Explanatory Memorandum to COM(2016)723 - Preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures - EU monitor

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Friday, January 15, 2021

Explanatory Memorandum to COM(2016)723 - Preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures

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Reasons for and objectives of the proposal

Insolvency rules cover a wide range of measures from early intervention before a company gets into serious difficulties, timely restructuring to ensure that viable business parts are preserved, liquidation of assets where companies cannot be otherwise saved and finally giving a second chance to honest entrepreneurs via discharge of debt.

A well-functioning insolvency framework covering all these measures is an essential part of a good business environment as it supports trade and investment 1 , helps create and preserve jobs, and helps economies absorb more easily economic shocks that cause high levels of non-performing loans and unemployment. These are all key priorities of the European Commission.

Insolvency matters have a strong Union dimension. An increasingly interconnected single market with an ever stronger digital dimension means that very few companies are purely national when aspects such as their client base, supply chain, scope of activities, investor and capital base (to mention a few) are considered. Importantly, insolvency matters are also a deterrent for cross-border expansion and investments. Many investors mention uncertainty over insolvency rules or the risk of lengthy or complex insolvency procedures in another country as a main reason for not investing or not entering into a business relationship outside their own country. A higher degree of harmonisation in insolvency law is thus essential for a well-functioning single market and for a true Capital Markets Union. This is why the issue has long attracted considerable interest at EU level.

Increased convergence of insolvency and restructuring procedures would facilitate greater legal certainty for cross-border investors and encourage the timely restructuring of viable companies in financial distress. Inefficient and divergent insolvency laws make it harder for investors to assess credit risk, particularly where they consider making cross-border investments. More cross-border risk-sharing, stronger and more liquid capital markets and diversified sources of funding for EU businesses will deepen financial integration, lower costs of obtaining credit and increase the EU's competitiveness.


Restructuring and insolvency

Today in Europe half of all businesses survive less than 5 years 2 . The number of corporate insolvencies has risen since the peak of the economic crisis in 2009 and remains high, although the trend seems now to be reversing. In several Member States there is a tendency to steer viable enterprises in financial trouble towards liquidation rather than early restructuring. It is estimated that in the EU, 200 000 firms go bankrupt each year (or 600 a day), resulting in 1.7 million direct job losses every year. One in four of these are cross-border insolvencies, i.e. they involve creditors and debtors in more than one EU Member State 3 . A significant percentage of firms and related jobs could be saved if preventive procedures existed in all Member States where they have establishments, assets or creditors. In addition, the availability of timely preventive restructuring procedures would ensure that action is taken before companies default on their loans. This would contribute to reducing the risk that loans become non-performing loans in cyclical downturns, thus reducing the related negative impact on the financial sector. But the cross-border dimension and costs of divergent insolvency frameworks are much broader. Firstly, although creditors might have suppliers in their supply chain that are purely domestic businesses, a supplier that experiences financial difficulties and cannot be saved may nonetheless have negative impacts which may trigger the insolvency of the cross-border company. The impact of these cross-border insolvencies may be extremely high as they are more likely to concern larger businesses. Secondly, some companies' cross-border creditors (especially SMEs) may prefer to drop cross-border claims simply because it is too costly to pursue them, for example if local legal advice is needed. Finally, future developments in the single market are expected to lead to more companies having cross-border dealings, and therefore more insolvencies with cross-border impact. Innovative companies in particular need a larger market to be able to thrive and avoid insolvency in the first 5 years.

The quality of Member States' restructuring and insolvency frameworks directly affects creditors' recovery rates. World Bank indicators suggest that in the EU recovery rates vary between 30 % in Croatia and Romania, and 90 % 4 in Belgium and Finland. Recovery rates are higher in economies where restructuring is the most common insolvency proceeding. On average, in such economies creditors can expect to recover 83% of their claims, against an average of 57 % in liquidation procedures 5 . While these outcomes also reflect economic factors such as the overall health of the economy, they underline the importance of a comprehensive insolvency framework, anchored in a strong institutional and cultural setting, in delivering better outcomes for society.

The elements of preventive restructuring procedures affecting their effectiveness and consequently the number of businesses rescued and their long-term viability diverge significantly between Member States. For example, an effective framework should require that a business in difficulty has access as early as possible to preventive restructuring. However, in several Member States debtors cannot restructure debts with their creditors before they are actually insolvent or if they do, they face very strict or expensive access conditions.

The conditions for a stay of individual enforcement to support restructuring negotiations are also very different: in some countries such a stay is not possible, while the others have a wide variety of durations and exemptions. When plans are adopted by creditors, rules in Member States tend to vary greatly on class formation, the possibility of restructuring only with certain creditors while leaving the rights of non-involved creditors un-affected, the majorities required, and the conditions for a judicial or administrative authority's confirmation of the restructuring plan. The protection of new financing and interim financing (essential in ensuring restructuring plans' success) also varies among Member States, ranging from minimum protection from avoidance actions to a form of priority over existing debt in subsequent insolvency procedures. Finally, the involvement of judicial or administrative authorities and practitioners appointed by the judicial or administrative authorities ranges from minimal to full involvement.

Such divergences make it virtually impossible to have a restructuring plan for a cross-border group of companies with subsidiaries in more than two Member States 6 .


Second chance

In many Member States it takes more than 3 years for bankrupt, but honest entrepreneurs to discharge their debts and make a fresh start. Inefficient second chance frameworks result in entrepreneurs being locked into debt-traps or driven to the black economy, or having to relocate to other jurisdictions to access friendlier regimes. Relocation is expensive for creditors, who need to factor in the additional risk that an entrepreneur could obtain a shorter discharge in a different jurisdiction. Relocation also has high economic and human costs for entrepreneurs since under Regulation (EU) No 2015/848 on insolvency proceedings 7 they may need to be established in a Member State for a certain period of time before being allowed to file for discharge in that jurisdiction. Furthermore, evidence shows that shorter discharge periods have a positive impact on both consumers and investors, as they are quicker to re-enter the cycles of consumption and investment. This in turn boosts entrepreneurship.

