On 22 November 2016 the European Commission published its proposal for a draft directive on preventative restructuring frameworks ("Draft Directive"). Having reviewed the proposal, it is clear that the terms of the Draft Directive may have a significant impact on the examinership process in Ireland.
Reasons behind the proposal
The Draft Directive follows the Commission's 2014 recommendation that Member States introduce into national legislation provisions which support greater business turnaround. A review of that Recommendation by the Commission found that the levels of implementation were quite low in most member states.
Given the aims of the European Union in the pursuit of the common market, the significant divergence in national insolvency legislation is regarded as an implement to progress.
To quote Commissioner Jourova "our aim is to harmonise key principles and other minimum standards of substantive insolvency law across the EU. Harmonised restructuring laws would give greater legal certainty to cross border investors in the EU and would encourage the restructuring of viable companies in financial distress".
Directive contains provisions for:
The Draft Directive proposes a restructuring tool that reads similar to that which Irish Insolvency practitioners would be familiar with in the form of examinership. There will be a stay on individual enforcement, the protection of assets, class rights in terms of votes on a restructuring plan and also a requirement that the plan be approved by judicial authority.
The Draft Directive however differs from examinership as follows:
- The moratorium as currently set out in the Draft Directive can extend to a period of no more than 4 months. This would be longer than that provided for in examinership in Ireland where there is a maximum of 100 days protection;
- Article 5 of the Draft Directive states that the debtor should be left in possession of its assets and affairs. The Draft Directive states that practitioners in the field of restructuring may have a role as such the practitioners should not be appointed by a judicial or else administrative authority in every case. This contrasts with the situation in Ireland in examinership of having an insolvency practitioner appointed as examiner in each case;
- The Draft Directive also proposes express protection for new financing provided to a company during the course of its restructuring. Any new financing or interim financing which is provided will not fall foul of unfair preference or voidable transaction provisions. The Draft Directive does not however set out a universal rule that such financing will receive priority over other creditors but rather states that the Member States may afford new/ interim financing such priority;
- The Draft Directive proposes that there be a requirement that each and every class of creditors vote in favour of the restructuring plan. It also states that the threshold for each class vote should not be higher than 75%. The current requirement under Irish examinership legislation is that only one impaired class vote in favour of the scheme of arrangement and that the threshold for such a vote is 50%.
- It is also worth noting that in the Draft Directive, "restructuring" is defined as "changing the composition, conditions or structure of a debtor's assets and liabilities and any other part of the debtor's capital structure including share capital or a combination of those elements including sales of assets or part of the business with the objective of enabling the enterprise to continue in whole or in part". This definition would allow for alternative forms of restructuring than those permitted under Irish examinership legislation which requires that the business and the company be saved.
The Draft Directive also recommends that in relation to debt forgiveness of entrepreneurs, there should be a maximum 3 years bankruptcy period. It is worth noting that following the recent overhaul of bankruptcy legislation in Ireland, the period of bankruptcy has reduced to a one year period.
Better Standards of Insolvency Proceedings across the EU
The final policy area provided for in the Draft Directive relates to training for insolvency practitioners and insolvency judges. The Draft Directive also includes a requirement for Member States to put in place systems for the supervision of IPs. The Draft Directive also recommends a fee structure for IPs which incentivise timely and efficient restructurings. In the context of cross border appointments, the Draft Directive states that the judiciary should give consideration to appointing those IPs who have an ability to communicate and cooperate with foreign colleagues in other languages and also to take into account the resources of that IP.
The next stage of the EU legislative process for the Proposal is that it will be considered by both the European Parliament and the European Council. We expect that the Draft Directive will take between 2 and 3 years to be enacted. By that stage, both the European Parliament and the European Council may have significantly amended the Draft Directive.
However, from an Irish practitioner point of view, if the Draft Directive were enacted as currently drafted, it could require examinership legislation in Ireland to be greatly amended with the result that the landscape will alter significantly.
Walkers will monitor the progress of this proposed legislation and provided relevant updates at each stage of the EU legislative process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.