EUROPEAN COMMISSION

Brussels, 7.12.2022

SWD(2022) 395 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the document

Proposal for a Directive of the European Parliament and of the Council

harmonising certain aspects of insolvency law

{COM(2022) 702 final} - {SEC(2022) 434 final} - {SWD(2022) 396 final}

Table of Contents

1.Introduction

1.1.Political context

1.2.Scope of the initiative

1.3.Key insolvency concepts

1.4.Economic context

1.5.Legal context

2.Problem definition

2.1.What are the problems?

2.2.What are the consequences?

2.3.What are the problem drivers?

2.4.How will the problem evolve?

3.Why should the EU act?

3.1.Legal basis

3.2.Subsidiarity: Necessity of EU action

3.3.Subsidiarity: Added value of EU action

4.Objectives: What is to be achieved?

4.1.General objectives

4.2.Specific objectives

5.What are the available policy options?

5.1.What is the baseline from which options are assessed?

5.2.Description of the policy options

5.3.Options discarded at an early stage

6.What are the impacts of the policy options?

6.1.Benefits and costs of a targeted regime

6.2.Benefits and costs of a comprehensive EU regime

7.How do the options compare?

7.1.Benefits and costs across the elements of insolvency regime

7.2.Quantification of effectiveness

7.3.Assessment of judicial efficiency and adjustment costs

7.4.Coherence with national and EU law

7.5.Synthesis

8.Preferred option

9.How will actual impacts be monitored and evaluated?

Annex 1: Procedural information

Annex 2: Stakeholder consultation

Appendix to Annex 2: Summary report – online public consultation

Annex 3: Who is affected and how?

Annex 4: Economic analysis

Annex 5: Detailed description of insolvency building blocks

Annex 6: Recent insolvency-related reforms in Member States

Annex 7: SME Test

10.List of references

Glossary

1.Introduction

1.1.Political context

It is a well-established view among stakeholders, researchers, international institutions and policy makers 1  that the significant differences in insolvency rules across Member States constitute an important barrier to cross-border investments and a key obstacle to further economic integration. 2 The European Central Bank (ECB) as well as the International Monetary Fund (IMF) recurrently flagged that tackling the divergence in national insolvency rules is key to achieving progress on the Capital Markets Union (CMU). The IMF “….identifies three key barriers to greater capital market integration in Europe: transparency, regulatory quality, and insolvency practices. 3 [..] As the EU seeks to build an integrated capital market, how best to regulate the sector and improve insolvency processes become key questions.” 4 According to the ECB “where insolvency and judicial frameworks are more efficient, risk-sharing through both capital and credit markets is higher [..] This empirical research finding shows that it is important to address the major shortcomings and divergence between insolvency frameworks which persist at the European level. This would require taking measures beyond the draft Directive on Insolvency, Restructuring and Second Chance”. 5  Furthermore, multiple think tanks and other international bodies concluded on the significance of divergences in insolvency rules as an obstacle to cross-border investment. 6

Regulators and market participants singled out differences in insolvency practices among the three most important barriers 7 to market integration in a survey carried out by the IMF (2019) on the benefits of the CMU and the obstacles towards its realisation. The empirical analysis undertaken by IMF identified that convergence in insolvency regimes would yield the largest contribution to three key metrics of financial integration: higher cross-border asset holdings, a reduction in cross-country differences in corporate funding costs and improved risk-sharing across the EU Member States. 8  Annex 4, Section 4 provides more details on the statistical analysis done by the IMF, ECB and academic researchers about the impact of more efficient and alligned insolvency rules on cross-border investment and risk sharing. 9

The Commission’s first Action Plan on building a CMU 10  in 2015 argued that “convergence of insolvency and restructuring proceedings would facilitate greater legal certainty for cross-border investors”. In 2015, the European Parliament adopted a resolution 11 where it called to ease cross-border investment and indicated that for the CMU to work smoothly, insolvency rules must be made to work better in a cross-border context. This led to the adoption of the Directive on Restructuring and Insolvency in 2019, which pursued targeted harmonization in the specific areas of pre-insolvency measures and debt-discharge procedures. Since it did not cover rules governing insolvency proceedings, the expert group 12  set up by the Commission and tasked with informing policy choices for the 2020 Capital Markets Union Action Plan 13  emphasised that progress towards the CMU, as the integrated market for capital, requires addressing further the inefficiency and divergence of insolvency regimes across Member States. 14 Similar recommendations were also put forward by a number of expert groups, organised by Member States and industry representatives. 15  

The CMU Action Plan from 2020 16 announced that the Commission would take a legislative or non-legislative initiative for minimum harmonisation or increased convergence in targeted areas of non-bank corporate insolvency law to make the outcomes of insolvency proceedings more predictable. 17 The Council Conclusions (ECOFIN) of 3 December 2020 on the Action Plan encouraged the Commission to deliver on this initiative. 18 In April 2021, Eurogroup concluded that national reforms of insolvency regimes shall progress in coherence with parallel work streams led by the EU institutions, which were undertaken in the CMU Action Plan. 19 The European Parliament reiterated again in 2020 that for the CMU to work smoothly, insolvency rules must be made to work better in a cross-border context. 20

1.2.Scope of the initiative

This initiative covers business non-bank insolvency procedures and does not include insolvency procedures for banks and consumers. The banks’ bankruptcy proceedings and recovery and resolution are governed respectively by the Winding up Directive and by the Bank Recovery and Resolution Directive 21 and Single Resolution Mechanism Regulation, 22 together with national liquidation law. Member States have national laws to deal with the bankruptcy of consumers, which are excluded from the scope of this initiative because of the limited cross-border dimension. Consumers do not typically raise funds from cross-border creditors and consumer bankruptcy procedures do not significantly contribute to the key objectives of the CMU.

The intiative aims at a targeted harmonisation of substantive insolvency rules. The initiative excludes policy intervention on preventive restructuring of corporations, as well as on other matters that are covered by the Directive on Restructuring and Insolvency (DRI) 23 . The intiative nonetheless includes the aspects of restructuring and reorganisation proceedings where relevant to debtors in insolvency. The scope of DRI carves out traditional insolvency law (with very minor exceptions), covering only situations of pre-insolvency and post-insolvency. The DRI deals with the debt discharge of failed entrepreneurs only to the extent it is relevant to answer the question on when and how an entrepreneur, who has become insolvent, can make a fresh start after insolvency proceedings. Section 1.4 clarifies the relationship between the DRI and this initiative.

1.3.Key insolvency concepts

Insolvency proceedings aim at ensuring the orderly winding down or restructuring of companies or enterpreneurs in financial and economic distress (i.e. that have been declared insolvent). 24 These are compulsory and collective procedures that take over the contractual enforcement of claims against the insolvent debtor, which would be otherwise exclusively left to the individually agreed enforcement mechanisms between a given counterpart and the debtor. This section provides a general overview of central concepts whereas Annex 5 describes the main features of insolvency systems in the EU Member States in detail.  25

The proceedings typically include tools that ensure a timely declaration of insolvency, so that it does not affect the possibility to either restore the going concern or to ensure a cost-effective liquidation, as well as tools to maximise the recovery value of the company’s assets being liquidated.

The main insolvency features relate to:

1.Governance of the proceedings;

2.Tools to recover asset values from the liquidated company;

3.Tools to distribute recovered values among creditors.

The governance of proceedings involves actions, such as defining when a business should be declared insolvent, and therefore should be subject to insolvency proceedings. It, for example, includes the obligation of directors to file for insolvency in due time before depleting the value of the company’s assets (e.g. to avoid the situation where directors make large pay-outs to themselves and other employees of the company). The governance of proceedings also cover the institutional aspect: notably, if the proceedings are run before a court or another competent authority, or if an insolvency practitioner is appointed to steer the procedure and administer the estate.

The insolvency regime may also include several tools to ensure proper identification of the debtor’s assets and recovery of their market value. These tools may include (i) transaction avoidance tools, i.e. actions to challenge past transactions that have been concluded to deprive creditors of the debtor’s assets; (ii) pre-pack liquidation, i.e. the possibility to conduct negotiations on the sale of the company or its parts as a going concern before insolvency filing with the deal finalised in insolvency, to avoid significant value destruction due to protracted insolvency proceedings, or (iii) access rights to asset registries, to ensure proper tracing of the company’s assets.

Finally, the value distribution tools of an insolvency regime include tools that govern the orderly allocation of the recovered value of the company’s assets among creditors. Such distribution tools may for example include a pre-determined creditors’ ranking that establishes the order of priority among various types of creditors, providing ex-ante clarity to creditors about their chances to recover value in case of insolvency and avoiding a lengthy case-by-case assessment based on court discretion in insolvency. Another tool is creditors’ committees that ensure that all represented creditors’ views are heard in insolvency, leading to a better coordination among creditors and more efficient decision making (lack of coordination among creditors often leads to disruption in insolvency cases).

A business is part of a complex web of relationships with suppliers, investors and creditors, employees, clients, public authorities (e.g. tax and social security authorities) etc. All of these groups are direct or indirect providers of financing and creditors of the business. The opening of insolvency proceedings directly affects the rights and positions of all these stakeholders. The rights of each type of creditor and some of their incentives differ in the event of an insolvency. Insolvency law is further strongly linked to questions of property law, labour law and freedom of economic activity.