A discharge of debt alone may in some Member States not be enough to allow an entrepreneur to start a new business activity, e.g. where bankruptcy is accompanied by a disqualification order which lasts for a longer period of time and which may be issued without consideration to whether the entrepreneur was acting in good faith. To give honest entrepreneurs an effective second chance, disqualifications linked to over-indebtedness should also be time-limited so that they expire at the latest when the discharge period ends. Personal data used in connection with the debtor's over-indebtedness should be adequate, relevant and limited to what is necessary in relation to the purposes for which they are processed and kept in a form which permits identification of data subjects for no longer than is necessary for the purposes for which the personal data are processed. The General Data Protection Regulation 8 which will replace Directive 95/46/EC and will apply as of 25 May 2018 further clarifies the legal framework and the requirements when processing personal data.

Over-indebtedness of natural persons is a major economic and social problem. 11.4% of European citizens are permanently in arrears with payments, often for utility bills 9 . This is mostly due to unfavourable macroeconomic conditions in the context of the financial and economic crisis (e.g. unemployment) combined with personal circumstances (e.g. divorce, illness).

Entrepreneurs are not the only ones affected. Although consumers have largely the same treatment under national insolvency laws, this is not the case in all Member States. This results in increased costs for Member States' social security schemes and economic consequences such as reduced consumption, labour activity and foregone growth opportunities.


General effectiveness of restructuring, insolvency and second chance

The excessive length of restructuring, insolvency and discharge procedures in several Member States is an important factor triggering low recovery rates and deterring investors from doing business in jurisdictions where procedures risk taking too long. In half of the Member States insolvency is resolved in 2 to 4 years 10 . Apart from three Member States, the length of procedures has not improved in the past 4 years, and in two Member States the length of procedures rose in the same time span. Specific aspects that play an important role in the length of procedures are the level of specialisation of judges and therefore their ability to take quick decisions, the professionalism of practitioners in the field of restructuring, insolvency and second chance, and the take-up of digital means of communication in such procedures. Specialised insolvency practitioners and judges, and the availability of digital tools can greatly help reduce the length of procedures, lower costs and improve the quality of assistance or supervision.

Despite an improvement in cyclical conditions, the level of non-performing loans, which increased rapidly in most Member States following the economic crisis, remains high. High levels of non-performing loans have a direct consequence on banks' capacity to support growth 11 . In some Member States, targeted reforms have had a positive impact. However, the resilience of non-performing loans in the European Union shows that further action needs to be taken to ensure that the negative feedback loop between poor asset quality, lagging credit developments and low growth does not become prevalent. Measures to increase the effectiveness of restructuring, insolvency and second chance frameworks would contribute to efficient management of defaulting loans and reduce accumulation of non-performing loans on bank balance sheets 12 . They would also contribute to improving the residual value which can be expected by creditors by allowing an earlier and swifter restructuring or resolution for debtors facing financial difficulties. Finally, they can also serve to avoid future build-up of non-performing loans since loans on which performance ceases could be enforced more efficiently. Improving legal settings of enforcement regimes will not fully resolve the issue of existing non-performing loans where enforcement proceedings have already started. However, reinforcement of the judiciary setting could help to speed up the proceedings' remaining steps. In this way, reforms of insolvency laws can complement other ongoing reforms at EU level in the banking sector and as regards capital markets.


Objective of the proposal

The proposal's key objective is to reduce the most significant barriers to the free flow of capital stemming from differences in Member States' restructuring and insolvency frameworks. The aim is for all Member States to have in place key principles on effective preventive restructuring and second chance frameworks, and measures to make all types of insolvency procedures more efficient by reducing their length and associated costs and improving their quality. More specifically, such frameworks aim to help increase investment and job opportunities in the single market, reduce unnecessary liquidations of viable companies, avoid unnecessary job losses, prevent the build-up of non-performing loans, facilitate cross-border restructurings, and reduce costs and increase opportunities for honest entrepreneurs to be given a fresh start.

Along with key principles, more targeted rules are necessary to make restructuring frameworks more efficient. Rules on company managers' duty of care when nearing insolvency also play an important role in developing a culture of business rescue instead of liquidation, as they encourage early restructuring, prevent misconduct and avoidable losses for creditors. Equally important are rules on early warning tools.

The proposal does not harmonise core aspects of insolvency such as rules on conditions for opening insolvency proceedings, a common definition of insolvency, ranking of claims and avoidance actions broadly speaking. Although such rules would be useful for achieving full cross-border legal certainty, as confirmed by many stakeholders in the public consultation 13 , the current diversity in Member States' legal systems over insolvency proceedings seems too large to bridge given the numerous links between insolvency law and connected areas of national law, such as tax, employment and social security law. Prescriptive harmonisation could require far-reaching changes to commercial law, civil law and company law, whereas flexible provisions risk not bringing about desired changes. Furthermore, the rules on filing and verification of claims mentioned in the Commission Communication of December 2012 14 are of rather low relevance given the improvements brought by the Insolvency Regulation 15 .

Instead, the focus of this proposal is on addressing the most important problems that could be feasibly addressed by harmonisation. Insolvency procedures need to be adapted to enable debtors in financial difficulties to restructure early. Rules which would contribute to this need include lifting the obligation to file for insolvency while the debtor is still in a formal restructuring process as otherwise such filing might prevent the restructuring from attaining its goals; and an avoidance actions regime in insolvency procedures to protect transactions concluded in good faith with a view to a debtor's preventive restructuring. The proposal also covers insolvency-related measures with direct impact on the length of procedures, such as judges' specialisation and the professionalism of practitioners, and those with a close link to the preventive restructuring framework, such as protecting new financing from avoidance actions.

To encourage entrepreneurial activity, entrepreneurs and company managers should not be stigmatised when their honest business endeavours fail. Individuals should not be deterred from entrepreneurial activity or denied the opportunity of a second chance. It is estimated that offering a true second chance to honest entrepreneurs to restart business activities would create 3 million jobs across Europe. 16

In designing the proposal, the Commission sought to strike an appropriate balance between the interests of debtors and creditors, providing for safeguards wherever the proposed measures would have a potentially negative impact on the parties' rights.

Above all, the proposal aims to enhance the rescue culture in the EU. The rules on business restructuring and rights of shareholders will predominantly contribute to 'prevention', the rules on avoidance, insolvency practitioners and judicial or administrative authorities to value recovery and the rules on second chance to debt discharge. Besides economic gains, there will also be positive social impacts.

