Contracting for a European Insolvency Regime

By Horst Eidenmueller (Oxford University)

The European Commission has proposed a directive on “preventive restructuring frameworks” for financially distressed firms. If adopted, the directive would force the Member States of the European Union (“EU”) to design restructuring proceedings that conform to the directive’s stipulations.

In a recent paper, I demonstrate that the proposal is flawed because it creates a refuge for failing firms that should be liquidated, because it rules out going-concern sales for viable firms, and because it is, in essence, a twisted and truncated insolvency proceeding. I also demonstrate that the Commission’s harmonization plan is misguided. If implemented, financing costs for firms would rise. The plan would cast in stone an inefficient restructuring framework on a European-wide scale, preventing member states from experimenting with more efficient procedures.

I suggest an alternative regulatory proposal: European firms should have the option to choose a “European Insolvency Regime” in their charter. This regime should be embodied in a European regulation, guaranteeing legal certainty to stakeholders. This proposal would preserve horizontal regulatory competition between the Member States for the best “insolvency product,” and it would introduce vertical regulatory competition between the member states and the EU in the field of insolvency law. Hence, my proposal would strengthen market testing of European insolvency regimes instead of eliminating creative discovery processes through a flawed harmonized framework.

Key design principles of the proposed optional “European Insolvency Regime” are the following: (i) it should be open for restructurings, going concern sales, and liquidations, and firms should be channelled into the appropriate process based on the opinion of a court-appointed supervisor; (ii) it should be a fully specified (complete) and fully collective insolvency proceeding; and (iii) the proceeding should be conducted in DIP form with the mandatory appointment of a supervisor who performs important insolvency-related functions.

The full paper is available here.