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Restructuring the European Business Enterprise: the European Commission’s Recommendation on a New Approach to Business Failure and Insolvency

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Abstract

Two events are currently changing the landscape for business restructurings in the European Union: the ‘Restructuring Recommendation’ (RR) of the European Commission, issued in 2014, and the 2015 recast of the European Insolvency Regulation (EIR). In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that the recast EIR and the RR do not dovetail perfectly—a restructuring proceeding as proposed by the RR would not necessarily be within the scope of the recast EIR; we also suggest that, in any case, the EIR is not optimally designed to facilitate restructurings, given its treatment of secured creditors. Regarding the regulatory approach pursued in the RR, the Commission rightly pushes towards harmonisation with respect to Member States’ restructuring regimes—regulatory competition is not a sensible regulatory alternative in this area. However, we criticise both the methodology and scope of the harmonisation proposal of the RR: sketchy minimum harmonisation of restructuring rules leaves huge potential for residual diversity in Member States’ restructuring laws, and the Commission’s narrow focus on restructuring proceedings ignores several aspects of the complicated interaction between the Member States’ formal insolvency laws and the restructuring mechanism proposed. Further, we disagree with the substantive recommendations for Member States’ restructuring laws suggested by the RR: they wrongly require financial difficulties or a likelihood of insolvency as an entry test for the recommended restructuring proceeding, and the process appears susceptible to abuse by sophisticated financial investors—it does not provide for the mandatory appointment of a supervisor and allows significant curtailments of creditor rights without sufficient safeguards in place. Instead, we propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency, provided that it is economically viable and that the filing is not abusive.

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Notes

  1. See Paulus (2013).

  2. Armour and Cumming (2008); Davydenko and Franks (2008); La Porta et al. (1997, 1998, 2002).

  3. Eidenmüller (1999), at pp. 319 et seq., 346 et seq.

  4. M. W. Buchenau, ‘Schefenacker trickst Insolvenzrecht aus’, Handelsblatt, 3 May 2007 (online). http://www.handelsblatt.com/unternehmen/industrie/umschuldung-zugestimmt-schefenacker-trickst-insolvenzrecht-aus/2803488.html. Accessed 19 August 2015.

  5. Magyar Telecom BV [2013] EWHC 3800 (Ch), [2014] B.C.C. 448.

  6. D. Fockenbrock, ‘Pleitefälle wandern nach London aus’, Handelsblatt, 27 June 2011 (online). http://www.handelsblatt.com/unternehmen/handel-dienstleister/insolvenzgeschaeft-pleitefaelle-wandern-nach-london-aus/4326762.html. Accessed 19 August 2015; see also Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] Bus. L.R. 1245.

  7. Re van Gansewinkel Groep BV [2015] EWHC 2151 (Ch).

  8. Eidenmüller et al. (2010), at p. 548 et seq.

  9. See the summary of restructuring and insolvency reforms in World Bank (2014) Business reforms for resolving insolvency (online). http://www.doingbusiness.org/reforms/overview/topic/resolving-insolvency. Accessed 18 August 2015.

  10. BGBl. 2011 I, p. 2582 et seq.; Bork (2012), Ch. 1 Part A, noting the financial crisis as a second driver of the reform.

  11. See text to n. 70 et seq. below.

  12. European Commission, Report from the Commission to the European Parliament, the Council, and the European Economic and Social Committee on the application of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, COM(2012) 743 final (12 December 2012); European Commission, Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings, COM(2012) 744 final (12 December 2012). On the proposal see, for example, Eidenmüller (2013a); Thole (2014).

  13. Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), OJ L141/19 (5 June 2015), Art. 92.

  14. As to the exceptional position of secured creditors in relation to assets situated outside the Member State in which the proceedings are opened, see n. 122 and text to n. 136 et seq. below.

  15. However, pre-insolvency proceedings will be covered by the EIR only if they ‘are based on laws relating to insolvency’ (Art. 1(1)). Hence, the English scheme of arrangement (SoA), which finds its legal basis in the Companies Act 2006 and has not been ‘designed exclusively for insolvency situations’ (Recital 16), will not be within the ambit of the EIR (see also Annex A, which is intended to be determinative of scope (Arts. 1(1) and 2(4), Recital 9) and in which the SoA is not listed). As a consequence, firms seeking to use the SoA will not be subject to the jurisdictional rules of the EIR, such that non-English firms will be able to use a SoA to restructure without moving their COMI to the UK (provided the domestic jurisdictional rules are satisfied). On the SoA as a cross-border restructuring tool see, for example, Eidenmüller and Frobenius (2011); Payne (2013). On the revised scope of the EIR, see Sect. 3 below.