The proposal sets common objectives, in the form of principles or, where necessary, targeted detailed rules. While aiming to achieve the needed coherence of frameworks across the EU, the proposal gives Member States the flexibility to achieve the objectives by applying the principles and targeted rules in a way that is suitable in their national contexts. This is particularly important since some Member States already have elements of well-functioning frameworks in place. The objective is not to interfere with what works well, but to establish a common EU-wide framework to ensure effective restructuring, second chance and efficient procedures both at national and cross-border level.

Boosting jobs and growth in Europe requires a stronger rescue culture which helps viable businesses to restructure and continue operating while channelling enterprises with no chance of survival towards swift liquidation, and gives honest entrepreneurs in distress a second chance. This proposal is an important step towards such a change of culture.


Institutional background

In 2011, the European Parliament adopted a Resolution on insolvency proceedings 17 which contained recommendations for harmonising specific aspects of substantive insolvency law, including restructurings, and company law. That same year, the Council called on Member States to reduce the discharge period and debt settlement for honest entrepreneurs after bankruptcy to maximum 3 years by 2013 18 .

Against this background and recognising the significant differences between national insolvency frameworks, the European Commission issued in December 2012 a Communication 19 which highlighted a need for a step-by-step approach in certain areas where differences between domestic insolvency laws could hamper the functioning of an efficient single market 20 . The first action under this approach was to amend Regulation (EC) No 1346/2000 21 . This was done by the adoption of Regulation (EU) 2015/848 on insolvency proceedings 22 . That Regulation focuses on resolving conflicts of jurisdiction and laws in cross-border insolvency proceedings, and ensures recognition of insolvency-related judgments across the EU. It does not harmonise Member States' substantive insolvency laws.

As a next step, the Commission adopted in 2014 the Recommendation on restructuring and second chance 23 . The Recommendation focused on restructuring and second chance, since it was considered that in these two fields action at EU level would bring most added-value 24 . The Recommendation invited Member States to put in place (i) effective pre-insolvency procedures to help viable debtors to restructure and thus avoid insolvency, and (ii) second chance provisions for entrepreneurs enabling them to have a discharge in no more than 3 years after insolvency.

Following adoption, two evaluations of its implementation were conducted in 2015 and 2016 25 . These reviews revealed that while the Recommendation provided useful focus for Member States undertaking reforms in the area of insolvency, it has not led to the desired impact in terms of consistent changes across all Member States that would facilitate the rescue of businesses in financial difficulty and give a second chance to entrepreneurs. This was due to its only partial implementation in a significant number of Member States, including those which had launched reforms.

There are still several Member States where a business cannot be restructured before it is insolvent. While some other Member States introduced new preventive restructuring procedures, those rules differ in several aspects from the Recommendation. On second chance, since the Recommendation's adoption, several Member States have introduced for the first time a debt discharge regime for natural persons. However, important discrepancies remain over the discharge period's duration. Such differences in Member States' legal frameworks mean continuing legal uncertainty, additional costs for investors in assessing their risks, less developed capital markets and persisting barriers to the efficient restructuring of viable companies in the EU, including cross-border enterprise groups.

The 'Five Presidents' report' of 22 June 2015 on Completing Europes Economic and Monetary Union' listed insolvency law among the most important bottlenecks preventing the integration of capital markets in the euro area and beyond 26 .

In this context, the 2015 Capital Markets Union Action Plan 27 announced a legislative initiative on business insolvency, including early restructuring and second chance. This initiative is intended to address the main barriers to the free flow of capital and build on national regimes that work well. The Single Market Strategy also stated that the Commission would support honest entrepreneurs and propose legislation to ensure that Member States provide a regulatory environment that is able to accommodate failure without dissuading entrepreneurs from trying new ideas again 28 .

The Council Conclusions of July 2016 on a roadmap to complete the Banking Union underlined the importance of Commission's work on a legislative proposal for minimum harmonisation over insolvency law in the context of the Capital Markets Union (CMU), noting that this may also support efforts to reduce future levels of non-performing loans. 29

More recently, in its Communication on Capital Markets Union - Accelerating Reform the Commission reiterated that inefficiencies and differences in national insolvency frameworks generate legal uncertainty, obstacles to recovery of value by creditors, and barriers to the efficient restructuring of viable companies in the EU, including for cross-border groups. 30

Consistency with existing policy provisions in the policy area


Regulation on cross-border insolvency proceedings

From 26 June 2017, Regulation (EU) 2015/848 31 will replace Council Regulation (EC) 1346/2000. Regulation 2015/848 deals with issues of jurisdiction, applicable law, recognition and enforcement of insolvency decisions, as well as coordination of cross-border insolvency proceedings. It designates the applicable law, i.e. restructuring and insolvency procedures that exist already in the Member States, and ensures that they are recognised throughout the EU. It also covers many types of insolvency procedures, including preventive/pre-insolvency procedures and certain personal insolvency procedures provided that they fulfil certain conditions (e.g. pre-insolvency procedures must be available at the earliest where there is a likelihood of insolvency, procedures must include all or a significant part of a debtor's creditors and must be public).

However, Regulation 2015/848 does not oblige Member States to introduce specific types of procedures or to ensure that their procedures are effective in promoting preventive restructurings and second chance.

The proposal would therefore complement Regulation 2015/848 by requiring Member States to ensure that their national preventive restructuring procedures comply with certain minimum principles of effectiveness.


Recommendation on a new approach to business failure and insolvency

The Recommendation, addressed to the Member States, aimed at establishing minimum standards for: (i) preventive restructuring procedures enabling debtors in financial difficulty to restructure at an early stage so as to avoid insolvency, and (ii) debt discharge, within prescribed periods, for honest bankrupt entrepreneurs as one of the steps necessary to give them a second chance. The proposal reinforces the 2014 Recommendation and goes beyond its scope by also establishing targeted rules on increasing the efficiency of all types of procedures, including liquidation procedures.


