12.9 Chapter 9: Assessment of the European Commission’s recommendation

The recommendation of the European Commission (EC) of 12 March 2014 on a new approach to business failure urges the Member States to introduce efficient pre-insolvency proceedings into their national systems.1 Meanwhile, the EC has announced that it is going to convert its recommendation into a binding directive and that it will publish a proposal to that effect before the end of 2016.

The main features of the pre-insolvency procedure that the European Commission has in mind are the following. The instrument must be available outside (and aim to prevent) formal insolvency proceedings. The debtor must in principle remain in possession. The appointment of an insolvency officer should not be mandatory. At the start of the proceedings, a general moratorium should preferably not enter into force, given the adverse publicity that this could generate. At the request of the debtor, the court should, however, have the power to suspend, for a brief period (in principle, 4 months), enforcement actions taken by individual creditors. The debtor should be able to involve only a certain group of creditors, rather than having to involve all creditors in the proceedings. The plan should be able to bind not only ordinary unsecured but also preferential and secured creditors. To this end, the creditors would have to vote in classes. In the context of confirmation, the court should have the power to impose the plan over the objections of one or more dissenting classes (cram-down). Overall, the procedure should be quick, efficient and flexible, with a minimum of formalities and judicial involvement. Judicial involvement is, in principle, needed only for the possible imposition of a specific stay and for confirmation.

My main criticism of the recommendation is that it says nothing about the need to be able to bind shareholders. It also lacks a recommendation to grant anyone other than the debtor, notably creditors, the right to propose a plan. A provision for handling executory contracts (ipso facto and change-of-control provisions) would also not have gone amiss in the recommendation. Finally, the recommendation lacks appropriate criteria for cram-down.

On balance, however, the EC’s recommendation is a positive step forward. It includes a number of important fundamental policy choices that could dramatically change the insolvency landscape in the EU. Perhaps the most fundamental of these, is the recognition of the need to significantly reduce judicial involvement and procedural safeguards in favour of speed, simplicity and efficiency. This fundamental choice is to be welcomed. All of that said, proceedings with relatively light procedural safeguards place correspondingly high demands on the quality and integrity of the players. That is where the focus will have to lie when it comes to safeguarding the integrity of the proceedings.