From the perspective of the CMU, the outcome of insolvency proceedings and the allocated recovered value therein is of particular importance to the supply of capital and credit in the economy and particularly to providers of financing to companies. When deciding on their offers, providers of financing consider the future risk of the company becoming insolvent and the value of recovered assets for the price that they will charge for the capital offered to that company. Recovery values, recovery time and the judicial costs of insolvency proceedings are all affected by differences in national insolvency laws that ultimately influence this risk assessment and thus have bearing on the willingness to invest and provide financing across borders and on the terms of such financing.

Banks as the most common type of lenders to businesses often enjoy a senior creditor status and hence a privileged treatment in insolvency. Since the market share of other financial investors and inter-company loans has been increasing over the last years, the recovery value of the insolvent businesses’ assets in an insolvency case is critical not only for banks, but also for other providers of equity and debt financing. Furthermore, value recovery could also be relevant for other companies such as suppliers, including many SMEs, which often suffer (disproportionately more than larger companies) from their trade partner becoming insolvent (often leading to what is known the insolvency domino effect).

Finally, public authorities are creditors in insolvency cases because of due tax or social security contributions. Often tax claims enjoy a privileged treatment in creditors’ ranking. Furthermore, employees, who are in a vulnerable situation in insolvency as they may lose their jobs, enjoy special privileges in some systems in relation to due wage claims. 26  

The longer insolvency proceedings last, the bigger the adverse effects on the value that can be recovered in a liquidation (“melting ice cube” phenomenon). 27 Moreover, any judicial proceedings, including insolvency proceedings, are associated with costs. Complex judicial proceedings are associated with very high costs (including in particular the costs related to insolvency practitioners (IPs) who often have to be appointed in insolvency proceedings). For SMEs, the costs of proceedings can be so high, that very little or nothing is left for allocation to creditors after paying the costs. The impossibility to pay for the costs remains to be a major reason why in many cases proceedings are not even opened for SMEs, depriving them of orderly liquidation.

Figure 1 presents a visualisation of central decision points during the insolvency process.

Figure 1: A stylised perspective of the different steps in insolvency procedures and critical elements that determine their outcome

1.4.Economic context

Efficient and harmonised insolvency rules underpin the efficient allocation of capital, economic recovery from recessions and thus also economic growth. 28 In contrast, lengthy and inefficient insolvency procedures undermine economic growth by preventing capital reallocation from businesses with low profitability and high indebtness. Such businesses are investing less and are less likely to pursue innovative activity, which slows down the diffusion of technical progress and ultimately the growth potential. Capital allocation is impaired because economic resources locked in distressed entities (zombie companies) are not available for more productive uses. Banks’ exposure to bad loans impairs their capacity to provide credit to new business. 29  

Insolvency rules impact on economic activity not only if a company needs to wound down and the remainings of the estate be distributed to its creditors. The expected recovery value, time and costs have an impact much earlier by affecting to what extent and under which conditions companies can get access to funding they need for their operations and growth. As further detailed below, inefficient insolvency procedures and divergences in procedures across Member States discourage the supply of cross-border funding, as evidenced by a high home bias in portfolio investment and a low proportion of cross-border credit.

The number of corporate insolvencies in the EU is in the range of 120,000 to 150,000 per year. 30  Data shows a substantial decline in bankruptcy declarations in 2020, which is primarily due to the public support measures during the COVID-19 crisis. Many more businesses cease to exist in the EU each year, which suggests that a substantial number of businesses are wound down without recourse to public insolvency procedures. 31  The introduction of debt moratoria and other means helped companies and entrepreneurs overcome the Covid-19 induced economic downturn at the expense of increasing the debt level in the corporate sector and the creation of a larger number of businesses exposed to debt overhangs. 32 While many observers anticipated a pronounced increase in corporate bankruptcies, it has not yet materialised. 33 It is however not excluded that it may still occur in the future, especially since the energy price shock and supply chain bottlenecks have increased the likelihood of a severe slowdown of economic growth in the EU. Accordingly, the IMF cautioned in its assessment of the euro area’s economic recovery prospects that “Insufficient efforts to address labor market rigidities, debt overhang, and inefficient insolvency processes could impede efficient reallocation of resources, thus leading to significant labor market hysteresis, low productivity growth, and sizable economic scarring.”  34 Although the proposed changes to insolvency rules will not be in place to support adjustment to and recovery from the current economic shocks, the latest economic developments demonstrate the vulnerability of the EU economy to sizeable economic shocks and distress. If and when future shocks hit the EU economy, corporate adjustment and the winding-down of insolvent firms should imperatively take place under more efficient and better-aligned insolvency rules in the EU, which suggests a need to act as soon as possible.

There is currently no information about the share of insolvency cases in which cross-border creditors are involved, neither for intra-EU nor for creditors from third countries. However, the data on the share of cross-border exposure of the EU companies may be seen as proportionate to the (potential) share of cross-border bankruptcy cases. It can hence allow for an approximation. 35  This data suggests that a significant number of all insolvency proceedings in the EU - 10%-20% are likely to involve claims of cross-border creditors 36 . This number should, however, not be interpreted as implying a low importance of insolvency rules for cross-border investors: the current level of cross-border investment (which may be subject to potential cross-border insolvency proceedings) is impaired by the existing cross-border obstacles, including those on divergent and inefficient insolvency regimes. It is, thus, likely to underestimate the true level of importance of cross-border insolvency proceedings, once these obstacles are removed (including via this initiative). 37  More details on economic context are discussed in Annex 4, Section 1.

1.5.Legal context

1.5.1.The limited scope of prior EU action

The intiative covered by this impact assessment seeks to increase the convergence of substantive insolvency rules of the EU Member States. It is different in terms of its objective and scope from any existing EU law. This section sets out how the EU law developed in the areas of pre-insolvency (preventive restruturing), insolvency and post-insolvency (second chance) over the course of the last years and where the current intiative fits in this context.

The Union started to legislate in the area of insolvency about twenty years ago. In the beginning, the EU did not aim at creating the convergence between the domestic substantive insolvency frameworks. Rather it intended to ensure a smooth coordination and cooperation between the national regimes in cases of cross-border insolvency. The EU Insolvency Regulation (EIR, first adopted in 2000, recast in 2015) was adopted on the legal basis for judicial cooperation in civil and commercial matters (Article 81 TFEU). 38 The EIR introduced uniform rules on international jurisdiction and applicable law that – for cases of cross-border insolvency – determined in which Member State the insolvency proceedings have to be opened and which law is to be applied to the questions at hand. In parallel, there were uniform rules that ensured that the judgments taken by the courts having jurisdiction in these cases are recognized, and if needed, enforced in the territory of all Member States. The EIR has no impact on the content of national insolvency law. It determines the applicable law but does not prescribe any features or minimum standards for that law. Therefore, it does not address the divergences across the Member States’ insolvency laws (and the resulting problems and costs). 

The approach of judicial cooperation hence did not comprehensively address the issues that are relevant from the perspective of cross-border investment. Accordingly, the EIR only allowed cross-border investors to establish which law would be applicable in the event of an insolvency of a debtor, but it left unchanged substantial divergences in national insolvency rules. These differences continued to weigh on cross-border investors’ ability to anticipate the outcome for value recovery in case of insolvency in another Member State and hence impair cross-border investment and, more generally, capital market integration in the EU.

The first Action Plan on building a CMU 39  of 2015 led to the adoption of the Directive on Restructuring and Insolvency in 2019. The DRI pursued targeted harmonization in the specific areas of pre-insolvency measures and debt-discharge procedures but not in relation to the rules governing insolvency proceedings per se. It obliged Member States to introduce preventive restructuring procedures with certain minimum standards and to provide fair debt discharge for failed entrepreneurs 40 .

The preventive restructuring procedures are only available to debtors in financial distress before they become insolvent, (i.e. when there is only a likelihood of insolvency) and are based on the fact that there is a much greater chance to save ailing businesses when tools for restructuring their debts are accessible for them at a very early stage and before they become definitively illiquid. These rules do not bring about any harmonisation of the rules governing insolvency. The minimum standards on the second chance for failed entrepreneurs, set out in the DRI, do not address the way insolvency proceedings are conducted either. They rather relate to the discharge of debts for insolvent entrepreneurs as a consequence of insolvency and could be described as a regulation of post-insolvency effects. Nevertheless, the DRI includes a few cross-cutting rules that also affect insolvency matters to a very limited extent. These rules contain very general high-level principles concerning specific topics (the training of judges, some professional standards for insolvency practitioners and the means of communication in insolvency proceedings) which were so horizontal in nature that it would have been artificial to regulate them for pre-insolvency and post-insolvency proceedings but not for insolvency proceedings.