Legal framework on financial services

Special arrangements apply to insurance and re-insurance undertakings as defined in points 1 and 4 of Article 13 of Directive 2009/138/EC 32 , credit institutions as defined in point 1 of Article 4(1) of Regulation (EC) No 575/2013 33 , investment firms and collective investment undertakings as defined in points 2 and 7 of Article 4(1) of Regulation (EC) No 575/2013, central counterparties as defined in point 1 of Article 2 of Regulation (EU) No 648/2012 34 , central securities depositories as defined in point 1 of Article 2 of Regulation (EU) 909/2014 35 and other financial institutions and entities listed in the first subparagraph of Article 1(1) of Directive 2014/59/EU 36 . For these, the national supervisory authorities have wide-ranging powers of intervention so it is appropriate to exclude such debtors from the preventive restructuring procedures envisaged in this proposal.

The proposal is also without prejudice to Directives 98/26/EC on settlement finality in payment and securities settlement systems 37 , Directive 2002/47/EC on financial collateral arrangements 38 and Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories 39 . This is important in order to avoid overlaps between these instruments and the current proposal which would impact on secured creditors' ability to enforce their financial collateral security provided by a corporate entity, including margins provided to central counterparties (CCPs) or to central banks/the ECB or of financial collateral arrangements concluded by a non-financial corporate with a financial institution. Without a carve-out of such transactions from the stay provisions, financial market's stability may be harmed.


Directives on workers' protection

Adequate and timely information and consultation of workers enhances the effectiveness of restructuring processes. A number of Directives guarantee the right to information and consultation before restructuring and/or collective redundancies. This proposal leaves the rights guaranteed by Directives 98/59/EC 40 , 2001/23/EC 41 , 2002/14EC 42 , 2008/94/EC 43 and 2009/38/EC 44 , intact and, in addition, grants affected workers the right to vote on restructuring plans.

Directive 2008/94 requires Member States to put in place guarantee institutions to guarantee the payment of workers' outstanding claims resulting from contracts of employment or employment relationships in the event of the employer's formal insolvency proceedings. Member States can extend the coverage of such guarantee institutions also to other types of procedures and the current proposal may incentivize, but does not oblige, Member States to extend coverage to restructuring procedures where this is not yet foreseen. The proposal aims at putting in place in each Member State preventive procedures to help debtors avoid insolvency. However, if restructuring efforts fail and the debtor becomes insolvent under national law, Directive 2008/94 will apply accordingly.

Under the proposal, workers' outstanding claims as defined in Directive 2008/94/EC should be in principle exempted from a stay of enforcement actions, which would lead to a temporary suspension of workers' ability to enforce such claims, irrespective of whether they have arisen before or after the stay is granted. A stay in relation to such claims should be permissible only for the amounts and for the period that Member States guarantee the payment of such claims by other means.

Directive 2001/23/EC aims at safeguarding workers' rights in the case of transfers of undertakings. Under the proposal restructuring may entail the transfer of part of an undertaking or business. In such cases, Directive 2001/23/EC and the level of protection for workers it guarantees will fully apply and will not be affected by this proposal. Where a restructuring entails a transfer of part of an undertaking or business, workers' rights should be safeguarded in accordance with Directive 2001/23/EC, without prejudice to the possibilities allowed by Article 5(2) of that Directive. Article 5(2) of Directive 2001/23/EC provides that, where proceedings are under the supervision of a competent public authority, the transferee can be relieved of previous liabilities if workers receive a compensation at least equivalent to the one they would receive from the existing guarantee fund for workers. In addition, working conditions can be altered in agreement with workers.

Directive 2002/14/EC establishes a right to constant information and consultation of workers' representatives in the company, including on decisions likely to lead to substantial changes in work organisation or in contractual relations. Such consultation shall take place with a view to reaching an agreement on such decisions. The proposal will not affect the rights guaranteed by Directive 2002/14/EC. Moreover, in addition and without prejudice to the workers' rights to consultation and information under Directive 2002/14, the proposal will give affected workers the right to vote on a restructuring plan. For the purposes of voting on a restructuring plan, Member States may decide to place workers in a class separate from other classes of creditors.


Directive 2012/30/EU on company law

Articles 19 (1), 29, 34, 35, 40(1)(b), 41(1) and 42 of Directive 2012/30/EU 45 provide for the necessity of convening a shareholders' general meeting. If capital is increased by consideration in cash, Article 33 of the Directive establishes a pre-emptive right of shareholders to the new shares. Both the requirements for a shareholders' general meeting and the pre-emption rights could jeopardise the effectiveness of the restructuring plan's adoption and implementation. The proposal requires Member States to derogate from those company law provisions to the extent and for the period necessary to ensure that shareholders do not frustrate restructuring efforts by abusing their rights under Directive 2012/30/EU. However, Member States do not have to derogate from company law rules if they can ensure that the above-mentioned company law requirements cannot jeopardise the effectiveness of the restructuring process or if Member States have other, equally effective tools ensuring that shareholders do not unreasonably prevent the adoption or implementation of a restructuring plan which would restore the viability of the business.


State aid rules

The proposal will not affect state aid rules. State creditors do not give away their claims and therefore cannot be considered as giving incompatible state aid to debtors by merely participating in a restructuring plan provided that the restructuring measures affect state creditors in the same way as private creditors, and that they behave like private operators in a market economy placed in the most comparable situation. This proposal is also without prejudice to the rules on full recovery of unlawful state aid, as affirmed in Case C-454/09 New Interline (paragraph 36) and Case C-610/10 Magefesa (paragraph 104).

Consistency with other Union policies

One of the measures announced in the Capital Markets Union Action Plan 46 of 30 September 2015 was that the Commission will produce a legislative initiative on business insolvency, including early restructuring and second chance, drawing on the experience of the 2014 Recommendation. The initiative would build on national systems that work well.

Also the Single Market Strategy 47 announced that the Commission would support bona fide entrepreneurs and propose legislation to ensure that Member States provide a regulatory environment that can accommodate failure without dissuading entrepreneurs from trying new ideas.

The economic significance of well-functioning insolvency frameworks is particularly relevant in the financial sector when dealing with high levels of private debt and non-performing loans, which is the case in some Member States. The European Central Bank’s 2015 comprehensive assessment identified EUR 980 billion in non-performing exposures in the banking system 48 . Such loans weigh heavily on banks’ capacity to finance the real economy in several Member States. Banks are the principal source of credit to businesses and households and therefore particularly sensitive to inefficiencies in insolvency frameworks. Good insolvency frameworks could help to address the problems, but cannot in themselves address all the challenges banks face in managing impaired balance sheets. Dealing with the problems of debt overhang and non-performing loans requires additional policies and general conditions. Good insolvency frameworks on paper do not deliver satisfactory outcomes without also having adequate judicial infrastructure or appropriate tax policies to ensure financial stability. Moreover, specific policies may be needed to reduce debt-overhang. For creditors, such measures relate in particular to the valuation of assets, the resolution targets set by the supervisor and the tax treatment of write-offs. For debtors, the availability of social safety nets would reduce the impact of more decisive resolution and recovery strategies considered necessary by creditors.

