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.

Restructuring the European Business Enterprise: The EU Commission Recommendation on a New Approach to Business Failure and Insolvency

By Horst Eidenmueller and Kristin van Zwieten, University of Oxford

In 2014, the European Commission issued a recommendation on the design of restructuring laws in EU Member States (the “Restructuring Recommendation,” or RR). It was followed in 2015 by the enactment of a recast version of the European Insolvency Regulation (EIR). These initiatives were intended to be complementary: the former was designed to improve the procedures available under national law for the restructuring of business debtor liabilities; the latter to improve the efficacy of these procedures in cross-border cases. Both initiatives have been driven by the view that the existing legal infrastructure for (cross-border) business restructurings in Europe is inadequate.

In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that although the two initiatives were intended to be complementary, they do not dovetail perfectly: procedures of the kind contemplated in the RR will not necessarily be eligible to fall within the scope of the recast EIR, so as to benefit from its rules on recognition and enforcement in cross-border cases.

In relation to the RR, we find that the Commission is right to push towards some level of harmonisation in Member States’ restructuring laws – regulatory competition is not a sensible regulatory alternative. However, we criticise both the methodology and scope of the RR, which leaves significant room for residual diversity in Member States’ laws, and ignores the complicated interaction between Member States’ existing insolvency laws and the restructuring procedures contemplated by the Commission.

We also take issue with some of the substantive recommendations made for the design of such procedures, arguing that the Commission wrongly requires evidence of financial difficulties or a likelihood of insolvency as the entry test, and that the process it contemplates is susceptible to abuse by sophisticated financial creditors at the expense of outside creditors and/or the debtor. We propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency provided that it is economically viable and that the filing is not abusive.

For the full article see here.