The initiative covered by this impact assessment does not seek to reopen the elements already covered by the DRI. Beyond these limited elements, the DRI does not harmonise any substantive insolvency law; its restructuring rules are expressly applicable only on the condition that the company in question is not yet insolvent. As a result, the substantive insolvency laws of Member States are currently not approximated at the EU level and as acknowledged by the EIR remain “widely differing”. 41  The limited scope of the DRI can be explained by the fact that pre-insolvency restructuring proceedings were considered important in order to create frameworks allowing to preserve value by avoiding insolvency proceedings where possible in a situation where such frameworks were previously entirely absent in many Member States. The relative novelty of such pre-insolvency proceedings to a considerable number of national legal orders made this an adequate topic for a first step of harmonising substantive law in the broader area of insolvency law because of the reduced number and sensitivity of clashes with the long-established principles under national law. This first step having been achieved, the initiative covered by this impact assessment aims at taking the next step by seeking the convergence of the rules governing insolvency where a debtor cannot be returned to viability in pre-insolvency restructuring but has to enter into insolvency proceedings.  

Figure 2 provides for a schematic representation of the coverage of the areas (pre-insolvency, insolvency, post-insolvency) and actors by the existing legal acts, as well as identifying the existing gap in EU law (substantive rules on insolvency proceedings).

Figure 2: Aspects and areas relevant to insolvency regulated and not yet regulated in EU law

1.5.2.The divergences between national laws on key features of insolvency law

There are important differences across Member States with respect to various aspects of substantive insolvency law. This section illustrates some of these differences across the relevant elements as a basis for the discussion of why they emerged as problem drivers in Section 2.3 of this impact assessment. More details on differences across Member States are provided in Annex 5.

Rules on transaction avoidance to protect the insolvency estate against undue transactions and thus ensuring the preservation of value for creditors exist in all EU Member States. Apart from few exceptions, they cover a broad range of reasons and recipients and define a maximum timeframe for the retrospective period for voidable transactions 42 . However, the features of national systems diverge considerably. In certain Member States, like France, Germany, Poland, Portugal and Sweden, all legal acts are subject to avoidance rules, regardless of whether they were performed by the debtor, the defendant or a third party, provided that they are detrimental to the general body of creditors. By constrast, in other Member States, like Czechia, Malta, the Netherlands, Slovenia and Spain, only transactions by the debtor that have disadvantaged the general body of creditors are covered. 43

Different EU regulations enable taking evidence and other asset tracing and recovery measures in civil or commercial matters across EU Member States 44 , although excluding the insolvency proceedings. The EIR does not specifically address the issue of asset tracing in the context of cross–border insolvency proceedings. It provides that the powers of insolvency practitioners are governed by the lex fori concursus 45 . Thus, the EU landscape is very fragmented in this respect and each Member State has its own rules and entrusts the insolvency practitioners with different powers in respect to the asset tracing. 46  

In relation to directors’ duties and liability in the vicinity of insolvency, only a duty to convene a meeting exists in EU company law (2017 Company Law Directive 47 ) but there is no obligation to take a decision on re-capitalizing or liquidating the company in difficulty. Member States take different strategies to protect creditors in the vicinity of insolvency by imposing varying duties on directors 48 . In a significant number of Member States 49 , directors must file insolvency proceedings within a certain period of time of their company becoming insolvent. The time in which filing must be done, however, varies widely across the EU (e.g., “immediately” in Germany, within one month in Belgium, within two months in Spain, no express time limit in some Member States). Some Member States make it clear that in the vicinity of insolvency, the focus of directors should shift to the creditors’ interest. 50 In Hungary, the change in duty involves the interests of creditors as a priority, and directors could be held liable for a form of wrongful trading. The German approach provides that the directors must call a meeting of shareholders in case of “serious loss of the subscribed capital” to take measures to safeguard both the interests of the company and its creditors. Some Member States (like Italy 51 ) require that, in case, of “serious loss of the subscribed capital”, the board shall call a meeting and have the company decide, upon losing half of its subscribed share capital, whether to recapitalise or wind down the company’s business and liquidate it 52 .

When an insolvent business has to be liquidated, creditors can usually achieve a greater recovery rate if the business or a part thereof is sold as a going concern, i.e. as an operating, value generating economic entity. 53 An effective form of a sale of the business as a going concern in insolvency proceedings is the “pre-packaged sale” or ‘pre-pack’, where a non-public negotiation phase between the debtor and some possible buyers precedes the formal opening of the insolvency proceedings. Whereas the liquidation of the debtor through a going concern sale is allowed in most of the insolvency laws of the Member States, pre-pack mechanisms exist only in a handful of Member States. Those that govern pre-packs, do it differently. For example, the sale of the entire assets of a debtor on a going concern basis is only possible outside of court in France, it requires court involvement in Belgium unless the pre-pack is organised as amicable settlement. Whereas pre-pack sales must achieve the continuation of the business in France, the German rules intend to liquidate the business.

With respect to opening of insolvency, there are typically two insolvency tests under national law that are used as insolvency triggers: the balance sheet test or the cash flow-based test. Different Member States use the general cessation of payments (cash-flow) test and the balance sheet test in different combinations to establish a commencement standard. Regardless of the causes that lead to insolvency, there is no unambiguous definition of “insolvency” across all Member States (numerically identifiable and therefore easily predictable or monitored) 54 . Hence, one can currently expect as much as 27 different answers under each Member State law or the question whether a business is (in)solvent, or likely to be insolvent that is whether or not it is making a profit sufficient to provide a return to the business owner while also meeting its commitments to business creditors or where it has sufficient cash resources to sustain itself through a period when it is not returning a profit. Moreover, in some Member States (e.g. the Netherlands) the court has relatively wide discretionary powers in assessing whether the debtor has ceased to pay its debts.

In most Member States, large companies and MSEs are treated alike and there are no special procedural alleviations to cater for the specific situation that micro- and small enterprises (MSEs) face when they are in financial distress. Small- and micro enterprises do not even have access to liquidation proceedings in a number of Member States, as in most cases such debtors have no or only very few assets left when becoming insolvent, which circumstance barres them from the opening of insolvency proceedings (i.e. Austria, Germany, Greece and Italy) or results in an immediate termination of insolvency proceedings (i.e. Belgium and Spain) 55 . Simplified liquidation procedures for MSEs are available only in Czechia, France, Greece, Lithuania, Romania and Slovakia. 56  

While some features of the ranking of claims of creditors are common to all Member States (e.g. the prioritization of secured over unsecured creditors), national systems are substantially divergent 57 . Almost all the Member States ensure a preferential treatment of secured credit 58 , but the position of secured creditors vis-à-vis other claims, specifically those relating to taxes and/or employee rights varies significantly. In the Netherlands – historically known to be a ‘creditor-friendly’ jurisdiction 59 – secured creditors are granted a strong position in respect of their claims as (in principle) these outrank other creditors (including those with a right of preference). 60 Only in specific exceptions may other claims take priority over secured claims. The most important example of this is the preference that is granted to the Dutch tax authorities for certain categories of tax debts over certain movable assets located on the premises of the debtor. 61 In turn, in France – a jurisdiction historically known for being debtor-friendly 62 – secured claims are (in principle) outranked by other claims. 63  In Spain claims concerning salaries, taxes and social security withholdings are granted (in said order) a status of ‘general privileged claims’ 64 , however, these are still outranked by ‘insolvency’ claims, and special privileged claims 65 (i.e., secured with in rem security over specific collateral (e.g., mortgage or pledge). On the other hand, in Germany certain categories of secured creditors do not fall within the ranking order since they shall benefit from an exclusive right over the economic value of the assets and, in practice, rank ahead all other creditors. Creditors entitled to separate satisfaction are completely excluded from the concept of insolvency creditors: they are granted a priority right of satisfaction and have the possibility to pursue their claims outside the rules of the relevant insolvency legislation 66 , i.e., in normal civil proceedings. In relation to specifically protected interests, Germany, for example, keeps workers in the same rank as all other unsecured creditors because its law and social safety net shelters workers from the consequences of their employers’ insolvency 67 . 68  

In the vast majority of jurisdictions a creditor committee may/must be appointed and its general role is to safeguard the interests of creditors. The amount of input that committees have in the administration of the insolvency, however, varies greatly. This difference affects the actual extent of creditor involvement in the proceedings. For example, while in some Member States they are merely carrying out an advisory role (e.g. in Denmark), in other Member States (e.g. in Greece) the functions of the committee are, principally, to support and supervise the insolvency practitioner (and even control the insolvency practitioner) and give consent for some actions to be taken by him/her. Similarly, in Austria for certain important transactions (e.g. sale of the business), the consent of the creditor committee is a precondition for their validity. In other Member States, such as Germany, for transactions of particular importance, such as entering into a loan contract with considerable burdens on the insolvency estate, the insolvency administrator needs the approval of the creditor meeting or of an appointed creditor committee. In Romania, the creditor committee can request the removal of the debtor’s right to manage its affairs.

2.Problem definition

2.1.What are the problems?

Insolvency rules are fragmented along the lines of national insolvency systems (see section 1.5). 69 They thus deliver different outcomes characterised by different degrees of efficiency across Member States in terms of the time it takes to liquidate a company and the value that can eventually be recovered (see Figure 3 ). This leads to a pronounced length of insolvency procedures, and a low average recovery value in liquidation cases (see Table 1). Differences in national regimes also create legal uncertainty as regards the outcomes of insolvency proceedings and lead to high information and learning costs for cross-border creditors. 

Low recovery values, long insolvency procedures, administrative costs of the procedures matter not only for the efficiency of a company’s liquidation. Even more important is that these three factors and the uncertainty surrounding them determine the magnitude of the risk premium that creditors factor in when they undertake an investment. A high risk premium increases the cost of capital for the corporation and, if the risk is particularly high, dissuades investors to provide credit and cross-border investors to consider investing abroad.