  16. Note particularly new Arts. 36, 38, 42 and 43 of recast EIR 2015/848.

  17. INSOL Europe (2010) Harmonisation of insolvency law at EU level, European Parliament, Directorate General for Internal Policies, Policy Department C: Citizens’ Rights and Constitutional Affairs, Legal Affairs, PE 419.633, discussed in the text to n. 47 et seq. below; more recently, see European Commission Discussion Paper 004 by M Carpus Carcea, D Ciriaci, C Cuerpo, C Lorenzani and P Pontuch P (September 2015) The economic impact of rescue and recovery frameworks in the EU, measuring the efficiency of Member States’ restructuring frameworks using a new point-in-time index of formal (‘law on the books’) features.

  18. Bebchuk and Guzman (1999).

  19. See n. 15 above and text to n. 129 et seq. below. Moreover, even where the EIR does apply, some aspects of its design may introduce new frictions in cross-border restructurings, particularly in relation to the position of secured creditors: see text to n. 136 et seq. below.

  20. European Parliament Committee on Legal Affairs, Report with recommendations to the Commission on insolvency proceedings in the context of EU company law (A7-0355/2011, 17 October 2011), and related Resolution of the European Parliament of 15 November 2011 [2011/2006(INI)], discussed below in the text to n. 55 et seq.

  21. Resolution, ibid, Annex Part 1.

  22. European Commission, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: A new European approach to business failure and insolvency [COM(2012) 724, 12 December 2012], discussed below in the text to n. 62 et seq.

  23. European Commission, Impact Assessment accompanying the document Revision of Regulation (EC) No 1346/2000 on insolvency proceedings (Commission Staff Working Document), SWD(2012) 416 final, p. 44.

  24. European Commission, Recommendation of 12 March 2014 on a new approach to business failure and insolvency, C(2014) 1500 final. Recommendations are not binding on Member States: Art. 288 TFEU.

  25. Ibid, at No. 1. There is a second component of the Recommendation, not dealt with in this paper, concerning discharge periods for entrepreneurs in Member States’ bankruptcy laws.

  26. European Commission, Directorate-General Justice and Consumers, Evaluation of the implementation of the Recommendation of 12 March 2014 on a new approach to business failure and insolvency, 30 September 2015. Available at http://ec.europa.eu/justice/civil/commercial/insolvency/index_en.htm.

  27. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Action Plan on Building a Capital Markets Union, COM(2015) 468 (final), Brussels, 30 September 2015, at p. 25. It may be that other topics are also included in the scope of the proposal.

  28. As modelled (with reference to different debt capital structures) by Gertner and Scharfstein (1991).

  29. This may be so even where the procedure provides a mechanism for debt restructuring, if the procedure commences too late (with associated costs to investment opportunities), or is too slow or otherwise costly: see Gilson (1996).

  30. See n. 39 below.

  31. See Eidenmüller (2009b), at p. 23.

  32. Jostarndt (2007), at p. 81. Holdouts can also occur for other reasons, e.g., because the creditor would benefit from the debtor’s default: see Lipson (2011), Part III(B).

  33. Roe (1987), Section I(A) (in the context of US restrictions on the renegotiation of core bond terms), and more generally at p. 273; Lee (2007), at p. 668.

  34. Jostarndt (2007), at pp. 82–83; Chatterjee et al. (1996), at p. 13; Asquith et al. (1994), Part IV.

  35. Such a negotiation can be avoided by the transfer of the business to a newly incorporated entity, along with select (restructured) liabilities—see text to n. 177 below.

  36. Lee (2007), at p. 687.

  37. This is the English approach to class constitution in the scheme of arrangement procedure (see Payne (2014), at p. 45 et seq.); see also US Bankruptcy Code § 1122 and the German Insolvency Code § 222. On class constitution, see also Eidenmüller (2014b), § 222, notes 2 et seq.

  38. Judicial scrutiny will typically be necessary to secure compliance with constitutional and/or human rights law, since the effect of the sanctioning of the scheme is to bind dissenting parties to it, resulting in the alteration or extinguishment of rights that they previously enjoyed.

