European Union: EU Proposal For Harmonising Insolvency Laws

In a bid to reinforce the Capital Markets Union (the "CMU"), on the 7^th December 2022 the European Commission unveiled the "Proposal for a Directive Of The European Parliament And Of The Council harmonising certain aspects of insolvency law" ¹ (the "Proposed Directive"). This initiative aligns with the Commission's strategic objective of fostering predictability in cross-border investment outcomes concerning insolvency proceedings, as delineated in the 2020 CMU action plan. It echoes the sentiments expressed in the 2015 Five Presidents' Report ², underlining the importance of addressing critical bottlenecks to integrate capital markets effectively, including challenges within insolvency law.

The Proposed Directive derives its legal basis from Article 114 of the Treaty on the Functioning of the European Union (the "TFEU"), empowering the European Union (the "EU") to enact provisions for the approximation of Member States' laws to foster the internal market's establishment and functioning.

The Proposed Directive targets "minimum harmonisation" in core non-bank insolvency proceedings across EU member states, seeking to rectify disparities in domestic non-financial corporation insolvency laws. Therefore, the directive specifically excludes financial institutions from its purview.

THE PRESENT SITUATION

An impact assessment accompanying the Proposed Directive highlighted extensive variations in Member States' insolvency laws, posing a significant barrier to the CMU. The absence of harmonised EU legislation on insolvency law leaves Member States responsible for developing national insolvency frameworks which results in an insolvency framework which is fragmented across the EU.

The Proposed Directive complements, whilst also diverging from, recently adopted legislation such as Directive 2019/1023 ³ on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and Regulation 2015/848 ⁴ on insolvency proceedings. Both of these legislative instruments have come into effect.

Directive 2019/1023 primarily addresses pre-insolvency procedures and debt discharge following the closure of insolvency proceedings, aiming to facilitate debt restructuring before insolvency. In contrast, Regulation 2015/848 focuses on determining territorial jurisdiction and applicable law for cross-border insolvency cases. Although the Regulation does not influence national insolvency law content, it does enhance cross-border information sharing and the application of insolvency proceedings and decisions.

PROPOSAL'S OBJECTIVES AND CHANGES

One of the focal points of the Proposed Directive is the importance of enhancing legal certainty for cross-border investments by streamlining national insolvency proceedings. It highlights the need for real progress in harmonising insolvency laws to overcome obstacles which hinder EU capital market integration.

Recognising the efficiency of insolvency laws as being fundamental for cross-border investors, the Proposed Directive lays down common rules governing various aspects of insolvency proceedings. These include the annulment of avoidance actions ⁵, asset tracing ⁶, directors' duties and the introduction of pre-insolvency proceedings to facilitate the sale of companies, amongst other measures.

The Proposed Directive also provides for the establishment of creditors' committees, which is an important tool to ensure that the insolvency proceedings are conducted transparently, and in the interests of the creditors, allowing for the participation and involvement of the latter in the proceedings.

Since the cost of ordinary insolvency proceedings, in the context of the liquidation of insolvent microenterprises ⁷, is prohibitively high, the Proposed directive introduces a simplified winding-up procedure for microenterprises. This "will help more entrepreneurs benefit from debt discharge, as insolvency procedures against microenterprises will be initiated more easily and conducted in a more efficient manner" ⁸.

The Proposed Directive aims to enhance capital allocation efficiency and ensure a level playing field among corporations in EU capital markets by addressing three important areas, namely: (i) the recovery of assets from the liquidated insolvency estate; (ii) the efficiency of proceedings; and (iii) the predictable and fair distribution of recovered value among creditors. Additionally, it obliges Member States to provide information factsheets with practical information on their domestic insolvency laws.

Whilst certain proposed measures are not entirely new to the Maltese insolvency framework, the EU's proposal for harmonising insolvency laws signifies a pivotal stride toward advancing the Capital Markets Union and fostering legal certainty in cross-border investment. By addressing discrepancies in national insolvency laws and establishing common rules, the Proposed Directive aims to enhance legal certainty and promote efficient capital allocation. While challenges remain, stakeholders must collaborate to ensure effective implementation and alignment with the CMU's overarching objectives.

Since the proposal takes the form of a directive, when (or if) it comes into effect, all Member States will need to transpose it to their respective national laws within the established deadline. It is pertinent to note that the Proposed Directive has not yet been promulgated to EU law and is therefore subject to possible amendments.

Footnotes

1. https://eur-lex.europa.eu/resource.html?uri=cellar:8adadc6c-76e9-11ed-9887-01aa75ed71a1.0001.02/DOC_1&format=PDF

2. https://www.ecb.europa.eu/pub/pdf/other/5presidentsreport.en.pdf

3. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019L1023

4. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02015R0848-20220109

5. Pre-insolvency transactions entered into by the debtor prior to the opening of insolvency proceedings.

6. The tracing and recovery of the assets belonging to the insolvency estate.

7. Defined in the Commission Recommendation 2003/361/EC as "an enterprise which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 2 million."

8. Section 2 of the Explanatory Memorandum of the Proposed Directive.

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