2.1.1.Costly and lengthy (national and cross-border) insolvency proceedings lead to low recovery values

If companies are liquidated, the recovery value is usually a low proportion of the initial investment. Whereas investors may be able to estimate the likelihood of insolvency, they face uncertainty about the consequences of an actual insolvency, which will depend to a considerable extent on the length and complexity of the individual case. Moreover, the predictability of outcome in insolvency cases and of recovery rates for cross-border creditors also depends on the level of discretion exercised by courts and IPs in insolvency cases. Insolvency laws do not offer adequate guidance on how the discretion should be exercised by courts (and insolvency practitioners).

Divergences in insolvency laws may increase uncertainty to such an extent that investors are not able to predict, quantify and manage the risks that affect their investment. This exposure to uncertainty will be mirrored in a higher risk premium demanded and in consequence higher funding costs for the corporate sector or even in greater reluctance to do business with foreign companies at all. Beyond the impact on risk premium, a lengthy insolvency proceeding reduces the present value of the expected investment returns, as the opportunity cost for creditors and investors of allocating these funds in other more profitable investments increases with passing time. Uncertainty about the possible value or time of recovery is an important factor for financial investors that need to generate returns or obtain additional refinancing if an investment is not redeemed in time to manage their liquidity needs.

A protracted time to recover some value may even lead to creditors becoming at risk of becoming insolvent themselves, leading to a possible cascade of defaults. This could be the case, especially for business partners that are not financial institutions, but rely on outstanding payments for the delivery of their products and services.

The scale of the problem is expected to be large: recovery values and recovery time determine recovery rates, which in turn determine the level of cross-border asset holdings 70 and risk sharing. 71 The insolvency experts interviewed in Deloitte/Grimaldi (2022) stated that they would expect sizeable gains in terms of lower costs and shorter duration of proceedings from the initiative subject to this impact assessment, pointing to considerable inefficiencies in the current insolvency regimes. Nevertheless, a comprehensive quantification of these inefficiences is not feasible due to a lack of data on recovery rates and on the degree to which they are influenced by the length and complexity of insolvency procedures. 72 Even many banks struggle to report recovery rates for non-performing loans despite credit provision being their daily business. 73   

Figure 3. Time and costs of insolvency proceedings and recovery rates

Source: World Bank Doing Business Report.

Despite considerable efforts to produce data on the outcome of insolvency proceedings, little data is available to date. 74  Annex 4, Section 2 explains the different data sources and their limitations. The analysis conducted in this impact assessment relies primarily on two sources: The World Bank Doing Business indicators 75  presented in the charts above and data from the benchmark study carried out by the European Banking Authority (EBA) in 2020. 76  The two sources, however, contain rather different data. In the World Bank exercise, insolvency experts are asked to assess the outcome of insolvency procedures based on a narrowly defined illustrative bankruptcy case 77 . In contrast, the EBA collected actual data from banks in the EU Member States on gross replacement rates, net replacement rates (i.e. after judicial costs), time for recovery and judicial costs. 78  

The World Bank Doing Business data yielded recovery rates in the case of liquidation in an EU Member State between 32 and 44 %, with an average for the Member States concerned of 38%. 79 The recovery rate in the five best performers outside the EU was 50 to 51%.

Data from the World Bank shows that the length of insolvency procedures and judicial costs in EU Member States tend to be higher than in other OECD countries (see chart above). National insolvency experts that provided estimates for benchmark scenario used for the World Bank Doing Business insolvency indicators pointed to a range of 1.5 to 3.5 years for the duration and judicial costs between 9 and 15% for EU Member States, which compares to 1.2 years and 5% costs for the fifth best performer in the panel of non-EU countries.

The EBA benchmarking exercise on national loan enforcement in insolvency (see Table 1 ) found that on average it takes 3.4 years and costs 1.4% of the recovery value to enforce corporate loans in the EU. Judicial costs for SMEs loans, however, are much larger in proportion, at 3.5% of the recovery value, while their time of enforcement is about the same as for corporate loans. The EBA benchmarking exercise also found that the simple average of recovery values of corporate loans in the EU is 40% of the amount outstanding at the time of the default and 34% for SMEs.

Table 1. EU-27 EBA benchmark exercise (2020)

Source: EBA. 1 gross, as a share of the notional amounts at time of default, 2 in years, from the start of the formal enforcement status to the date of ultimate recovery from the formal enforcement procedures.

The EBA benchmark exercise also revealed substantial variations across Member States, with the average recovery time ranging from 0.6 to 7 years and judicial costs ranging between 0 to above 10%.

The pronounced differences across EU Member States, documented in the EBA and World Bank data, suggest that procedures in some Member States suffer much more from delays and result in additional costs. Both data sources also show that enforcement regimes in some Member States yield considerably less efficient outcomes than the best performers in the EU. The World Bank data suggests that the average outcome for EU Member States is less efficient in terms of recovery values, time and judicial costs than in the best performers outside the EU. It is unlikely and no analysis exists that demonstrates that these differences could be entirely explained by debtor characteristics. 80

2.1.2.Low predictability of insolvency proceedings lead to high information costs and constitute barriers to cross-border investments

Differences in legal systems across Member States fragment the single market and increase transaction costs for cross-border business: 81 “disparate national law rules may lead to higher transaction costs, especially information and possible litigation costs for enterprises in general and SMEs and consumers in particular. Contractual parties could be forced to obtain information and legal advice on the interpretation and application of an unfamiliar foreign law.” 82 Already in the mid-1990s, “legal uncertainty was regarded by the European Commission as the main reason for the fact that the economic dynamics triggered by the process of European integration in the early nineties developed more slowly than expected and desired”. 83  Transaction costs are caused by “(a) costs of collecting information, (b) costs of legal disputes, (c) costs of setting incentives for pushing through legal claims, and (d) other transaction costs” and these “costs are higher in international transactions than in domestic trade”. 84

Legal uncertainty and associated transaction costs could also be expected specifically in the case of differences in insolvency regimes. The divergence of insolvency regimes across EU Member States 85  discourages cross-border investments through high information and learning costs and low predictability of outcome of recovery rates. Large divergences in time to recovery, judicial costs and recovery rates among Member States suggest that cross-border investors in the single market are at a higher risk of being unable to predict outcomes of insolvency proceedings if they allocate their investment portfolio across several/different Member States.

Information costs and low predictability of the investment outcome in insolvency and recovery rates play a key role for cross-border creditors, since they need to account for all possible scenarios and so the conditions and prospects for recovery of their investments in case of failure of the company they are invested in. This aspect is even more important for unsecured funding operations, which require significant knowledge of procedures and conditions affecting recovery rates in insolvency. The higher is this knowledge, the easier and more accurate will be the calculation of loss given default and probability of default and therewith the price discovery of financial assets, which is key to the orderly functioning of capital markets.

The more dissimilar the insolvency system abroad is from that in the home country, the less can domestic experiences and those made in other jurisdictions be used to assess the expected return on a cross-border investment if the debtor becomes insolvent. The consistent finding in empirical studies is that geographical distance and clusters of legal traditions 86 are important determinants of cross-border investments. This confirms the notion that familiarity matters, suggesting that the more similar the rules, the lower the threshold to engage and undertake the necessary due diligence. 87 Greater differences in substantive insolvency laws make it more costly to assess the risks of cross-border investments compared to those realised in a home Member State. High information barriers with respect to claim procedures increase the costs of legal advice. 88  

Recent studies presented empirical evidence that the outcome of insolvency proceedings and their respective design have a significant effect on the magnitude of cross-border investment across EU Member States. The effect is material even when using different data sources and specifications for measuring insolvency and cross-border investment. 89 The statistical support at macro level that convergence of insolvency regimes to best practices would foster capital market integration implies by inversion that inefficient and diverging insolvency regimes are an obstacle to cross-border investment. Due to the methodological difficulties of (objectively) measuring information and learning costs, the empirical research about the transmission channels is still scarce. 90  The effects of insolvency regimes on the magnitude of cross border investment should be overall comparable to those of other institutional determinants such as investor protection, accounting standards or corporate governance for which the empirical literature established a significant link to cross-border investment. 91  

While there is no data about the magnitude of information and learning costs that cross-border creditors face, these costs can be approximated through the substantial home bias in investment. Home bias describes the under-proportionate investment in cross-border equity and debt (and hence over-proportionate investment in home equity and debt). Home bias is evidenced in a large body of empirical research, and the literature attributes an important role of informational frictions and uncertainty avoidance in explaining it. 92  

2.1.3.Stakeholders’ perspectives

129 stakeholders submitted replies to the public consultation on this initiative, which is a sufficiently large number to derive quantitative results about their positions. 93 These results can, however, not be considered fully representative for the EU. Stakeholders from one large Member State are over-represented, while there were no submissions from some EU Member States. Like all public consultations, there is also a self-selection bias, implying that stakeholders for whom the issue is particular pertinent are overrepresented.