  39. Gilson (1996), at pp. 315–316. It may also be possible for some classes of creditors to commit themselves ex ante to a restructuring procedure set out in a contract, with the result that they can be bound by the agreement of a prescribed majority of the class without recourse to a state-supplied restructuring procedure and a court.

  40. Provision may also be made for binding shareholders to a plan that provides for the elimination or modification of their existing rights. Alternatively, the law may facilitate the transfer of assets along with select (restructured) liabilities to a newly incorporated vehicle, enabling shareholders to be left behind except to the extent they are given an interest in the new entity. See further below, text to n. 177.

  41. Ayotte and Skeel (2013), Part II.

  42. Lee (2007), at pp. 685–686. Of course, to the extent that investors anticipate and price in the risk of this, the outcome is not properly characterised as a transfer vis-à-vis those investors: Jenson and Meckling (1976), at p. 336.

  43. Paterson (2014), at p. 18.

  44. The control enjoyed by the new financier during the restructuring process may also lead to value-diminishing outcomes: Skeel (2004).

  45. Lee (2007), at pp. 687–688.

  46. For example, because the debtor is facing a liquidity crisis that renders prolonged informal negotiations impractical (for empirical evidence consistent with this, see Chatterjee et al. (1996)), or because the heterogeneity of creditor claims makes it difficult to reach private agreement ex post or to design a contractual restructuring procedure to facilitate this ex ante.

  47. INSOL Europe (2010), supra n. 17.

  48. Ibid, 1(I)(i).

  49. Particularly by whom they could be proposed: ibid 1(VI)(i).

  50. ‘In some jurisdictions the creditors are divided up into different classes, in others they are not’: ibid 1(VI)(ii).

  51. ‘The laws of the Member States also contain different rules on the standards applied by the courts when reviewing the plan and appeal possibilities’: ibid.

  52. Ibid, at p. 17.

  53. Ibid.

  54. Ibid, 2.1, and 1(VIII), (IX). Part 1 also identified some other areas where harmonisation was desirable in the longer term, including the rules governing the liability of directors of distressed companies (Pt 1(X), and see also Pt 3(iii)), the criteria for the opening of insolvency or reorganisation proceedings (Pt 1(I)), and the rules governing the filing and verification of claims for the purpose of facilitating a distribution in insolvency proceedings (Part 1(V)).

  55. European Parliament Committee on Legal Affairs, Report with recommendations to the Commission on insolvency proceedings in the context of EU company law (A7-0355/2011, 17 October 2011), Annex, Part 1.

  56. Resolution, supra n. 20, Recital I: ‘whereas the approach in relation to insolvency proceedings is now centred more on corporate rescue as an alternative to liquidation’.

  57. Ibid, Recital J: ‘whereas insolvency law should be a tool for the rescue of companies at Union level’.

  58. Ibid, Recital A.

  59. Ibid, Recital B: ‘whereas steps must be taken to prevent abuse, and any spread, of the phenomenon of forum shopping’.

  60. Ibid, 1.

  61. European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Single Market Act II: together for new growth, COM(2012) 573, 3 October 2012, Key Action 7 (at p. 11).

  62. European Commission, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: a new European approach to business failure and insolvency, COM(2012) 724, 12 December 2012.

  63. Ibid, at pp. 2–3.

  64. Ibid, Section 3.3.

  65. Ibid, Section 3.6.

  66. Ibid.

  67. 126 respondents answered ‘yes’, 39 ‘no’: European Commission, Consultation on a new European approach to business failure and insolvency (online), Q5. http://ec.europa.eu/yourvoice/ipm/forms/dispatch?userstate=DisplayPublishedResults&form=InsolvencyTwo. Accessed 21 August 2015. When asked which area of divergence was most problematic, the two most common answers were (a) ‘the required majorities for approving the plan/voting rules’ (24 of the 126 affirmative responses) and (b) ‘the criteria for approving the plan by the supervising court’ (19 of 126 affirmative responses).

  68. Communication, supra n. 62, at p. 2.

  69. Baird (1986), acknowledging, however, that there are cases where a transfer of crucial assets to a new entity is not feasible (see Sect. 4.3.1 below).