The proposal will help prevent accumulation of non-performing loans. Crucial complementary elements in this context are firstly to allow companies to restructure more easily and thus get back to financial viability faster and honour their debts and, secondly, to make sure that banks can recover assets where debtors have no prospect of return to viability.

A successful restructuring plan will turn non-performing loans into loans a company can actually pay back. In liquidation, secured creditors have to consider the possibility of substantial reduction in the value of their claims. In restructuring, on the other hand, insolvency is avoided, contract debts are in general paid, and negotiations concern in most cases only the financial debt. Data shows that the highest recovery rates for creditors are in economies where restructuring is the most common insolvency proceeding 49 and that 45 % of OECD economies use restructuring as the most common way to save viable firms. They also have an average recovery rate of 83 cents on the dollar, versus 57 cents on the dollar in countries where liquidation is the prevalent outcome 50 . Another important factor to improve the overall recovery rates, and thus the residual value of potential non-performing loans, is the swift handling of restructuring and insolvency cases 51 .

The discharge of entrepreneurial, and possibly private, debt will also help to remove the loans that cannot be paid anyhow from credit institutions' balance sheets. The number of cases referred can also be reduced by developing successful arrangements for restructuring debt between debtors and creditors with limited or no intercession of judicial or administrative authorities or judicial procedures.

However, this proposal is not designed to and will not fully solve banks' loan enforcement problems, especially the effectiveness of enforcement, which constrains banks' financing of the real economy. As stated in the Commission Communication ‘Towards the Completion of the Banking Union’ of 24 November 2015 52 , the efficiency of both restructuring and insolvency proceedings needs to improve. The Commission also examined national insolvency frameworks as part of the European Semester – the EU’s economic governance framework. Lengthy, inefficient and costly insolvency proceedings in some Member States were found to be a contributing factor to insufficient post-crisis debt deleveraging in the private sector and exacerbating debt overhang. Efficient and transparent public administration and effective justice systems are necessary to support economic growth and deliver high quality services for firms and citizens, including as regards insolvency frameworks. In this view the Commission will continue to work with Member States in the context of the European Semester towards enhancing their judicial systems.

Due to the absence of commonly agreed data collection practices and low cross-country comparability of data itself it is not possible to have a complete picture of the situation in Member States especially as regards the impact on financial institutions. Therefore, as announced in its Communication on 'Capital Markets Union – Accelerating Reform', the Commission is conducting a benchmarking review of loan enforcement (including insolvency) regimes to establish a detailed and reliable picture of the banks' outcomes when faced with defaulting loans in terms of delays, costs and value-recovery. The review will assist Member States seeking to make their regimes more efficient and transparent. The Commission will therefore continue to look into issues not directly dealt with in this proposal.

Strengthening and convergence in the functioning of national frameworks for debt-restructuring, loan enforcement, insolvency and debt discharge will also contribute to the functioning of the single market, and in particular Capital Markets Union. Convergence in principles and confidence in the effective implementation of those principles in Member States will be crucial in creating the conditions for creditors to make loans to debtors in other Member States. Creditors will refrain from cross-border lending if they lack confidence in their ability to protect themselves in the event of non-payment and to recover value or collateral as necessary. By establishing common principles to support alignment of national restructuring and insolvency frameworks, this proposal makes a further contribution to debt restructuring.

Individual entrepreneurs' personal and business debts are often intertwined: entrepreneurs take personal loans to start and run their business, for example because they guarantee their business loan with their personal assets such as a car, while natural persons use consumer credits to buy assets for their professional activity. Under the proposal, both types of debt can be consolidated, where applicable, where incurred by individuals in their entrepreneurial activity.

At the same time, the proposal invites Member States to extend the application of the discharge principles also to natural persons who are not entrepreneurs, i.e. consumers. Many Member States in recent years have adopted or reformed national laws on consumer insolvency recognising the importance of enabling consumers to discharge of their debts and obtain a second chance. However, not all Member States have such laws and the discharge periods for over-indebted consumers remain very long. Helping consumers back into the economic spending cycle is an important part of good functioning markets and retail financial services. The Commission will continue to look into how Member States have reformed their national frameworks and monitor how they implement this specific second chance provision in the proposal, so as to review the situation of consumer over-indebtedness.


Legal basis

The proposal is based on Articles 53 and 114 of the Treaty on the Functioning of the European Union (TFEU).

The proposal sets out a comprehensive set of principles and, where necessary, targeted rules for an effective preventive restructuring framework and second chance. It also provides measures to make procedures more efficient, including formal insolvency (liquidation procedures), with the aim of reducing their length. An effective second chance would also imply limiting the length of disqualification orders issued for honest over-indebted entrepreneurs to enable them to take up and pursue an entrepreneurial activity after a reasonable period of time.

This proposal's objective is to remove obstacles to the exercise of fundamental freedoms, such as the free movement of capital and freedom of establishment, which result from differences between national laws and procedures on preventive restructuring, insolvency and second chance. In particular, the proposal will remove additional ex ante costs for investors when assessing the risks of debtors entering financial difficulties in one or more Member States and the ex post costs of restructuring companies that have establishments, creditors or assets in other Member States, typically when restructuring international groups of companies. The proposal will also remove the additional risk-assessment and cross-border enforcement costs for creditors of over-indebted entrepreneurs who relocate to another Member State in order to obtain a second chance in a much shorter period of time. It would also remove additional costs for entrepreneurs themselves who relocate to another Member State to obtain second chance.

The single market problems are not limited to purely cross-border situations. Even purely national insolvencies may have a domino effect on the functioning of the single market. Companies operating cross-border have in their supply chain some suppliers that may be purely domestic businesses. Where a supplier experiences financial difficulties and cannot be saved, this may have negative impacts, triggering the insolvency of the cross-border company.

