Getting a second chance and bringing a business back to life with the help of effective restructuring procedures seems uncontroversial throughout the EU - however, until recently, an EU-wide legal framework for such procedures was still missing. After more than two years of negotiations, the EU Directive was received quite controversially with major concerns being that it would be too favourable for debtors. One thing however is clear: During the implementation process to be completed by 17 July 2021, lots of further issues and details will have to be brought to the table.
Aims of the Directive
What the EU legislator had in mind was keeping the Know-How, jobs and general structure alive rather than liquidating the assets. A European-wide harmonization of these procedures not only provides legal certainty for cross-border investments but also prevents forum shopping for jurisdictions with more efficient procedures providing a truly fresh start for entrepreneurs. The directive’s aim therefore is to ensure the proper functioning of the internal market.
When Does it All Start?
Entities who want to benefit from these new procedures if they are in financial difficulties have to still be viable and cannot be insolvent. In fact, in order to be able to initiate a procedure, there must be a “likelihood of insolvency”. When exactly this is the case has to be defined by the national legislator. In Austria, there is a duty for filing insolvency under the insolvency code (Insolvenzordnung) in case of threatening insolvency (drohende Zahlungsunfähigkeit) and the need for reorganisation under the business restructuring act (Unternehmensreorganisationsgesetz) where the equity ratio materially and lastingly deteriorates are the most prominent examples. However, it is still unclear how the definition of the likelihood of insolvency will relate to these statutory facts.
The restructuring plan
The debtor and, if national legislation so determines also creditors and the restructuring office holder, can submit a restructuring plan. The voting upon it is open to affected parties, so creditors but also workers and equity holders whose interests are directly affected by the restructuring plan.
A major difference to Austrian law is the mandatory division of creditors into classes according to their commonality of interest, for example the division into secured and unsecured creditors. There is also no minimum quota that has to be guaranteed in the plan, this ultimately representing the second chance and a fresh start for the debtor. However, currently, under the Austrian insolvency code, a quota is necessary and usually amounts to 20%, rising to 30% for a reorganisation in selfadministration. This no quota requirement is balanced out by the seemingly high treshold of consent to the restructuring plan which can be set up to 75% of votes by the Member States. Generally speaking, the consent of all classes is needed, except when a cross-class cram-down takes place.
But what about the creditors‘ interest?
As a counterpart to many provisions ensuring the benefits for the debtor and the efficiency of the whole procedure, there is the guiding principle that all restructuring measures have to comply with the best-interest-of-creditors-test. The test is only passed and the plan confirmed by the court if no dissenting creditor would be worse off under the plan than in normal ranking of liquidation priorities in national insolvency or restructuring proceedings.
One will have to see what the future brings.