  70. As modelled by Shleifer and Vishny (1992) focusing on industry distress; see also Gertner and Scharfstein (1991), at p. 1216 (‘[I]f the market for the sale of distressed firms is thin and inefficient, the buyer will get some rents. This will inefficiently increase the firm’s ex ante cost of capital since neither original shareholders nor creditors receive these rents’). Some empirical evidence runs counter to this prediction: see Eckbo and Thorburn (2009).

  71. Text to n. 66 above; see also the European Commission, Impact Assessment accompanying the document Commission Recommendation on a new approach to business failure and insolvency (Commission Staff Working Document), SWD(2014) 61 final, at p. 2: ‘An effective insolvency law should be able to liquidate speedily and efficiently unviable firms and restructure viable ones’. A recent Commission discussion paper (see n. 17 above) indicates continuing use of this dichotomy.

  72. Consistent with this analysis, see Impact Assessment accompanying the Recommendation, ibid, at p. 24.

  73. Suarez and Sussman (2007), at p. 7 and Part 6 (modelling the weaknesses of this reform strategy in the long run). As alluded to by Suarez and Sussman, restructuring law reforms were made in a number of jurisdictions following the East Asian financial crisis (on which see also Claessens et al. (2001)). For earlier examples of restructuring reforms in times of crises, see Percerou and Nadelmann (1938), Part II.

  74. See also Impact Assessment accompanying the Recommendation, supra n. 71, at p. 2.

  75. This is consistent with Weatherill’s observations on trends in EU harmonisation more generally: ‘It is plain that harmonisation, conventionally understood as a process of generating common rules for a common market, increasingly exists with other “softer” forms of governance and a general willingness to tolerate, even extol, a higher degree of flexibility and diversity in coverage under the EU umbrella than would previously have been imagined to be feasible … This raises the possibility of an EC contribution to the regulation of a particular area that is pitched at a less dogmatic level than would be expected of traditional harmonisation’: Weatherill (2004), at p. 16.

  76. See Impact Assessment accompanying the Recommendation, supra n. 71, at p. 7: ‘As a general observation, the later a business initiates restructuring proceedings, the higher the costs of restructuring and the lower the management powers and the success rate’; see also Recital 16 of the Recommendation. As to the costs of financial distress, see n. 28 above.

  77. RR Recital 2. For jurisdictional examples, see Impact Assessment accompanying the Recommendation, supra n. 71, at pp. 11–12.

  78. The definition of ‘debtor’ in RR No. 5(a); see also RR No. 6(a) and Recital 16.

  79. Text to n. 43.

  80. RR Recital 16: ‘… in order to avoid any potential risks of the procedure being misused, the financial difficulties of the debtor must be likely to lead to insolvency’. The Impact Assessment accompanying the Recommendation, supra n. 71, at section 7.2.1, suggests that the Commission feared that relaxing this financial qualification would require increased judicial scrutiny to control abuse of the procedure, which would increase the direct costs of its use.

  81. For example, those whose continuing relationship with the debtor is considered essential to the preservation of its going-concern value, such that their claims will be met in full during the restructuring process. See Impact Assessment accompanying the Recommendation, supra n. 71, at p. 10, fn. 26, and p. 11.

  82. RR Recital 19.

  83. See also Recital 17, and Impact Assessment accompanying the Recommendation, supra n. 71, section 7.2.6, contemplating a preventative procedure in which the court ‘needs only be involved at 2 moments’: the imposition of a moratorium on enforcement action [principle (4)], and the sanctioning of a plan.

  84. Impact Assessment accompanying the Recommendation, supra n. 71, at pp. 14–15.

  85. Ibid, Section 7.2.3.

  86. Ibid, at p. 10.

  87. Ibid, at p. 33.

  88. Gertner and Scharfstein (1991), at p. 1210.

  89. Impact Assessment accompanying the Recommendation, supra n. 71, at p. 31.

  90. RR No. 16.

  91. As to the ambiguity in the word ‘affected’, see Sect. 4.3.3 below.

  92. Except for a recommendation that distance communication should be permissible wherever ‘the laws of the Member State require a formal voting process’: RR No. 19. The silence of the Recommendation on other aspects of the voting procedure appears to be a deliberate attempt to permit Member States to remove the need for formal meetings and otherwise reduce voting formalities: see Impact Assessment accompanying the Recommendation, supra n. 71, Section 7.2.4.

