Rethinking priority: The dawn of the relative priority rule and the new “best interests of creditors” test in the European Union

Abstract

AbstractThis article identifies one aspect of the cross‐class cram‐down from the EU Directive on restructuring and insolvency that has not drawn wide attention to date. In addition to giving EU Member States the option of a “relative priority rule,” the European legislator has introduced a new “best interest of creditors” test, which does not—like in Chapter 11 of the US Bankruptcy Code—use the value that a party could expect in a hypothetical liquidation as a comparator but refers to the “next‐best‐alternative scenario.” First, this article addresses the concepts of the absolute and relative priority rule from the Directive and explores the motives for introducing the relative priority rule. In particular, a demand for more flexibility in restructuring negotiations, the call for an instrument to overcome structural hold‐out positions of preferential (priority) creditors in some Member States, as well as a trend in Europe to break with the “traditional laws of insolvency law” of law and economics seem to have inspired the legislator in drawing up the relative priority rule. This article then deals with the new “best interest” test and examines its interaction with the relative priority rule. It is shown that the concept of combining the new “best interest” test with the relative priority rule is coherent in theory. However, this article remains skeptical as to whether this interaction can succeed in practice, as the new “best interest” test is likely to add another stress point to the negotiations of restructuring plans.