As the European economy continues to stumble along, more and more businesses are finding themselves in dire financial straits. The numbers are sobering, as are the effects: the EU Justice Commissioner has estimated that some 1.7 million jobs are lost each year as 200,000 firms based in member states go into liquidation.
Any measures to help distressed businesses and potentially save some of these jobs are to be welcomed. This is what changes to the European Insolvency Regulation, issued in December 2012, are intended to achieve.
The main thrust of the proposals is to make the process for cross-border insolvencies more efficient. “It’s about improving the functioning of the internal market and its resilience in the face of economic crises,” says Chris Laughton, partner at Mercer & Hole and past president and council member of INSOL Europe.
A bunch of Wall Street financiers putting together a deal can cope with London, but don’t want to worry too much about 27 member states
The changes highlight the idea of the rescue culture – something that has been prevalent in the UK for some years but which is perhaps less well-used in civil law jurisdictions in continental Europe. “It’s about the survival of businesses and second chances for honest entrepreneurs,” says Laughton. “The EU is trying to create an efficient system to re-organise businesses so that they can survive financial crises, operate more efficiently and, where necessary, make a fresh start.”
Samantha Bewick, member of the ICAEW Insolvency Committee, says the changes are about creating an environment that helps restructurings. “The proposals should work to increase the options available to financially stressed companies. The more tools you have in the toolbox, the more likely you are to find one that will give the best outcomes for everybody.”
One of the most important proposed changes to the regulation is the extension of its scope to cover pre-insolvency and rescue proceedings. These are formal procedures that can be entered into when a company is in trouble without it being either illiquid or overly indebted.
One of these proceedings, familiar to UK accountants, is schemes of arrangement. These are court-sanctioned compromise agreements on restructuring a company that are entered into by a company and its shareholders or creditors. Schemes of arrangement have been used by UK courts to help restructure not only UK companies, but also companies in other jurisdictions, provided they have a sufficient nexus with the UK. However this kind of cross-jurisdictional operation has been on an informal basis as, until now, these kinds of pre-insolvency proceedings have not been included in the European Insolvency Regulation. The proposals are to include these (as well as other pre-insolvency and hybrid proceedings) in Annex A to the regulation, bringing them under its remit.
The present question for the UK government is whether or not it should apply to include schemes of arrangement in the annex. The risk of not including them is that other EU member states may choose not to recognise them if they are not part of the regulation. However, there are compelling reasons for leaving them out.
For example, Bewick is concerned that putting schemes of arrangement in Annex A might affect their wider use. “Schemes of arrangement are not wholly, or even majorly, an insolvency tool. They are a Companies Act procedure and have very wide uses in a solvent context. We would not like to see anything done that might damage their broader scope.”
Laughton points out that American investors are fine with the status quo, as this offers them a straightforward process that is similar to their Chapter 11 proceedings. Including the
We’re all here to act in the best interests of creditors. It’s not in their interests for us not to be talking to someone else acting for the same group of people
schemes in Annex A could complicate matters by extending the arrangements to other EU nations. “If you have UK financing you can get into a scheme of arrangement without worrying about getting dragged into some other country’s processes,” he explains. “A bunch of Wall Street financiers putting together a deal can cope with thinking about what might happen in London but don’t want to worry too much about 27 member states.”
The second area the proposals deal with is the centre of main interest (COMI), which determines the jurisdiction in which insolvency proceedings are opened. Theamendments bring the COMI definition into the body of the regulation, updating it for recent clarification by the European Court.
The amendments also propose the introduction of a new COMI definition for individuals. The rationale behind this is to try to stem the rise in so-called bankruptcy tourism, in which individuals from countries with long bankruptcy periods (such as Germany with eight years and Ireland with 12) move to less draconian jurisdictions, such as the UK (where bankruptcy lasts 12 months or less) in order to get back on their financial feet as quickly as possible.
Turning back to companies, the COMI is used to determine the place in which main insolvency proceedings are instigated. If the company involved has an establishment in other EU member states, then secondary proceedings can be started in those states and these proceedings cover the assets located there. At the moment these secondary proceedings can only be for a winding up. The proposals want to make secondary proceedings more flexible so that they can also be part of a restructuring. In addition, secondary proceedings could be refused by the local court if they are not considered necessary to protect the interests of local creditors.
Laughton explains that secondary proceedings have typically been started by creditors who don’t see the bigger picture. “There’s no proviso at the moment for the court to say ‘We already have main proceedings which are doing sensible things in the interests of all the creditors and it’s not going to help to have secondary proceedings as this will be expensive and non-productive.’ These proposals instead allow the court to take a more pragmatic approach when it needs to, which will be useful.”
While the regulation as it stands talks about co-operation between liquidators there’s no mention of co-operation between the courts; the proposals aim to change this. Laughton thinks courts might find this idea novel. “Many courts like to think they have responsibility for dealing with what’s going on in their jurisdiction and they just get on with it. The idea of consulting with someone in another jurisdiction will be challenging to some jurists. But cross-border insolvencies need more co-operation between courts. Since we don’t have harmonised European insolvency law, there has to be some kind of mechanism by which the legal bodies can communicate and work together.”
The idea of increased cross-border co-operation extends to the fourth arm of the proposals, on groups. In the future, any liquidator of any group company should be able to propose a stay of proceedings or a rescue plan in any other group company: for instance, a liquidator of a subsidiary of a German company will be able to be heard in a German court with an idea for a rescue plan for the entire group. The idea of separate corporate entities will still hold, so that each company stands on its own. But, as Laughton says, “A degree of interaction between liquidators of different entities will be helpful.”
Many current administrative problems revolve around a lack of information, making the fifth part of the proposals, for an electronic insolvency register across EU member states, hugely important. Data on the register will include the dates for the opening and closing of insolvency proceedings, the debtor’s name and contact details, the type of proceedings, the liquidator’s contact details, how to make claims and the time limits on claims. A few countries, such as the Czech Republic, already have an online insolvency register. However, it will take time for the others to create these and for the new law needed at EU level to be passed. “There will be all sorts of detailed implementation issues for different jurisdictions,” Laughton says. “But this will be very helpful for insolvency practitioners.”
Finally, standardised forms will be extended to make it easier for foreign creditors to lodge their insolvency claims, and there will be a time limit of at least 45 days after publication of the invitation to claim for creditors to lodge their claim.
The real strength of the overall proposals is, Laughton believes, the extension of the ideas of communication and co-operation across borders.
He says: “We’re all here to act in the best interests of creditors. It’s not in their interests for us not to be talking to someone else acting for the same group of people.”