  93. See also Impact Assessment accompanying the Recommendation, supra n. 71, section 7.2.4.

  94. RR No. 21 makes clear that a plan that will ‘affect the interests of dissenting creditors’ (i.e., one for which unanimous consent has not been given by affected creditors) must be court sanctioned to become binding.

  95. RR No. 22(b) and RR No. 24, noting that an appeal should ‘not in principle suspend the implementation of the restructuring plan’. More generally, RR No. 22(a) recommends that courts be required to confirm that the plan has been ‘adopted in conditions which ensure the protection of the legitimate interests of creditors’.

  96. The Impact Assessment accompanying the Recommendation indicates that the Commission was anxious about the impact of recommending a super-priority rule on secured creditor rights: supra n. 71, Section 7.2.5.

  97. Report on the convention relating to bankruptcies, compositions and analogous procedures, by J Noel and J Lemontey (1970) Commission of the European Communities Working Document 16.775/XIV/70, at p. 8: ‘[In a “genuine and vast” internal market] the various components of assets and creditors of many enterprises will be more and more spread over different States … If some of them are not in a position to face up to their obligations, the effects of bankruptcy or similar measures pronounced against them will extend beyond the frontiers of a single State’. The Noel and Lemontey report accompanied the first in a series of draft bankruptcy conventions for the EEC, which eventually culminated in the negotiation of a 1995 convention that was subsequently enacted as European Insolvency Regulation 1346/2000: see the historical review in van Zwieten (2016).

  98. Westbrook (1991), at p. 460.

  99. Particularly foreign creditors whose claim is governed by a law other than the law of the forum, for the conflict of laws rules of many jurisdictions would recognise a compromise validly effected under the law of the liability: see, e.g., Fletcher (2005), section 2.7.

  100. This may also reduce the prospects of attracting new finance during restructuring negotiations: Westbrook (2005), at p. 505.

  101. Art. 4, subject to the exceptions and qualifications in Arts. 5–15 of EIR 1346/2000; Arts. 7–18 of recast EIR 2015/848. Note that these provisions are designed to regulate only the intra-EU effects of the Regulation: Virgos and Garcimartin (2004), at p. 91.

  102. Art. 16 of EIR 1346/2000, subject to the public policy exception in Art. 26; Arts. 19 and 33 of recast EIR 2015/848.

  103. Art. 17(1) of EIR 1346/2000; Art. 20(1) of recast EIR 2015/848.

  104. Art. 5 of EIR 1346/2000; Art. 8 of recast EIR 2015/848. See further below, text to n. 136 et seq.

  105. Except to the extent that rival (secondary) proceedings are opened.

  106. Under EIR 1346/2000 these proceedings were limited to winding-up proceedings (Art. 3(3)), but this restriction has been relaxed in the recast EIR.

  107. Defined to require more than the presence of assets: Art. 2(h) of EIR 1346/2000; Art. 2(10) of recast EIR 2015/848.

  108. Art. 3(2) of EIR 1346/2000 and recast EIR 2015/848.

  109. External Evaluation of Regulation No. 1346/2000 on insolvency proceedings (‘Heidelberg-Vienna Report’) (JUST/2011/JCIV/PR/0049/A4), presented by B. Hess, P. Oberhammer and T. Pfeiffer.

  110. Ibid, at p. 10.

  111. Apart from those proceedings listed in Art. 1(2).

  112. Viz. ‘Does the Regulation apply to a national insolvency procedure which is not listed in the Annexes, but which corresponds to the definition of Art. 1(1) EIR? Does the Regulation apply to national procedures which are listed in the Annex, but do not correspond to the definition of Art. 1(1) EIR?’: Heidelberg-Vienna Report, supra n. 109, at p. 11; see also p. 36. The same ambiguity afflicts the definition of ‘liquidator’ in Art. 2.

  113. That is, proceedings that do not necessarily encompass or affect the entire body of creditors: ibid, at p. 38.

  114. Ibid, at pp. 11 and 38.

  115. Although the Heidelberg-Vienna Report also found that some Member States had succeeded in having procedures added to Annex A that did not comply with the substantive definitions in Arts. 1-2: supra n. 109, at p. 40.

  116. Ibid, at pp. 38–40.

  117. Ibid, Sect. 2.2.2.1. For an analysis of whether and when pre-insolvency proceedings should receive universal recognition, see Eidenmüller (2016).