An instrument limited to cross-border insolvencies only would not solve the single market problems, nor would it be feasible for investors to determine in advance the cross-border or domestic nature of debtor's future potential financial difficulties. The proposal goes beyond matters of judicial cooperation and establishes substantive minimum standards. For these reasons, it would not be appropriate to use Article 81 as a legal basis.

Several Members States took or have taken action independently and have recently enacted or started preparatory work to adopt new rules to improve the preventive restructuring and second chance framework. However, these national rules differ widely in content and, as a result, provide an uneven level of transparency and protection for investors. Investors may be obstructed from investing cross-border because the costs of doing so are much higher than they need to be. If the EU does not act, it is to be expected that other Member States reforming existing restructuring and second chance frameworks or introducing such frameworks for the first time will follow this divergent trend. This proposal is also designed to prevent such divergent legislative developments and consequent obstacles in the future.


Given the substantial divergences between national restructuring and second chance frameworks in the EU and the absence of convergent trends in the more recent legislative changes at national level, it is highly unlikely that Member States individually would be able to ensure the overall coherence of their legislation with other Member States' insolvency legislations.

On second chance, to assess the question of subsidiarity a distinction needs to be made between natural persons who are entrepreneurs and those who are consumers. Unlike entrepreneurs, who constantly search for any sources of investment (often cross-border), consumers tend to receive, at this stage, local financing (loans from local banks) 53 . Hence, the problem of consumers' over-indebtedness should be tackled first at national level. However, most recently in the replies to the Green Paper on retail financial services 54 , industry respondents often indicated diverging national consumer insolvency laws as a barrier to selling retail financial products cross-border. Member States may therefore consider applying the same principles on discharge to all natural persons including consumers.

A well-functioning EU single market requires a coherent restructuring and second chance framework capable of addressing the cross-border dimension of firms, as interaction between companies located in different Member States has become increasingly common. EU action will therefore add value by facilitating cross-border investing in the EU, ensuring that viable businesses in financial difficulty, wherever they are located in the single market, will be able to benefit from a wider range of accessible tools to prevent their insolvency. At the same time, entrepreneurs will benefit from being able to use reasonable discharge periods in their Member States. This could not realistically be achieved by the Member States acting alone. In addition, ensuring that cross-border creditors and investors involved in such a restructuring process have at their disposal appropriate safeguards will have positive economic effects. The proposed rules will create legal certainty for creditors and investors who want to lend in other Member States; the necessary information will be available so that they can take informed decisions.

In conclusion, the proposal respects the principle of subsidiarity by proposing action only where and to the extent that the Member States cannot achieve the objectives by themselves.


The proposal is designed to respect the principle of proportionality. The means it uses will be tailored to achieve the objective of ensuring the proper functioning of the single market. The future EU instrument should set common objectives and general rules, while leaving freedom to Member States to determine how to achieve those objectives.

Choice of the instrument and degree of harmonisation

A binding instrument in the form of a Directive setting up a minimum harmonised framework appears necessary to achieve the policy objectives on restructuring, insolvency and second chance. The 2014 Commission Recommendation did not succeed in ensuring that Member States have a coherent and robust response to the problems it identified. Moreover, shortcomings in the functioning of the EU's single market due to lack of convergence of insolvency frameworks were further highlighted by the Commission in the Capital Markets Union Action Plan and the Single Market Strategy. A Directive would allow Member States to retain flexibility as to the most appropriate means to implement in their national context principles such as the availability of early warning tools or the duties of directors in the vicinity of insolvency. They could also set more detailed targeted rules needed to attain the proposal's objectives, such as maximum periods of stay of enforcement actions or majorities for adopting restructuring plans.

Restructuring, insolvency and second chance are highly regulated at national level and are linked to other areas of law such as company law, employment law, tax law and state aid law. Furthermore, restructuring, insolvency and second chance are treated differently in the Member States not only due to different historical and economic developments, but also due to different approaches to protecting social values, such as workers' rights or the right to property. Minimum standards are therefore the most appropriate means to ensure a coherent framework in all Member States while also enabling Member States to go beyond the Directive's provisions. For example, Member States may further encourage new and interim financing in restructuring procedures by giving it priority ranking above pre-restructuring claims in subsequent liquidation procedures. Member States may also enhance second chance frameworks by extending its personal scope to cover all natural persons, including consumers. Member States may also improve the treatment of workers when at the stage of adoption of restructuring plans, by requiring that workers are placed in a class of their own, separate from other creditors.


Ex-post evaluations/fitness checks of existing legislation

The proposal builds on the 2014 Recommendation on a new approach to business failure and insolvency 55 . A Commission evaluation concluded that the Recommendation has been only partially taken up by some Member States, including those that received insolvency-related recommendations under the European Semester. Even the Member States that implemented the Recommendation have done so in a selective manner, so significant differences remain. 56 Consequently, the Recommendation by itself was not sufficient to achieve the objectives of convergence and the reduction of inefficiencies for rules enabling early debt restructuring and a second chance.

Stakeholder consultations

The Commission conducted extensive consultation of stakeholders. An online public consultation from 23 March 2016 to 14 June 2016 received more than 260 contributions from 27 Member States (particularly Germany, followed by the United Kingdom, Belgium and Lithuania). Dedicated meetings were held with Member States governmental experts. An informal group composed of selected stakeholders with particular interest in issues of debt restructuring, insolvency and second chance was created and met three times in 2016. 57 Finally, a Conference on the convergence of insolvency frameworks within the European Union was organised under the Slovak Presidency on 11 July 2016.

Most Member States supported the objectives of the Commission to improve early restructuring and second chance frameworks, but insisted that harmonisation should remain mainly on the level of principles due to complex links with other areas of law such as company law. As to the stakeholders, business organisations, professionals' associations, financial institutions, consumer organisations, Trade Unions and academics were in general supportive of minimum harmonised rules on early restructuring and a second chance approach and welcomed the idea of an efficient and (cost)-effective EU insolvency framework for saving viable businesses. They also stressed that a balanced approach should be envisaged, safeguarding the interests of all stakeholders and preventing moral hazard. The banking sector and some other stakeholders were of the view that EU rules on consumer discharge, if considered, should be covered in a separate instrument. The European Parliament supported harmonisation of certain aspects of restructuring and put emphasis on ensuring a second chance to all natural persons.

