New EU Restructuring Directive which enters into force on 16 July 2019 aims to further increase the efficiency of restructuring procedures
On 6 June 2019 the Council of the European Union (EU) adopted new Directive 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132. Officially the new Directive's legislative procedure was completed on 26 June 2019 following publication in the EU Official Journal.
The new Directive aims to:
- establish common principles for preventive restructuring mechanisms in each EU Member State, including Lithuania;
- enable viable enterprises and entrepreneurs in financial difficulty to access effective preventive restructuring frameworks that help them continue operating;
- give honest and insolvent or over-indebted entrepreneurs a second chance, allowing them to benefit from full discharge of debts after a reasonable period;
- increase the efficiency of restructuring and insolvency procedures, in particular by shortening them, thus increasing the ability to satisfy creditors' claims to a greater extent.
The new Directive sets minimum standards which Member States are required to implement by transposing the new Directive into national insolvency laws. The new Directive provides the following basic principles:
- debtors accessing preventive restructuring procedures remain totally, or at least partially, in control of their assets and the day-to-day operation of the business;
- in order to facilitate negotiations for approval of the restructuring plan, debtors may be given the opportunity to benefit from a stay of individual enforcement actions for four months, with a possibility to extend the initial stay up to 12 months. In this way the debtor may continue operating or at least preserve the value of its estate during negotiations;
- a restructuring plan not supported by the required majority in every voting class may, under certain conditions, become binding upon dissenting voting classes (a cross-class cram-down);
- financial assistance granted to the debtor prior to approval of the restructuring plan or during execution of the plan must be subject to appropriate safeguards;
- preventive restructuring procedures should not affect individual and collective workers' rights under EU and national labour law.
In the context of the new Directive, it is also important to mention that the Lithuanian Parliament has adopted and the President has signed the Law on Insolvency of Legal Entities, due to come into force next year. This law consolidates corporate restructuring and bankruptcy procedures, aims to increase the efficiency of insolvency proceedings and to enable viable businesses to continue operating. Note that this legislation includes several restructuring mechanisms that meet the requirements of the new Directive and which give priority to restructuring viable companies rather than liquidating them.
The new Directive enters into force on 16 July 2019 and its essential provisions must be implemented by Member States no later than 17 July 2021. However, in justified cases, Member States may ask the European Commission to extend the implementation period for an extra year.
Although the new Directive aims to harmonize the different regulation of restructuring procedures throughout the EU, a high degree of flexibility is allowed to Member States to transpose the new Directive into national law. This means that forum shopping will not be completely prevented in the future.
Moreover, each Member State will inevitably interpret and transpose the new Directive in a slightly different way. Nevertheless, the Commission's efforts to establish common EU principles for preventive restructuring mechanisms should be seen as a useful starting point for creating a viable business rescue culture in Europe. The purpose of this culture is to enable debtors to restructure effectively at an early stage in order to avoid insolvency and to increase the ability of creditors to satisfy their claims.
With offices in 10 countries and 100+ lawyers, bnt attorneys in CEE is one of leading business law firms in Central and Eastern Europe and the Baltic States. Experts from the firm‘s insolvency and corporate restructuring practice group advise creditors, debtors, insolvency administrators and other stakeholders in all matters of insolvency and restructuring. The firm‘s international practice group insolvency and restructuring is headed by Frank Heemann, who is also managing partner of the firm‘s Lithuanian office.