European Commission Proposes to Harmonise Insolvency Laws across Member States

December 15, 2016

The European Commission (EC) announced proposals on 22 November 2016, which are intended to harmonise national insolvency laws across the EU through a proposed directive “on preventative restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures” (Directive). The Directive will need to be passed by the European Council and European Parliament. Then, EU Member States would be required to adopt the Directive’s provisions into their respective national laws within two years from the date of its entry into force. 

The Directive will be of particular interest to investment managers that focus on turnaround situations. The Directive is part of the “Capital Markets Union Action Plan” and the “Single Market Strategy”, and so will be of general interest to investors, as barriers to the development of capital markets in the EU continue to be addressed.

Current Regulations 

EU members (apart from Denmark) are already subject to the EC Regulation on Insolvency Proceedings 2000 (Regulation), which came into force in 2002. The Regulation seeks to resolve conflicts of laws and jurisdiction in cross-border proceedings, and ensures reciprocal recognition across the EU of insolvency proceedings and judgments. The Regulation adopts the concept of Centre of Main Interest (COMI) – once COMI is established1, a Member State’s proceedings are automatically recognised throughout the EU (with the exception of Denmark). The Regulation was updated in 2015 (Recast Regulation), to take effect from 2017. The Recast Regulation further develops and strengthens the cross-border insolvency framework within the EU, particularly in relation to group coordination proceedings. However, neither the Regulation nor the Recast Regulation harmonise the substantive insolvency laws of the EU. 

Separately, the UK in 2006 adopted the UNCITRAL Model Law on Cross Border Insolvency (UCITRAL Model Law), which recognises foreign, non-EU jurisdictions’ insolvency proceedings on a non-reciprocal basis. The UNCITRAL Model Law, which also uses the concept of COMI, has been adopted by a handful of other EU Member States. 

Harmonisation Directive 

The EC suggests that many otherwise potentially viable businesses succumb to formal insolvency processes in circumstances where adequate restructuring options are not available at the critical time of distress. As a result of divergent restructuring laws across Member States, there is significant disparity in the restructuring options available to distressed businesses and, accordingly, their chances of survival when in financial difficulty. The EC indicates that 200,000 businesses enter formal insolvency processes in the EU every year, one in four of which operate on a cross-border basis, and this results in 1.7 million job losses. The EC reports that, between Member States: creditor recovery rates vary between 30% and 90%; the length of insolvency proceedings can range from a few months to four years; and discharge periods for entrepreneurs are between one and 10 years. The EC has concluded that these differences create barriers to cross-border investments, with investors facing legal uncertainty and additional costs of risk assessments in different countries.

The EC’s Proposals 

The proposed Directive details a number of legal principles, and introduces minimum standards for all Member States, to improve the efficiency of moving capital within the single market and to enhance the rescue culture in the EU. The EC describes the principal objectives of the proposal as being to “attract investors, create and preserve jobs, as well as help economies absorb economic shocks”. Ultimately, the intention is to allow for capital to flow more freely between Member States. 

The proposed Directive can be broken down into three distinct parts: 

  • Preventative restructuring frameworks (Title II of the Directive); 
  • Second chance policy for entrepreneurs (Title III of the Directive); and 
  • Targeted measures to improve the efficiency of insolvency, restructuring and discharge procedures (Title IV of the Directive). 

A summary of the key provisions follows. 

Title II – Preventative Restructuring Frameworks 

A number of the key recommendations set out in Title II are somewhat different from the UK’s current laws. 

Broadly, the EC aims to implement consistent preventative restructuring frameworks, central to which is a debtor’s access to a time-limited moratorium (referred to as “breathing space”) to facilitate negotiations and allow for implementation of a restructuring plan, thereby preventing (or at least delaying) a formal insolvency process. The maximum period of the stay would be four months, with judicial extension permissible for a period of up to 12 months in total. During the period of the stay, the debtor would remain at least partly in control of its assets and affairs. Notwithstanding the concept of “breathing space”, safeguards are provided to ensure the stay is not abused. In particular, a judicial or administrative authority can lift the stay when it becomes apparent that a group of creditors who could otherwise block the restructuring plan do not support its continued negotiation. 