Collection and use of expertise

The expert group on restructuring and insolvency law held six expert group meetings between January and July 2016. A comprehensive comparative legal study on substantive insolvency laws in all Member States was carried out to identify all areas where differences in national laws might raise obstacles to the single market 58 . An economic study on the impact of minimum standards in restructuring, insolvency and second chance was also carried out 59 .

Impact assessment

The following high level options were considered:


Option 1: Maintaining the status quo (baseline scenario)

Option 2: Setting up a fully harmonised preventive restructuring procedure and a second chance framework

Option 3: Introducing an alternative, optional EU restructuring and second chance regime

Option 4: Setting up a harmonised minimum legal framework in the area of restructuring and second chance for entrepreneurs

The selected option under the impact assessment was to set up a harmonised minimum legal framework for restructuring and second chance for entrepreneurs, with a non-binding provision on second chance for consumers, and to make procedures more efficient. The preferred option offers the following benefits:

(i) efficient possibilities for early restructuring;

(ii) improving chances of negotiation by allowing the debtor ‘breathing space’ via a stay of enforcement actions (moratorium);

(iii) facilitating continuation of a debtor’s business while restructuring;

(iv) preventing dissenting minority creditors and shareholders from jeopardising the restructuring effort, while safeguarding their interests;

(v) increasing restructuring plans’ chances of success;

(vi) reducing costs and length of restructuring procedures;

(vii) enabling discharge for over-indebted entrepreneurs in a reasonable time (3 years);

(viii) increasing the effectiveness of restructuring, insolvency and second chance.

The preferred option will help reduce barriers to cross-border investment. It would result in more viable business being rescued than at present since minority creditors will not be able to destabilise the negotiation process in the hope of extracting some commercial advantage, e.g. by forcing an early recovery of their debt. Efficient preventive procedures can contribute to limiting the occurrence of non-performing loans in cyclical downturns while ensuring a high recovery rate on loans whose value is impaired. The preferred option should lead to increases in recovery rates which, in turn, lead to lower borrowing costs. The preferred option will reduce the costs of and increase the opportunities for natural persons (entrepreneurs) to have a fresh start. The cost of assessing investment risks ex ante will fall and recovery rates in insolvency proceedings will improve. The greater the alignment of restructuring regimes, the lower the cost of legal advice currently used to avoid application of multiple national restructuring and insolvency frameworks.

The preferred option will also increase self-employment, since reducing discharge periods increases the rate of self-employment. The preferred option will also favour consumption and growth.

The preferred option will mean that some Member States incur costs when amending their restructuring and second chance frameworks. Some Member States will need to put in place a preventive procedure or adapt a procedure already notified under Annex A of the Insolvency Regulation. Some changes to company law may be needed to implement the provisions on shareholders' position in restructuring.

Regulatory fitness and simplification

The preferred option will reduce barriers for providing cross-border credit to SMEs: efficient restructuring would enable SMEs who are creditors to recover more than they would if the debtor entered insolvency. This is because creditors’ recovery rates are generally higher where the insolvency and restructuring framework allows for early and efficient restructuring of viable firms and quick resolution of non-viable firms. As debtors, SMEs will have access to early warning tools which should lead to more restructurings being filed early. SMEs in particular will also benefit from model restructuring plans developed nationally as they would make it easier for debtors to draft restructuring plans with the appropriate disclosures. By promoting a more flexible restructuring framework and better conditions for fresh start upon failure, the death rate of companies can be reduced, as well as the negative knock-on effects of related insolvencies in the supply chain. Easier discharge conditions for entrepreneurs also contribute to higher birth rates for companies.

Raising the efficiency of restructuring, insolvency and discharge procedures and in particular the digitisation of all insolvency procedures will help reduce the length of procedures and increase their efficiency, which would translate to lower costs of restructuring and higher recovery rates for creditors.

Fundamental rights

Freedom to conduct a business and the right to engage in gainful employment (Articles 16 and 15 of the Charter of Fundamental Rights): these rights are guaranteed. Debtors in financial difficulties can continue operating during restructuring negotiations and have full or at least partial control of their assets and affairs. Over-indebted entrepreneurs would be able to have a second start after a full discharge of debt.

Right to property and the right to an effective remedy and to a fair trial (Articles 17 and 47 of the Charter): although certain parts of the procedure may affect these rights, they are necessary and proportionate in order to facilitate speedy implementation of restructuring plans capable of restoring debtors to viability. Appropriate safeguards have been included in each case to ensure that the parties’ legitimate interests are protected against abuse.

Workers’ right to information and consultation (Article 27 of the Charter): these will be affected positively by the proposed measures since the proposal is without prejudice to existing Union legislation in this area and provides, in addition, a right for affected workers to vote on restructuring plans.

Right of collective bargaining and action (Article 28 of the Charter): the proposal is without prejudice to the rights of workers and employers, or their respective organisations, to negotiate and conclude collective agreements at the appropriate levels and, in cases of conflicts of interest, to take collective action to defend their interests, including strike action in accordance with Union law and national laws and practices.


The proposal will not have implications for the EU budget. The costs of implementing and transposing the Directive will be fully covered by the Justice Programme's voted budget allocation. The cost of preparing an implementation report 5 years after the date of application of the Directive and every 7 years thereafter will be covered by the budget allocation of the instruments in the Justice and Consumers policy area for the years in question.


Implementation plans and monitoring, evaluation and reporting arrangements

The Commission will facilitate the Directive's implementation in the Member States by:

• providing transposition assistance;

• organising two transposition workshops and interim stock-taking exercises;

• organising bilateral meetings including on demand by Member States;

• providing Member States with templates for communicating national transposition measures.

Member States will also be invited to take certain implementation measures, such as indicating a dedicated contact point, notifying all national transposition measures and raising awareness.

To ensure monitoring and implementation of the rules, the proposal would require Member States to collect data based on a standard methodology, on indicators such as the number of filings for each type of procedure (restructuring, insolvency, second chance), length, outcome of procedures, administrative costs of procedures, recovery rates, and success of such procedures. Data will be broken down by size and type of debtors so that the effectiveness of Member States' procedures can be objectively assessed. Member States are required to transmit data to the Commission annually.

