, the Insolvency Directive laid out basic principles on the winding down of a business, ground rules for the pre-pack proceedings, and limited protection for the parties involved in the company’s insolvency. The current legal development has elaborated on extending protections and obligations of specific parties, specifically during the pre-pack proceedings, during the insolvency process.
As mentioned before, the pre-pack phase has been the main subject upon which this directive builds. The new edits to the Insolvency Directive have mainly focused on the pre-pack proceedings – a phase in which the debtor is allowed to sell its assets and business to the interested parties. Initially, pre-pack proceedings were mainly subject to the national laws, while this Directive attempts to harmonise these proceedings and make them available for all Member States within the EU.
Key implications of the pre-pack under the Directive
Under the new Directive development, the pre-pack proceedings have established themselves as a liquidation-oriented procedure. The new procedural rules have established the primacy of the creditors during the liquidations of the business, without trying to rescue and restructure the debtor. Taking precedence from related EU case – Heiploeg (C‑237/20) - this classification grants primacy for the creditors and ensures legal certainty for the pre-packing measures by standardising the rules of traditional liquidation for the Member States. HEIPLOEG CASE
Another aspect that is important to mention is the automatic transfer of the employees in a pre-pack if the business is sold to the successful bidder. New establishment aims to balance out the standard liquidation process and the protection of the workers in the case of winding up. There have been questions on that issue before (rewinding to the previous EU case of SmallSteps (C-126/16)), where the transferor was not obliged to transfer all relevant employment contracts to the transferee, as it does not constitute an automated transfer of the employees. It is visible that the same implication will stay in the new Insolvency Proposal. Yet, the Directive still aims to balance the rights of workers, accentuating that if the national laws contain rules more favourable to the employees and their representatives, these rules will have primacy.
New procedural protections during the pre-pack
Besides adding new features to the proposal, the Insolvency Directive also extends its protections and rights to the parties. Such an important aspect of the new developments in the Directive is the allowance for member States to become more active in the liquidation of the company within their borders – namely, during the pre-pack proceedings. Member States were granted the privilege to suspend creditor-filed bankruptcy petitions. In such cases, Member States are permitted to suspend the requirements for a company to apply for insolvency proceedings. However, in such cases, it is required that the creditors are granted the same level of protection as in normal insolvency proceedings. For instance, a Member State could request a petition if it wishes to improve the company’s financial issues and restore solvency. Additionally, Member States are granted an obligation to ensure that contracts are transferred from the debtors to the buyers free of debts and liabilities, ensuring that the buyer can acquire assets without second-hand concerns. Simultaneously, Member States should safeguard the contracts by granting rights for counterparties to terminate said contracts within 3 months’ notice.
The New Insolvency Directive also extends its protection for the debtors, allowing them to benefit from creditors racing to liquidate their assets. Under the enactment of this “temporary stay”, debtors can still have a hold on their assets (at least partially) as if they were before insolvency.
Practical consequences for Dutch and EU clients
The practical environment for Dutch and EU clients involved in restructurings and distressed transactions is much improved by the EU's recent insolvency initiatives. The Directive lowers execution risk among Member States and enhances legal certainty for complicated restructurings and troubled M&A by harmonising standard rules and making them accessible for companies within the EU. Clearer procedural safeguards and greater transparency, which enable quicker and more predictable results, are expected to make pre-pack sales more appealing to investors and buyers. Because early involvement and effective restructuring techniques assist in preventing needless asset destruction, creditors gain from better prospects for value maximisation. New Developments balances rights and protections for both debtors and creditors, which makes the process of liquidation proceedings fair and swift.
Relevance for non-EU clients
The harmonised EU bankruptcy framework may become an increasingly appealing restructuring platform for non-EU clients. As an example, given from the closest non-EU member - Switzerland - Swiss businesses with major interests in the European Union. Swiss entities may benefit from a clearer choice of restructuring venue within the EU, with universal minimum criteria for insolvency proceedings and the adoption of pre-pack sales across all Member States. This would lessen the current fragmentation that can make cross-border restructurings more difficult. Instead of traversing up to 26 different cantonal regimes, harmonisation tends to promote procedural predictability for cross-border groups by facilitating planning and risk assessment across many jurisdictions under a single, understood set of regulations. Because it facilitates more seamless cross-border coordination of restructuring measures, this predictability can be particularly helpful for multinational Swiss groups with EU subsidiaries or substantial assets in the Single Market.
Dutch Outlook
Another important effect of the Directive is that the Netherlands, like all EU Member States, will now have to finally put in place a legal pre-pack framework. This change has been on hold for more than ten years because of earlier case law and legislative hesitation. The EU framework now gives clear direction and protections, so it is very likely that the Netherlands will quickly set up a formalised pre-pack regime. This will strengthen its position as a desirable and predictable place to restructure in the EU.