The replies to the public consultation on this initiative revealed that stakeholders find that the problem created for the internal market by differences in Member States’ insolvency frameworks is serious. 54% of the respondents who provided an answer to the question perceived the problem for the internal market stemming from the divergence in insolvency rules as important, attributing a score between 3 and 5 (with 0 meaning no problem and 5 meaning an extremely significant problem).

Figure 4: Number of responses in the public consultation – Do differences in corporate (non-bank) insolvency frameworks in EU Member States pose a problem for the functioning of the internal market?

Note: 0 means 'no problem' and 5 means 'extremely significant problems'

An especially large representation of German respondents (58 out of 129) created a geographical bias in the response rate. The responses revealed a geographical split across the Northern and Southern Member States. They also showed that researchers and the business sector see a higher need for policy measures than public authorities. The views and level of ambition of insolvency practitioners and legal experts differ depending on the issue. 94  

Note: Average rating on a 0-5 scale with 0 means 'no problem' and 5 means 'extremely significant problems'. Number of responses on the x-axis.

Source: European Commission.

When asked for the reasons, stakeholders indicated that differences in national insolvency frameworks deter cross-border investment/lending. In a follow-up workshop with selected stakeholders, these stakeholders reported on practical difficulties resulting from the fragmentation or different performance rates of the national insolvency frameworks. These stakeholders expressed strong support for greater convergence in insolvency rules in the EU. Annex 2 provide more details about stakeholders’ views.

2.2.What are the consequences?

The first consequence of lengthy, costly and very divergent insolvency proceedings is the impact on capital allocation, which is likely to be less efficient compared to the situation when insolvency regimes are more efficient and overall more similar across Member States. Creditors and investors anticipate the consequences of inefficient insolvency regimes in their decision to provide credit or to invest. 95 They will demand a higher risk premium or insist on other safeguards such as collateral, which increases capital costs for the corporates. 96  This higher risk can also discourage investors from undertaking the investment at all, limiting the supply of funding available to companies, leading to higher funding costs for corporations and, more broadly, to less efficient capital allocation in the EU economy. 

The design of insolvency systems therefore has consequences for the provision (supply) of credit, capital costs and the allocation of capital. The academic literature reviewed in Annex 4, Section 4 found empirical evidence of significant adverse effects of inefficiencies in insolvency regimes on cross-border capital flows, credit provision, funding cost and, ultimately, the adjustment capacity of the economy, with follow-on effects on the diffusion of technical progress and productivity growth. 97 Whereas the earlier economic research found that better insolvency regimes lead to more lending to the economy in cross-country comparisons, 98 newer studies point that positive effects of more efficient insolvency regimes are better visible in funding costs or non-price credit conditions in advanced economies. 99 Annex 4 gives more details of this literature.

Since they impair cross-border investment, both differences and inefficiencies in insolvency regimes fragment the single market for capital in the EU and deter the realisation of the CMU that seeks to build an integrated market for capital in the EU. Since market practitioners consider divergence of insolvency regimes a central obstacle to cross-border investment, absence of tangible progress in this policy field could jeopardise the credibility of the overall CMU project. The studies quoted in the introductory section provide evidence that more efficient (and more converging) insolvency regimes spur cross-border investment and macroeconomic risk sharing. 100  

Finally, differences and inefficiencies in insolvency regimes can also have an impact on business relocations. Business can relocate either to declare bankruptcy and avoid paying creditors (insolvency tourism), or to gain certain advantages that would allow them to benefit from the availability of more favourable insolvency laws. In practice, however, while the possibility for the company to migrate to a different and more favourable jurisdiction may be an option in theory, this may end up being costlier and more inefficient than staying in the debtor’s own jurisdiction. A recent study finds that relocation can only be an option for large companies. 101 In any event, the reduction or elimination of key differences between national insolvency laws and an enhanced degree of efficiency of insolvency regimes across the EU would remove incentives for relocations that are driven by the existing divergences.

2.3.What are the problem drivers?

The members of the expert group on insolvency, the stakeholders in the public consultation and the external contractor performing the economic study 102 in the preparation of this Report recognised the differences in certain targeted aspects of insolvency rules as drivers of the problems identified above. Insolvency tools available in these areas appear to be very different across Member States (See also Section 1.4. of this impact assessment). For several of these elements, rules are missing completely in some Member States’ insolvency regimes; where they exist, their design may deliver suboptimal outcomes, at least in some of the Member States. They are grouped below according to the role they primarily play in triggering various problems. 103  One driver might lead to several problems. Similarly, several drivers might contribute to the same problem and reinforce it.

2.3.1.Inadequately designed (or missing) features and large cross-border divergences on asset recovery proceedings

Some of the components of insolvency regimes help recover as much capital as possible from the insolvent company. If they are missing or not well designed, there is scope for moral hazard because the owner, debtor or director of a company may face an incentive to procrastinate on filing for insolvency (“gamble for resurrection”) or to use their better knowledge of the company to redirect resources away from the estate, thereby leading to a lower value that can be distributed to creditors. Detecting whether transactions have been initiated for this purpose or whether assets are placed in hidden places allows increasing the recovery value.

Without suitable measures that govern transaction avoidance, it is difficult to claw back assets that were alienated in the vicinity of insolvency, for example transactions to benefit owners or transactions at unjustified prices. Member States have currently very different rules to govern transaction avoidance aimed at the rescission of, or the compensation for, transactions that are detrimental to creditors and had been performed prior to the opening of insolvency proceedings. Divergences among Member States go across all the key elements of transaction avoidance, such as the suspect periods, the legal acts concerned, the limitation period and so on (Grimaldi and Deloitte 2022). For example, only transactions of the debtor are considered in some Member States (Czechia, Spain, Malta, the Netherelands, Slovenia), whereas all legal acts performed by the debtor, the defendant or a third party that are detrimental to the general body of creditors are subject to avoidance actions in others (Germany, France, Poland, Portugal, Sweden). There are also divergences in the suspected periods and in the limitation periods across Member States. Such differences lead to information and learning costs in particular for cross-border investors and makes cross-border investments, especially in companies in financial difficulties, more costly. 104  

Consultations with stakeholders (see Annex 2) revealed problems related to asset tracing, especially where the asset is situated in another Member State than the one where the proceedings have been opened. Each Member State has its own rules and entrust the insolvency practitioners with different powers in respect of asset tracing. This implies that powers of insolvency practitioners may not include coercive measures if they are not provided by the applicable law, unless ordered by a court of the specific Member State or the right to rule on legal proceedings or disputes. Missing or cumbersome possibilities of asset tracing impair the capacity of courts, insolvency practitioners or other parties with a legitimate interest to determine and locate the assets, examine the revenue generated by often fraudulent activity, and follow its trail. As a “follow the money” tool, asset tracing is of particular significance in an insolvency context, as debtors have an incentive to remove assets from the insolvency estate.

Directors and managers’ have a key role in the vicinity of insolvency. It is detrimental to the recovery value if rules are absent or ineffective that govern (i) when directors have to file for insolvency, (ii) whether their goal should shift to the creditors’ interest, or (iii) whether they are liable if it is found that they acted, prior to the advent of formal insolvency proceedings, with intent to defraud creditors. Procrastination in the start of the process, including of attempts to engineer restructuring solutions early on, however, tend to reduce the recovery value. 105 Duties (and potential liability) for directors are very differently defined across the EU. In some Member States there is not even such a duty, while in others there is a duty to file within a very short timeframe or more generically in a ‘timely manner’. As illustrated in Annex 5 Section 2.3, the time in which filing must be done varies widely across the EU and directors have different obligations vis-à-vis shareholders.

This divergent landscape generates additional costs, uncertainty and, hence, obstacles for investors that operate cross-border. This can be further complicated by the fact that investors can also hold directors’ positions in various companies and face different obligations in companies in different Member States. This is particularly the case, in both large and small innovative companies, for very active investors with large stakes that want to be more engaged with the governance of their (invested) companies.

Recovery values are low and could be different across Member States, everything else being equal, also because pre-pack sales are not available in Member States. At present, many Member States either do not have pre-pack procedures or have very different rules regulating them. Some of those Member States that have rules on pre-packs are among those with the highest recovery rates (Denmark, Netherlands and Sweden). 106

2.3.2.Inadequately designed (or missing) features and large cross-border divergences in the governance of insolvency proceedings

Procedural efficiency is determined by the capacity of public actors such as courts and insolvency practitioners to deal with the liquidation of a company.

Without the involvement of public actors in insolvency proceedings, the possibility of creditor runs leads to a market failure, i.e. creditors who claim first will be served first and those that claim last will receive only what is left. 107 A market failure occurs since this can lead to companies being liquidated prematurely. Since it is not rare that companies face liquidity shortages and payment difficulties, there is a risk that creditor runs lead to the liquidation of viable companies that face temporary difficulties.

The absence of lighter procedures for micro and small companies (MSEs) contributes to the workload of courts and insolvency practitioners. MSEs are often not wound down properly 108 but remain in limbo. Incentives to close their cases are distorted because the costs of proceedings can easily exceed the value of the estate. For MSEs, in particular, traditional long and complex liquidation procedures easily cost more money than what they are able to generate in proceeds for creditors. To allow an orderly liquidation of MSEs, some Member States already have a lighter regime, which may even avoid the launch of standard proceedings if resources are structurally limited (size of the firm). However, the picture is rather patchy across the EU and the conditions and the definitions of eligible MSEs vary considerably. 109 While France and Greece introduced simplified rules for MSEs recently, 110 MSEs for example in Austria, Germany and Italy will find their application for opening insolvency proceedings rejected if their remaining asset value is too low to cover the expenses of that insolvency proceeding.