The Directive's operation will be first reviewed 5 years after its entry into application and every 7 years thereafter.

Detailed explanation of the specific provisions of the proposal

The Directive has three distinct main parts: preventive restructuring frameworks (Title II) and second chance for entrepreneurs (Title III) and measures to raise the efficiency of restructuring, insolvency and second chance (Title IV). Titles I, IV, V and VI are horizontal in scope.

Title I General provisions: contains provisions on the scope of application, both rationae materiae and rationae personae, several definitions and a provision on the availability of early warning tools for debtors, be they legal persons or natural persons engaged in a trade, business or professional activity (entrepreneurs).

Although the provisions in Title III are restricted to entrepreneurs, it is explicitly stated that Member States may extend those provisions to all natural persons to ensure consistent treatment of personal debt. Indeed, several Member States do not distinguish between personal debts incurred following a business activity and those incurred outside such activity. Nothing in this Directive suggests that such a distinction should be made or is appropriate. The Directive invites Member States to apply the same principles on second chance to all natural persons.

Title II Preventive restructuring frameworks: this puts in place common, core elements for preventive restructuring frameworks to give debtors in financial difficulty, be they legal or natural persons, effective access to procedures facilitating restructuring plans' early negotiation, adoption by creditors and possible confirmation by a judicial or administrative authority.

Article 4: preventive restructuring frameworks can consist of one or more procedures or measures provided that a debtor can combine all the elements listed in them in order to effectively negotiate and adopt a restructuring plan.

Article 5: the debtor should be left in possession of its assets and affairs. Mediators or supervisors (practitioners in the field of restructuring) may have a role, but such practitioners should not be appointed by a judicial or administrative authority in every case.

Article 6 and 7: allow negotiations to take place and to fend off hold-out creditors, the debtor should have access to a stay of individual enforcement actions. Concerns that creditors might be negatively affected by the stay are addressed by provisions on the duration of the stay, the conditions for its renewal and the conditions for lifting the stay. Workers' outstanding claims are exempted from the stay to the extent Member States do not provide for an appropriate protection by other means. The debtor should also not be under obligation or under threat of opening of other types of insolvency procedures, in particular liquidation procedures, for the period of the stay, so it can continue operating its business. It should also be able to count on the continued performance of contracts with suppliers and other creditors provided that it fulfils his obligations under such contracts.

Article 8: provides for minimum mandatory information to be included in restructuring plans. Member States may require additional mandatory information, provided this does not put a disproportionate burden on debtors. Member States should develop on-line restructuring plan models and practical information on how a plan proposer can use such models.

Article 9: provides for adoption of restructuring plans by affected creditors or classes of creditors. Where creditors with different interests are involved, they should also be treated in separate classes. As a minimum, secured creditors should always be treated separately from unsecured creditors. Member States may also provide that workers are treated in a class separate from other creditors.

Article 10: lists cases where a restructuring plan need confirmation from a judicial or administrative authority to make it binding and specifies the conditions for such confirmation.

Article 11: sets out the conditions to be fulfilled to ensure that a restructuring plan not supported by all classes of creditors is nevertheless confirmed by a judicial or administrative authority.

Article 12: lays down the principle that shareholders and other equity holders should not be allowed to obstruct the adoption of restructuring plans of a viable business, provided that their legitimate interests are protected.

Article 13: provides rules on valuation, on when and how it must be determined in order to ensure fair protection for dissenting parties.

Article 14: spells out the effects of restructuring plans on affected and non-affected parties.

Article 15: lays down minimum rules on appeals as safeguards for protecting the parties' legitimate interests, while also ensuring that such safeguards do not delay confirmation or implementation of restructuring plans.

Article 16 and 17: provide minimum protection for new financing necessary to implement a restructuring plan, for interim financing incurred to ensure a business's continuity during restructuring negotiations, and for other transactions concluded in close connection with a restructuring plan.

Article 18: contains an obligation for the Member States to impose specific duties on directors in the vicinity of insolvency which would incentivise them to pursue early restructuring when the business is viable.

Title III Second chance for entrepreneurs: puts in place minimum provisions on discharge of debt for over-indebted entrepreneurs as the basic conditions for ensuring entrepreneurs a second chance. Member States can go beyond this minimum protection, by allowing even more friendly treatment of entrepreneurs, e.g. through rules on access to finance for second starters.

Article 19: lays down the principle that over-indebted entrepreneurs should have effective access to full discharge without a minimum repayment amount or percentage of the debt.

Article 20: entrepreneurs should have the benefit of a full discharge of debts after maximum 3 years, without the need to reapply to a judicial or administrative authority. The starting point of the three-year period differs, depending on whether the entrepreneur makes payments to creditors under a repayment plan or the procedure consists only in a realisation of assets. Limitations to a short discharge period are included in Article 22.

Article 21: entrepreneurs disqualified on grounds linked to their over-indebtedness should also have the benefit of short disqualification orders to offer them an effective second chance. The limitations in Article 22 should apply.

Article 22: gives Member States a large margin of discretion when setting limitations to the provisions on access to discharge and on discharge periods, provided that such limitations are clearly specified and are necessary to protect a general interest.

Article 23: as personal debts of a professional and non-professional nature are often intertwined, Member States should try to consolidate, where applicable, the separate procedures to achieve effective access to second chance for entrepreneurs.

Title IV Measures to increase the efficiency of restructuring, insolvency and discharge procedures: applies not only to preventive restructuring and discharge procedures, but also to insolvency procedures.

Article 24: requires Member States to ensure that members of the judiciary and of other competent authorities are properly trained and specialised in restructuring, insolvency and second chance matters.

Article 25: requires Member States to encourage the initial and further training as well as the establishment of codes of conduct for practitioners dealing with restructuring, insolvency and second chance matters.

Article 26: contains minimum standards for appointing, supervising and remunerating practitioners in the field of restructuring, insolvency and second chance.

Article 27: provides for the use of electronic means of communication in the context of restructuring, insolvency and second chance.

Title V Monitoring of restructuring, insolvency and second chance: contains minimum rules on data collection by the Member States and on communication of such data to the Commission using a standardised data communication template;

Title VI Final provisions: rules on the Directive's relationship of the with other Union instruments, on reviewing the Directive's application, on adopting standard forms, on entry into force and entry into application.