  118. In Art. 2(1) of recast EIR ‘collective proceedings’ are defined to mean proceedings which include all or a significant part of a debtor’s creditors, ‘provided that, in the latter case, the proceedings do not affect the claims of creditors which are not involved in them’.

  119. See also the definition of ‘insolvency proceedings’ in Art. 2(4) of recast EIR 2015/848.

  120. Impact Assessment accompanying the Recommendation, supra n. 71, section 2.5. For a critical analysis of the Commission’s approach see Eidenmüller (2016), at p. 145 et seq.

  121. Under the recast EIR it will also be possible for such proceedings to be commenced as secondary or territorial proceedings, thanks to the removal of the restriction that such proceedings be winding-up proceedings (see supra n. 106), but these are confined to local assets.

  122. The EIR (either in current or recast form) does not fully resolve the question of the ability of secured creditors to enforce against assets subject to security that are situated outside the Member State where the main proceedings are opened (see Art. 8 of recast EIR, which provides that the opening of proceedings under the EIR shall not affect the rights in rem of creditors in relation to assets located in the territory of another Member State at the time of opening, with the result that this is left to the applicable law to determine, likely to be the lex situs). At best, the EIR offers the possibility of secondary proceedings being opened in any place of establishment. This may enable a stay to be imposed in those jurisdictions where the law of the forum so provides: Recital 68 of recast EIR 2015/848.

  123. Impact Assessment accompanying the revision of the European Insolvency Regulation, supra n. 23, Section 3.2.1.

  124. Impact Assessment accompanying the Recommendation, supra n. 71, section 2.5.

  125. See Art. 45 of EIR 1346/2000.

  126. Mucciarelli (2015): ‘[U]nder the Insolvency Regulation Recast, Annexes can only be amended by ordinary legislative proceeding, which makes the system more rigid and not able to adapt to evolution of Member States’ laws promptly’, at p. 9.

  127. ‘[T]heir purpose shall be to avoid the debtor’s insolvency or the cessation of the debtor’s business activities’: Art. 1(1).

  128. RR No. 6(a) and Recital 1: text to n. 78 above.

  129. There is no solvency criterion associated with the use of the scheme of arrangement procedure (Payne (2014), at pp. 176–178). The procedure does not appear in Annex A of the recast EIR 2015/848. As to the use of schemes for debt restructuring, see also supra n. 15.

  130. Art. 2(1) of recast EIR 2015/848. Recital 14 indicates that where proceedings do not encompass all creditors, they should be ones aimed at the rescue of the debtor.

  131. Provided that the proceedings provide for suitable measures to protect the general body of creditors, and—where no agreement is reached between the debtor and its creditors—that the proceedings are preliminary to either the divestment of the debtor and appointment of an insolvency practitioner, or the control or supervision of assets and affairs by a court: Art. 1(1)(c). The other option in Art. 1, viz. proceedings in which the debtor is totally or partially divested and an insolvency practitioner appointed, will not be applicable to restructuring procedures of the kind contemplated by the Commission.

  132. Recital 10 suggests however that the requirement of court ‘control’ should be interpreted liberally, such that the mere possibility of court intervention in the debtor’s assets and affairs through the imposition of a stay or appointment of a supervisor may suffice.

  133. RR No. 20 and text to n. 91 above.

  134. One consequence of this approach will be that provisions of the EIR that assume general characteristics of the proceedings will have to be read down where the particular proceedings in issue do not exhibit these characteristics: thus, for example, the requirement that creditors return that which they have received by pursuing enforcement action in Member States other than that in which main proceedings are opened (Art. 20 of EIR 1346/2000; Art. 23 of recast EIR 2015/848) will presumably be interpreted in the context of quasi-collective restructuring proceedings to apply only to creditors intended to be affected by the proposed plan (see Veder and Oberhammer (2016) on Art. 23, and van Zwieten (2016) on Art. 1).

  135. Recital 12 of recast EIR 2015/848 (emphasis added); see also Recital 13, expressly excluding ‘confidential’ proceedings from the scope of the Regulation. As to a challenge to jurisdiction to open, see Art. 4.

  136. Art. 5 of EIR 1346/2000; Art. 8 of recast EIR 2015/848. These provisions are expressed to apply to all ‘insolvency proceedings’ opened under the EIR, but only main proceedings encompass assets situated outside the Member State where proceedings where opened.