Companies normally face financial distress some time before an insolvency procedure is initiated. From the perspective of the creditor, the insolvency trigger is therefore a determinant of the length of time s/he is exposed to uncertainty. In the absence of a harmonised definition there could be as many as 27 different answers to the question of whether a business is (in)solvent and the insolvency procedure should start, which creates high information and learning costs for cross-border creditors. In some Member States the main determinant is the cash flow, i.e. a company is declared insolvent when it cannot pay its debts as they become due. In other Member States, it is also the value of a company’s liabilities on its balance sheet outweighing the value of its assets. Most Member States apply a combination of both determinants and many also require a durability criterion (See Table A5.1 in Annex 5).

2.3.3.Inadequately designed (or missing) features and large cross-border divergences on procedures for distribution of recovered values

A number of components in insolvency regimes govern the position of all types of creditors and define rules that determine the share of the value of the estate that can be paid to each creditor. 111 Their design impacts on their bargaining position and incentives of each creditor to support the resolution of the insolvency case. 

Knowledge of these rules is important for investors and creditors when they decide to provide credit or to invest. Transparency and fairness of these rules is also important for those business partners of a defaulting company that became creditors through their provision of goods and services to the defaulting company. Creditors are heterogeneous. There are differences in the type of claims on a defaulting company (financial, trade credit, labour liabilities, obligations vis-à-vis public authorities). Creditors’ different priority status (secured, senior, junior) generally entails high information and learning costs for (other) creditors and have a substantial impact on the recovery prospects and risk premia.

The large divergences across Member States on how distribution of recovered value is organised mean that costs are even higher for creditors acting cross-border, which may hamper their willingness to do business. Cross-border creditors will in particular need to understand what the existing rules mean for their position in the group of creditors and relative to preferred creditors, debtors and other stakeholders, such as employees or public authorities. They are likely to be disadvantaged, facing obstacles to coordinate with domestic creditors due to different legal regimes, language and less knowledge about the (divergent) insolvency systems and domestic actors. Creditors from third countries encounter problems identical to those of cross-border creditors within the EU. 112

The potential drivers that contribute to determining the distribution of recovered value among the different creditors include the ranking of claims and creditor committees (in the scope of this initiative) and a few others (which are not in scope and briefly discussed in a separate section below).

The ranking of claims is of key interest to creditors since it determines the distribution of the remaining value of a defaulted company. It presents an important source of uncertainty because the impact of the ranking of creditors on the expected recovery rate is generally hard to predict for all creditors. They are a particular challenge for cross border creditors since systems are substantially divergent across Member States and the differences are not sufficiently transparent. For example, a number of Member States afford particular privileges to tax and other governmental claims (for example Italy, France, Spain). Some Member States give a priority or even super-priority ranking (trumping all other claims including those of secured creditors) to the claims of employees (unpaid wages). 113  A new phenomenon with potential impact on the ranking of claims concerns the remediation of environmental damage. 114  Given their impact on the risk premium and, hence, the cost of lending, divergences in this area may act as a significant deterrent for engagement by cross border creditors.

While creditor committees exist in most Member States, 115 different rules across Member States and limited powers and scope in some of them (see Table A5.9 in Annex 5) for creditor committees contribute to the high information and learning costs for cross-border creditors, in particular due to the difficulty to coordinate their actions during proceedings or the risk of facing hold-up problems. 116  Cross-border creditors are, in particular, disadvantaged by language barriers and unfamiliarity with domestic proceedings. Unless they hold a sizeable claim against the defaulting company, cross-border creditors are likely to face a bargaining disadvantage relative to domestic creditors. As creditors’ committees provide an institutional guarantee that creditors can articulate their views in the insolvency proceedings, in particular thanks to their oversight by the insolvency practitioners, cross-border creditors may specifically benefit from this tool to compensate their disadvantages listed above. Thus, rules on creditor committees can have a decisive impact on the recovery value.

2.3.4.Stakeholders’ views about problem drivers

When the DRI was negotiated as well as in their replies to the public consultation, Member States reasoned that the close links of insolvency law with other areas of national law would make full harmonisation of insolvency rules not feasible at this point. Many stakeholders, however, argued that the complexity and opacity around national insolvency laws is a barrier to cross-border investments as it makes it costly to understand and measure the risk in investing in the EU. This applies to both EU as well as non-EU investors.

Stakeholders expressed divergent views in the public consultation about the importance of the different problem drivers as an obstacle to the single market. 117 For example, insolvency practitioners highlighted in particular divergent rules on asset tracing and avoidance actions as important obstacles. 118  Financial institutions identified the insolvency trigger and the ranking of claims as the key obstacles, whereas non-financial business indicated asset tracing and the ranking of claims. Firms that provide consultancy or other services to businesses flagged the insolvency trigger, directors’ duties in the vicinity of insolvency and the ranking of claims as most concerning. Researchers argued that both avoidance actions and the ranking of claims needed to be harmonised, whereas public authorities generally considered the need to act on any of the proposed elements as low.

Figure 7: Stakeholder views on the extent problem drivers constitute a problem for the functioning of the single market on a scale 0 to 5, average reply in the public consultation (left-hand chart) and average per stakeholder group (right-hand chart)

Note: 0 means 'no problem' and 5 means 'extremely significant problems'.

The relevance of the different problem drivers can also be derived from the indications about their cost and time saving potential that the insolvency experts surveyed in Deloitte/Grimaldi (2022) attributed to them. The existence of cost and time saving potential suggests that current rules are not efficient. Table 2 shows how many of the insolvency experts supported measures in this area and their assessment of the effectiveness of EU harmonisation from the perspective of cross-border insolvency procedures. It suggests that foreign investors would derive benefits mainly from measures that improve asset recovery and transparency, and perhaps see less in relative terms direct benefits from common MSE regimes and creditor committees. Similarly to the results of the public consultation, German and Swedish respondents were less supportive of wider harmonisation efforts than French, Spanish or Italian respondents. 119  Respondents from Romania and Poland were on average even more supportive than those from the Southern Europe in this survey, differing from the views of respondents from Central and Eastern Europe in the public consultation, to which neither Polish nor Romanian stakeholders contributed.

Table 2: Indications by insolvency experts about the impact of policy measures on the effectiveness of an EU regime from the perspective of cross-border creditors

Note: + a % share of the 120 interviewed insolvency experts who indicated an increase in effectiveness out of all positive replies to “Considering the overall effectiveness of the cross-border insolvency procedure, as concerns the liquidation of debts and the satisfaction of the claims of creditors, please provide us your estimate of the change in the overall effectiveness determined by the introduction of EU rules” [in this area]. * A glossary of insolvency terms and of the equivalent professional figures in different jurisdictions. **. The score is defined as 0 indicating no efficiency gains, 0.5 marginal gains, 1 normal gains and 2 significant gains and likewise for negative values.

Source: FISMA with Survey data from Deloitte/Grimaldi.

2.3.5.Out -of-scope drivers

The proper functioning of the courts and the high quality of judges can significantly contribute to reducing the length of proceedings 120 and increase the ability to distinguish viable from non-viable companies 121 . The long recovery time documented above is also the result of (insufficient) court capacity.

In the same way, the qualifications and incentives of insolvency practitioners can have a significant impact on the running and outcome of insolvency proceedings. On the one hand, costs for insolvency practitioners, for example, reduce the payback to creditors and often make the opening of bankruptcy procedures non-economical for smaller companies. On the other hand, insolvency practitioners often play an essential role in ongoing proceedings. Notably, they can act on transaction avoidance and trace assets, manage the operations of the insolvent estate and influence how the debtor’s assets are sold. The powers and efficiency of insolvency practitioners thus affect the length of the insolvency framework and therewith the trust cross-border investors place on the efficient treatment of their claims. The exposure of insolvency practitioners to conflict of interests, the absence of mandatory professional assurance and – possibly – standards relating to their remuneration makes them sensitive to moral hazard that can compromise their role as neutral and independent actors.

Nevertheless, despite their importance, this initiative excludes an intervention on the capacity and quality of judicial systems and qualifications and incentives of insolvency practitioners. First, major interventions to improve capacity and quality of domestic courts and insolvency practitioners adds a major complexity to the overall EU action, such as the need to have significant political support (currently lacking) for major reforms of domestic judicial systems and significant investments in available infrastructures and personnel. Moreover, the Directive on Restructuring and Insolvency is already expected to lead to some convergence towards more efficient court structures and framework for insolvency practitioners. As the Directive is being transposed, it is still too early to take stock or envisage another EU intervention.

2.4.How will the problem evolve?

In the absence of an initiative on the convergence of insolvency laws, EU action would remain restricted to the few general provisions in the Restructuring Directive on insolvency proceedings concerning digitalisation, training of judges and insolvency practitioners and data collection and to country specific recommendations issued each year towards several Member States 122 . This does not leave ground to believe that action would be taken across Member States to move in the direction of a coordinated or comparable solution for the problems and problem drivers identified above (see Annex 6 for a review of progress with insolvency reforms in the Member States). 