The negotiation and implementation of the restructuring plan would ideally be consensual. However, in certain conditions, classes of creditors and shareholders will be unable to block a restructuring plan. Further, where there are creditors who withhold consent, the plan can be confirmed judicially and binding on those dissenting classes. 

Also of note is a proposal whereby if new and interim financing is put in place, it is envisaged that this will be protected and rank at least senior to the claims of ordinary unsecured creditors, in order to incentivise lenders financially to support a restructuring plan. 

Finally, to ensure consistency, minimum mandatory content is to be set forth in restructuring plans and Member States are required to make model plans available online. 

Title III – Second Chance Policy for Entrepreneurs 

Another feature of the proposed Directive is the concept of affording entrepreneurs a “second chance”. 

The Directive ensures that “honest” over-indebted entrepreneurs are to be fully discharged from their debts after a maximum period of three years. Upon discharge, any disqualifications connected with the over-indebtedness will also cease to have effect. It is envisaged that the shorter periods will mean that entrepreneurs are not precluded from pursuing new business opportunities. 

In addition, where partial repayment of a debt of an over-indebted entrepreneur is a condition to obtaining a full discharge, any such repayment must be proportionate to the entrepreneur’s disposable income over the period of discharge. 

Finally, debtors and entrepreneurs must have access to “early warning tools” intended to benefit SMEs by allowing for detection of a weakening business and enabling preventative action to be taken. 

Title IV – Improvement of Procedures 

The Directive also seeks to improve process across the EU generally, by requiring that Member States: ensure that insolvency practitioners receive initial and ongoing specialist training; and implement a framework for appointment, removal and resignation of practitioners. Further, members of the judiciary are to have similar training. 

On a broad level, the use of technology is encouraged for actions such as the filing of claim forms, in order to make the procedures more efficient and less costly. 

In addition to the above, there are several provisions aimed at vulnerable parties, including consumers and workers. For example, outstanding claims of workers will not be subject to a stay on enforcement – the intention is that workers will remain entitled to full labour protection laws in accordance with existing EU legislation. As a practical matter, this will mean that wages for work already carried out would be fully protected, even where those amounts are potentially void, voidable or unenforceable as acts detrimental to the general body of creditors. 

The UK and the Directive 

Many businesses have moved their COMI to the UK to take advantage of its sophisticated insolvency framework. Given the proposed harmonised regulations, some will question whether the UK will stay ahead of the pack as a favoured jurisdiction for insolvency proceedings. The proposals largely reflect existing UK (and U.S.) insolvency regulations, and the changes the UK will need to make are limited. 

In any event, consistent with the above Title II proposals, the UK is currently undertaking a consultation on its insolvency laws. On 25 May 2016, the Insolvency Service issued a consultation paper on the options for reform. The Government is consulting on four proposals: 

  1. Creating a new preliminary moratorium to enable businesses to consider rescue options; 
  2. Helping businesses to continue trading through the restructuring process; 
  3. Developing a flexible restructuring plan; and 
  4. Exploring options for rescue financing. 


Despite several existing EU regulations on insolvency, the proposed Directive is the first EU-wide initiative to set a single standard and harmonise laws on insolvency processes across Member States. 

It is possible that Brexit negotiations will not affect these proposals, because it would appear unlikely that the outcome of those negotiations will result in an absence of reciprocal recognition arrangements between the UK and the remaining EU Member States. However, even if Brexit did have an impact, this would not affect the UNCITRAL Model Law or the current non-reciprocal recognition arrangements in the statutes of certain Member States. In any event, there will be no change in current arrangements pending the expiry of the two-year exit negotiations to be triggered pursuant to Article 50. 


1) COMI refers to the location where a business is registered or has its main centre of interest.

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