  137. See the literature review in Wessels (2012), para. 10635.

  138. Moss et al. (2009), para. 6.138; Wessels (2012), para. 10658; see also the tentatively expressed view of the reporters in the Heidelberg-Vienna Report, supra n. 109, at pp. 282–283; cf. Pannen (2007), Art. 5 para. 28.

  139. As Moss et al. (2009), ibid, note at para. 6.56, Manfred Balz—who was the chairman of the working group that produced the 1995 convention on which the EIR 1346/2000 was based—wrote at the time of drafting that this provision was expected to prevent such secured creditors from being ‘impaired by a plan’: Balz (1996), at p. 509.

  140. The opening of secondary restructuring proceedings (under which a parallel, mutually dependent, restructuring plan is negotiated) is one possible solution, but this will involve significant direct costs and will in any case not be possible (wherever the parallel proceedings fall within the scope of the EIR) if the debtor does not have an establishment in the place where the assets are located. As Moss et al. (2009), note, ibid, at para. 6.138, a contractual solution to this problem might be negotiated ex ante between a class of secured creditors.

  141. See Moss et al. (2009), reasoning that the issue of anti-suit injunctions would be contrary to Art. 5 of EIR 1346/2000, para. 6.84; Virgos and Garcimartin (2004), at para. 162.

  142. Hayek (1968), at p. 119 et seq.

  143. Eidenmüller (2009a), at p. 6 et seq.

  144. See Bebchuk and Fried (1996).

  145. Eidenmüller (2009a), at p. 6 et seq.

  146. See Klausner (1995), p. 789 et seq.; Gomez and Ganuza (2011), at p. 281; Eidenmüller (2013b), at p. 70 et seq.; Engert (2013).

  147. Indeed, the new provisions on the relaxing of the COMI presumptions are explicitly designed to restrict debtors’ ability to forum-shift in the lead-up to the commencement of proceedings that fall within the scope of the EIR (Recital 31 and Art. 3(1) of recast EIR 2015/848), although the restriction is a limited one in that it remains open to debtors to prove that their COMI has been moved.

  148. However, it has already been mentioned that not all of the Member States’ pre-insolvency proceedings will, after the recast EIR has entered into force, be within the scope of the Regulation (see Sects. 1, 3). They must be based on a law relating to insolvency, and they must be included in Annex A. This is not the case, for example, with respect to an English SoA. Hence, regulatory competition as regards restructuring regimes will continue to be part of the regulatory landscape in Europe, albeit only to a limited extent.

  149. Text to n. 78 and Sect. 4.3.3 below.

  150. On the latter issue RR No. 17 only stipulates that creditors with different interests should be treated in separate classes and that, at a minimum, there should be separate classes for secured and unsecured creditors. As is well known, the rules on group formation are, in practice, very important and litigation-prone. Against this background, it is surprising how little normative guidance No. 17 provides.

  151. Text to n. 93 and Sect. 4.3.2(4) below.

  152. Section 2.3(4) above.

  153. Ibid, and Sect. 4.3.3 below.

  154. See Sect. 2.3(6) (the Commission’s Recommendation dealing only with the application of transaction avoidance law to new finance provided for in a plan), and Sect. 4.2 immediately below.

  155. RR No. 27 and Sect. 2.3(6) above..

  156. RR No. 12 and Sect. 2.3(4) above.

  157. Text to n. 47 et seq.

  158. Text to n. 64.

  159. Text to n. 69.

  160. Text to n. 69 et seq.

  161. This is the Suarez and Sussman (2007) argument against the introduction of corporate reorganisation procedures in crisis.

  162. See Eidenmüller (1999), at p. 31 et seq.; Eidenmüller (2010), at p. 650.

  163. Ibid (Reformperspektiven).

  164. Franken (2004).

  165. See Eidenmüller 1999, at p. 33; Bitter and Laspeyres (2010).

  166. Text to n. 69 et seq. above.

  167. Direct bankruptcy costs are the costs of conducting bankruptcy proceedings, such as fees of an insolvency administrator or court fees. Indirect bankruptcy costs comprise the loss of firm value because of its financial distress. These indirect costs are usually much higher than the direct costs. See Brealey et al. (2011), at p. 478 et seq.; Eidenmüller (1999), at p. 75 et seq.