The expected phasing out of policy measures to keep distressed companies as going concerns during the Covid-19 economic downturn and the significant adjustment challenges for the economy 123  are likely to increase the number of business exits in the future. 124  The exposure of the EU economy to energy price shocks and supply-chain bottlenecks evidenced in 2022 reveal the vulnerability of the EU economy to pronounced economic shocks. Whenever these hit the economy, companies may come into conditions where their debt level turns out unsustainable or may find that changes to demand and factor costs make their business models no longer viable. 125  The baseline scenario is therefore one in which a rising number of insolvency cases will continue challenging the capacity of judicial systems. The absence of converging insolvency regimes will imply that the magnitude of cross-border investment and extent of cross-border business relationships would remain below its potential.

3.Why should the EU act?

3.1.Legal basis

Since the objective of this initiative is to ensure the functioning of the Single Market, the EU has the right to act under the Treaty. Article 114 TFEU provides a suitable legal basis for the approximation of legislation and administrative actions in Member States. The use of Article 114 is justified by problems for the functioning of the Single Market, which result from the disincentives to invest across borders (described in more details above) as a consequence of the divergences and inefficiencies in national insolvency laws.

3.2.Subsidiarity: Necessity of EU action

The functioning of the single market is in the interest of the EU and all Member States. Without EU actions, there is no mechanism to foster that elements of national insolvency regimes would become more similar over time. An important obstacle to the functioning of the single market for capital and the completion of the CMU would remain unadressed and many companies would be deprived of access to (cross-border) investment. Member States’ different starting points, legal traditions and policy preferences imply that reforms at national level in this area are unlikely to lead to converging insolvency systems. Member States that assess their insolvency regime as already well-functioning may not undertake any reforms that make elements of their system more similar to those in other Member States. Among those Member States with higher recovery rates, there are only two that have undertaken insolvency reforms in the last years or committed to doing so in the recovery and resilience plans. 126 Member States that consider their insolvency system as in need of reform are likely to focus on improving elements that promise an increase of effectiveness of the national system and tailor them to their domestic preferences rather than aiming to make them more similar to those in other Member States. 127  

Since cross-border creditors are not part of the electorate, there is a risk that national reforms will be biased towards the interest of domestic stakeholders and not place sufficient attention to the interests of and disadvantages faced by cross-border creditors.

3.3.Subsidiarity: Added value of EU action

Action at the European level is better suited to substantially reduce the fragmentation of insolvency regime and ensure convergence of targeted elements of Member States’ insolvency rules towards the rules that would work well across all Member States. Rules at national level with a cross-border component, such as cross-border asset tracing, information to cross-border creditors, would be less suitable to address the needs of cross-border creditors and imply higher information and learning costs for them than if they were following a common design at EU level.

Measures at the EU level would ensure a level-playing field and avoid distortions of cross-border investment decisions caused by both lack of information about and actual differences in the designs of elements in insolvency regimes. This would help to facilitate cross-border investments and competition while safeguarding the orderly functioning of single market. Since divergences in insolvency regimes are a key obstacle to cross-border investment, addressing this obstacle will be crucial to realise a single market for capital in the EU.

EU action would act as motor of reform and help overcome policy inactivity in the Member States to address issues with core insolvency rules. 128  The options proposed respect the principle of proportionality, are adequate for reaching the objectives and do not go beyond what is necessary. They aim at striking a balance between establishing pan-European standards in targeted areas, while at the same time, leaving sufficient flexibility to Member States to adapt to local conditions and to maintain the consistency of insolvency rules with the broader national legal system.

4.Objectives: What is to be achieved?

4.1.General objectives

This policy initiative aims to contribute to the more efficient allocation of capital in the single market and enhance market integration under the CMU. While it cannot and will not, on its own, achieve capital market integration in the EU, it could, alongside other CMU measures (outside the scope of this initiative), contribute to the creation of more favourable conditions for better market integration.

·A first general objective is to allocate capital in the economy more efficiently, which means supporting the provision of credit to companies and improving the adjustment capacity of the EU economy as elements crucial for balanced economic growth and a highly competitive social economy. This requires accomplishing more efficient (non-bank) insolvency regimes in the Member States that are able to generate a higher recovery value of liquidated companies in a shorter time and at lower costs than at present.

·The second general objective is to ensure the free movement of capital in the single market by fostering investors’ trust and increasing cross-border investment, with the ultimate objective of creating a level playing field for all economic operators in the EU concerned with regards to insolvency rules regardless of their location. This demands to make the design of insolvency regimes more similar across Member States and reduce the information and learning costs that they entail for cross border creditors. .

Both general objectives reinforce each other. The more efficient the insolvency regimes at national level, the more conducive they are to cross-border investment in the single market. The more similar the elements of insolvency rules are in Member States, the more active would be cross-border investors and therewith - the more intense would be competition among providers of funding and the lower would be the cost of financing for companies.

4.2.Specific objectives

The initiative aims to initiate a completion of the toolbox used in insolvency cases by adding specific, targeted elements to insolvency regimes, pursuing the following specific objectives:

·The development of more efficient and similar rules in Member States for better value recovery, notably in the fields of transaction avoidance, asset tracing, directors’ duties and pre-pack procedures.

·The development of more similar rules in Member States for more efficient insolvency proceedings, notably with respect to MSEs procedures, insolvency triggers and insolvency rule transparency to support a timelier conclusion of insolvency proceedings for non-bank companies.

·The development of more similar rules for efficient and fair distribution of recovered values in Member States, notably in the field of creditor committees and the ranking of claims to reduce legal uncertainty and information costs related to insolvency processes for cross-border creditors. 

Insolvency rules need to be consistent with the wider legal system in the Member States such as company law, labour law and property law. The convergence of insolvency rules should not compromise neither the consistency of national insolvency regimes with other parts of the national legal systems nor a fair treatment of debtors, creditors and other stakeholders in companies undergoing insolvency procedures.

5.What are the available policy options?

The problem analysis identified a number of elements related to the value recovery tools, governance of proceedings, and tools for efficient value allocation typically used in insolvency cases that insolvency experts identified as either missing in national insolvency laws in some Member States or inadequate in other Member States to address the problems of overly lengthy and costly insolvency proceedings and low predictability of insolvency proceedings, notably for cross-border creditor. Building on those findings, this section assesses how the problem would evolve if there is no intervention (baseline scenario) and what policy options can be considered to address such problems. Annex 5 complements this section by providing more details on the individual building blocks.

5.1.What is the baseline from which options are assessed?

Without action at EU level, Member States are likely to either keep their existing insolvency regimes unchanged over the next years or introduce limited changes that would very likely not be aligned across the EU. After the transposition of the Directive on (preventive) Restructuring and Insolvency, which had to be concluded by July 2022, Member States are unlikely to enhance further the convergence between substantive elements of their national insolvency regimes.

Against the forecast of rising bankruptcy figures in light of winding down of public support measures related to Covid-19 and slowing economic activity as a consequence of the energy inflation shock, 129  a rising case load is likely to increase further the duration of insolvency proceedings. This could be partially mitigated by action by Member States to improve court capacity. Annex 6 reports on what kind of measures Member States already envisage to undertake in the area of insolvency in their reform and resilience plans. Furthermore, were not already done, Member States could also improve judicial capacity by making better use of digital means, as well as react to a rising number of insolvency cases by reallocating courts and judges’ capacity to address bottlenecks. While such measures would partly help address the first identified problem, they are unlikely to happen in a uniform matter across the EU.

The prospect of a rising case load and widening divergence in the efficiency of insolvency procedures should be seen against the backdrop of a gradual improvement in cross-border investment flows stimulated by other CMU policy measures and the resulting more important role of cross-border creditors in this context. Increased cross-border activity is likely to exacerbate further the issue around the length and ensuing bottleneck of insolvency proceedings across Member States.

Ongoing (or future) CMU measures in other areas will not make this initiative superfluous, but should contribute to addressing other obstacles to cross-border investments. 130  In doing so, these proposals may also implicitly raise the potential number of cross-border insolvency cases in the future. The Commission proposal on the European Single Access Point for company data, once agreed by the co-legislators,  should increase the visibility of companies across the EU and hence further facilitate cross-border investment. 131 The upcoming Commission proposal on the Listing Act should make the use of funding through public markets by companies more attractive, also contributing to more public offers of securities cross-border. Cross-border activity is likely to remain significantly below its potential if structural barriers, at least in the area of insolvency, remain unaddressed. The importance to tackle the insolvency-related barriers would remain irrespective of progress made on other determinants. Slow and costly treatment of cross-border creditors’ claims in a liquidated estate and low value recovery, unless tackled, will serve as a serious obstacle and disincentive for them to engage in cross-border investment in the future, reducing the EU growth potential overall.

The assessment of the quantitative impact of the envisaged policy measures will use, as a benchmark, the EU averages for recovery values, judicial costs and recovery time experienced by banks as creditors. 132  Since the numbers pre-date the COVID crisis, they are not distorted by the low bankruptcy numbers accomplished by the public support measures in the last years. They are the most recent indicators that represent “normal” business conditions and therefore considered to be suitable for the baseline. Although these values may not be necessarily representative of all creditors, variations in their values would be expected to closely mirror variations for other creditors.

