Rethinking Priority: The Dawn of the Relative Priority Rule and a New ‘Best Interest of Creditors’ Test in the European Union

Abstract

[Revised version as of June 20, 2020] Article 11 of the EU Directive on restructuring and insolvency provides for a cross-class cram-down mechanism. When implementing the instrument, EU Member States may choose between an ‘absolute priority rule’ (APR) and an EU specific ‘relative priority rule’ (EU RPR) as a condition for the use of cram-down powers. The EU RPR is characterized mainly by the fact that it offers more flexibility in the negotiation of restructuring plans. So far, not enough attention has been paid to the fact that the European legislator has also introduced a novel and upgraded ‘best interest of creditors’ test (EU BIT) as part of the mechanism. This article explores the interaction of the EU RPR and the EU BIT from both a theoretical and practical standpoint. It concludes that, through its interaction with the EU BIT, the EU RPR does in theory not lead to the drastic consequences often described. A properly interpreted EU BIT absorbs large ‘distortions’ in the allocation of reorganization value. However, this article points out problems that could arise in practice. The fact that under an EU RPR/EU BIT cross-class cram-down two hypothetical values mark out the realm in which the EU RPR operates, and the priority rule itself lacks a clear guideline for entitlement, gives cause for concern that the praised flexibility would come at the expense of plan negotiability and plan acceptance.