  168. Baird and Rasmussen (2003); see also Eidenmüller (2011), at p. 19 et seq., with further references.

  169. Eidenmüller, ibid, at p. 21.

  170. In the US, a special commission of the American Bankruptcy Institute (ABI) recently reviewed the operation of Chapter 11 and suggested reforms, see http://commission.abi.org/.

  171. See Eidenmüller (2011), at p. 29 et seq.

  172. Eidenmüller (2014a), at p. 1201 et seq.

  173. Ayotte and Morrison (2009).

  174. This implies that there are no further requirements for the initiation of restructuring proceedings, such as, for example, that creditor interests are not negatively affected by the process. Creditor interests are safeguarded by the obligatory appointment of an examiner/supervisor, see in the text supra and infra.

  175. Assuming that a debt-to-equity swap can be forced upon the incumbent shareholders in the proceedings (see 4.3.2(4) below), it could be argued that this might reduce their incentives for an early filing. However, such swaps are relevant in restructuring practice primarily with respect to large (listed) public corporations and, regarding such firms, management typically has greater autonomy in conducting the firm’s affairs than in a small closely held corporation (see, for example, § 76 para. 1 of the German Stock Corporation Act). Moreover, the US restructuring practice under Chapter 11 does not suggest that filings are delayed because shareholders fear that they lose their equity stake in the process.

  176. This includes the difficult determination, to be made in the proceedings, of which creditors are above water/not out of the money.

  177. Paterson (2014), at p. 15.

  178. See Eidenmüller (2006), at p. 242 et seq.

  179. It is true that, quite often, creditors now have another form of exit through the distressed debt market (see Paterson (2014)). However, this exit route will not always be available, especially not with respect to SMEs.

  180. One can query whether cornerstone (1)(c) is necessary if there is no stay. Do we then need to worry about the abuse of the procedure by non-viable firms? The managers of this kind of firm do not appear to have much leverage if creditors are not stayed, and restructuring negotiations will presumably be short-lived if creditors simply decline to participate. However, even in the absence of a stay, initiating formal restructuring procedures will usually give firms some bargaining leverage, i.e., via mobilising public opinion to support ‘value destruction’ through layoffs, etc.

  181. A recent Commission discussion paper (European Commission Discussion Paper 004, supra n. 17) encouragingly suggests that the Commission may be moving away from imposing such a requirement. The Discussion Paper identifies twelve dimensions of the efficiency of restructuring frameworks, including the conditions for initiating the procedure. Its scoring system ranks jurisdictions with no solvency-related test for entry higher than jurisdictions that require proof of financial difficulties for entry: see Table 2.1.

  182. Text to nn. 125–126 above.

  183. The RR envisions a mediator as a person who assists the debtor and creditors in the negotiations on a restructuring plan (RR No. 9(a)), and a supervisor as a person who oversees the activity of the debtor and creditors and takes the necessary measures to safeguard the legitimate interests of one or more creditors or another interested party (RR No. 9(b)).

  184. A recent Commission discussion paper (European Commission Discussion Paper 004, supra n. 17) appears to take the same approach, favouring limiting court involvement to the appointment of an insolvency practitioner and confirmation of a plan: see Table 2.1.

  185. ‘More likely than not’ means a probability of greater than 0.5 in a scenario analysis.

  186. On these, see, for example, Tabb (1997), at p. 788 et seq.; Parzinger (2013), at p. 81 et seq.

  187. Supra n. 27.

  188. Current bankruptcy reforms in Italy relating primarily to non-performing loans have not been triggered by the RR, see ‘Beautifying bankruptcy’, The Economist, 4 July 2015, at pp. 62–63.

  189. See Sect. 1 of the Evaluation of the implementation of the Recommendation supra n. 26, noting that reforms in the Netherlands and Sweden may also be forthcoming.

  190. Section 4 of the Evaluation of the implementation of the Recommendation, ibid.

  191. Ibid.

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  1. University of Oxford, Oxford, UK

    Horst Eidenmüller & Kristin van Zwieten

  2. St Hugh’s College, Oxford, UK

    Horst Eidenmüller

  3. Harris Manchester College, Oxford, UK

    Kristin van Zwieten

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Eidenmüller, H., van Zwieten, K. Restructuring the European Business Enterprise: the European Commission’s Recommendation on a New Approach to Business Failure and Insolvency. Eur Bus Org Law Rev 16, 625–667 (2015). https://doi.org/10.1007/s40804-016-0042-2

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