Abstract
The European Commission has proposed a Directive on ‘preventive restructuring frameworks’ for financially distressed firms. 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 harmonisation 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, and it would lead to more written-off loans instead of fewer non-performing loans. The Commission should withdraw its proposal. 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. Firms might be given the additional option to have the regime enforced by a specialised European insolvency court. 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. Key design principles of the proposed optional ‘European Insolvency Regime’ are the following: (1) it should be open for restructurings, going-concern sales, and liquidations; firms should be channelled into the appropriate process based on the opinion of a court-appointed supervisor; (2) it should be a fully specified (complete) and fully collective insolvency proceeding; (3) the proceeding should be conducted in DIP form with the mandatory appointment of a supervisor who performs important insolvency-related functions.
Highlights
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
Key design principles of the proposed optional ‘European Insolvency Regime’ are the following: (1) it should be open for restructurings, going-concern sales, and liquidations; firms should be channelled into the appropriate process based on the opinion of a courtappointed supervisor; (2) it should be a fully specified and fully collective insolvency proceeding; (3) the proceeding should be conducted in DIP form & Horst Eidenmuller horst.eidenmueller@law.ox.ac.uk
The Commission’s proposal is flawed because it rules out going-concern sales for viable firms
Summary
It has recently been suggested that in the US ‘the market sale has become a prime system of industrial restructuring’.1 It appears that the days of lengthy bargaining over the contours of a Chapter 11 reorganisation plan are over. Sales under 11 U.S.C. § 363 occur in a significant portion if not in the majority of bankruptcies of public companies: ‘Today we sell firms in bankruptcy to the highest bidder.’ And this is not the end of the story: with the demise of large, vertically integrated conglomerates, the rise of decentralised firms that are contractually assembled from small building blocks, the bankruptcy safe harbours for derivatives, and the possibility to rapidly refinance existing debt, cornerstones of traditional bankruptcy scholarship and policy, such as the automatic stay and (temporarily) keeping the assets of a bankrupt firm together, are increasingly called into question.. Issues such as the governance of insolvency proceedings (including the role of the courts, insolvency administrators and the debtor), as well as the substantive ranking of claims are dealt with very differently across Member States, which reflects diverse regulatory traditions and contested value judgments It appears to be a much safer political strategy to focus on preventive corporate restructuring frameworks that can be accessed by the debtor preinsolvency. Without further analysis, the Commission assumed that Member States’ passivity was unjustified and announced in its ‘Action Plan on Building a Capital Markets Union’, on 30 September 2015, that it ‘will propose a legislative initiative on business insolvency, including early restructuring and second chance, drawing on the experience of the Recommendation. If the Member States’ pre-insolvency restructuring laws were harmonised according to the Commission’s proposal, regulatory damage would be done on a grand scale—an inefficient procedure would be forced upon all Member States without market forces operating as a potential corrective.
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