5.2.Description of the policy options

Available policy options have been carefully selected and grouped, among others, considering the experience during the negotiatons of the Restructuring and Insolvency Directive, the deliberations and final recommendations of the expert group, the results from the public consultation, a study by an external consultant and extensive interactions with stakeholders. More specifically, the impact assessment considered the areas put forward for harmonisation of insolvency regimes by stakeholders in the public consultation. Furthermore, the group of experts on restructuring and insolvency law 133 elaborated on the scope of these areas. Finally, the external study (Deloitte and Grimaldi (2022)) provided further analysis on the impact of harmonisation in these areas and how the rules in question are currently applied in Member States. 134  

Measures that target different elements of insolvency proceedings are packaged in two options that differ in their degree of ambition. Option 1 focuses on targeted elements for which some commonalities already exist across Member States. They would not necessitate that Member States overhaul fundamental principles of their current national insolvency laws (and other areas of national law that are related to insolvency laws). Option 2 is more ambitious as it aims to address the problem more holistically. It includes some elements that certain respondents (e.g. corporates) to the public consultation signalled as obstacles to the efficiency of insolvency proceedings and the removal of which would be beneficial to foster cross-border integration. These in particular concern a trigger for insolvency proceedings and the ranking of claims. 135  As set out in later in this impact assessment (see in particular sections 7 and 8), the higher ambition in option 2 may, however, lead to potential conflicts with other areas of law in Member States, determined by differences in legal tradition, history and policy preferences across Member States.

The composition of those packages was intensely analysed, especially on the elements that distinguish the two options. The elements presented in option 1 reflect recommendations by insolvency experts about what they considered appropriate. Option 2 is a credible alternative to Option 1, reflecting the perspective of wider economic and business interests. Given the number of building blocks and links between them, the present grouping of options was considered the only feasible approach to present options with different levels of ambition. Each option, by design, covers a number of elements to ensure that the reform under each option has a meaningful impact (which would not be the case if, instead of grouped options, each element would be presented as a separate option). No additional elements have been identified in interactions with stakeholders and experts, which would also be politically feasible and could thus be incorporated in either (or both) options.

Both options suggest legislative changes, namely through a new Directive, whereas the option to pursue them through a Recommendation was discarded from the onset (see section 5.3).

5.2.1.Option 1: Targeted measures on procedural efficiency and value maximization (‘Targeted harmonisation’)

Option 1 presents targeted measures grouped based on the problem driver they primarily address.  

5.2.1.1. Measures targeting value recovery

Under this option, a set of targeted measures would aim to increase value recovery for all creditors, including cross-border creditors in the EU. More specifically, these measures would aim to increase the effectiveness of transaction avoidance rules and subsequent asset tracing for its recovery across the EU. Furthermore, they would aim to introduce more discipline on timely filing of insolvency to avoid unnecessary value destruction in case of delayed filings. Finally, they would seek to put in place harmonised rules on procedures allowing for better value recovery through a pre-pack arrangement.

In the case of transaction avoidance, a minimum set of harmonised conditions for exercising avoidance actions would be introduced. 84% of the respondents to the public consultation supported a more comprehensive harmonisation of avoidance actions and for the harmonisation of elements such as the different avoidance grounds, of the objective and subjective conditions leading to avoidance, as well as of the time periods prior to the opening of insolvency, which count as relevant for avoidance claims. 136  More concretely, the following key elements of the transaction avoidance legal framework would be clarified in EU law: types of suspicious transactions, avoidance grounds, related parties, the period during which the avoidance measures can be enacted, and, finally, legal consequences of avoidance, including the liability of third parties and rights of the opponent.

Transaction avoidance measures would be complemented by measures strengthening asset traceability through a better-facilitated access by insolvency practitioners to asset registers, notably in a cross-border setting (i.e. when assets have been moved to/acquired in another Member State during the period relevant for transaction avoidance rules). In the public consultation, almost 85% of the stakeholders favoured harmonised rules on assistance (including the interconnectivity of relevant registers) in the cross-border tracing of assets of the insolvent debtor. This would be achieved by enhancing in EU law the access rights of practitioners to a registry in another Member State. This can also build on the already existing arrangements for access to EU-wide interconnected registries (BRIS, BORIS, etc. 137 ).

Furthermore, to avoid potential asset value losses due to a delay in filing for opening the insolvency proceeding, directors would be obliged to timely file for insolvency within a pre-defined period of time (e.g., at least within the three months of failing the insolvency test of the Member State). Directors failing to comply with this obligation would be held liable. The public consultation yielded widespread support (81%) for minimum harmonization at EU level of the duties and obligations of directors in the event of vicinity of insolvency or when the company is insolvent. In particular, the most beneficial aspect of harmonization would be to impose a duty on the director, once the company is insolvent, to file for insolvency proceedings (71%). 138

Finally, under this option, a minimum set of harmonised standards for a pre-pack liquidation procedure would be introduced to maximise the value preservation in the sale of all or part of the business. The pre-pack rules would set out harmonised conditions for conducting negotiations on the sale of the business before insolvency filing, with the deal finalised in insolvency, hence enabling the realisation of the value of the insolvency estate right or shortly after the official opening of the proceedings. The pre-pack arrangement could thus avoid significant value destruction, which usually happens, when the assets can be realized only at a later stage of the proceedings, long after the opening. 139  The pre-pack rules would include safeguards to ensure transparency and equal treatment of creditors, to avoid abuses. In addition, these safeguards would need to ensure that employees’ rights are not unduly curtailed by the pre-pack administration, including the right to information and consultation.

5.2.1.2.Measures targeting procedural efficiency

With SMEs being the backbone of the EU economy, it is important to ensure that the new rules work well also for smaller companies in the EU, for whom the cost of the ordinary (i.e. established) insolvency procedure is prohibitively high, and where a more rapid debt discharge would allow to unblock the entrepreneurship capital for new projects. Under this option, a special harmonised insolvency procedure would be set out in EU law tailored to the needs of micro and small enterprises (MSE). This MSE insolvency proceeding would be designed proportionally to the needs of MSEs, their creditors and other stakeholders, allowing them to be wound down orderly at low costs. Instead of establishing derogations for MSEs from the existing general rules of insolvency proceedings, this option would suggest a bespoke MSE procedure at EU level.

This specific procedure should follow a flexible, modular approach, in which the default liquidation process is run with reduced formalities and without the involvement of lawyers or insolvency practitioners. Additional elements, such as the involvement of an insolvency practitioners or the ordering of a moratorium could be included optionally, on the request of the debtor or creditors, thereby keeping costs as low as possible. The procedure would set out simple rules on the entry conditions and the administration of procedures (including digitalisation and automation of key procedural steps 140 and the use of electronic auctions to generate revenues from MSE assets 141 ). In order to make this procedure attractive for MSEs, the procedure would be coupled automatically with a debt-discharge. The system shall ensure that liquidations could also be carried out where the debtor’s assets do not cover the costs of the procedure.

In addition, under this option, Member States would be required to further enhance transparency of the key features of their respective insolvency rules, by making such information easily accessible to investors on a public website and in a pre-defined user-friendly format, with the e-Justice Portal as default option. 142  This would take the form of a brief factsheet document with standardised key information that would be essential for (potential) investors to make a “glance-through” assessment of the insolvency framework in a given Member State, in a comparable way. The factsheet would provide targeted information about relevant insolvency triggers. It would also contain information on the average duration of an insolvency proceeding in a given Member State. A requirement for Member States to raise awareness among the potential investors on these factsheets would be part of the option.

5.2.1.3.Measures targeting the distribution of recovered values

To ensure a distribution of recovered values that is perceived as fair and predictable, this option introduces requirements for improving the representation of interest of the creditors throughout the proceedings and for enhancing the transparency about the ranking of claims.

In relation to the representation of the creditors in the insolvency proceedings the option would set out the minimum harmonisation requirements on creditors’ committees. These measures would encompass the establishment of the committee, the organisation of meetings, the voting rules and the powers and duties of the creditors’ committees.

As regards the ranking of claims of different types of creditors, the option would introduce enhanced transparency requirements to ensure that Member States make public the easily readable information on the ranking of claims in their jurisdiction in a simplified (user-friendly) format, possibly on the e-Justice portal. This disclosure should include references to national laws setting the ranking and possible exceptions to the standard ranking of claims in corporate insolvency.

5.2.2.Option 2: A more comprehensive harmonisation of insolvency regimes in the EU (‘Wide harmonisation’)

Option 2, in addition to the policy options set out under option 1, would include a number of additional elements that would seek to pursue a more comprehensive harmonisation of national corporate insolvency rules across the three dimensions (value recovery, procedural efficiency and distribution of recovered values). This option is more holistic and ambitious, moving beyond what insolvency experts considered as broadly consistent with the existing rules in Member States and touching on the areas that are deeply intertwined not only with the fundamental principles of national insolvency laws, but also with other areas of law such as property, company or labour laws in many Member States.

5.2.2.1.Value recovery measures

On value recovery, option 2 would include the transaction avoidance and asset tracing measures, as well as the minimum standards on the pre-pack as set out under option 1.

In addition to those measures, option 2 would also include further reaching measures on asset seizure and recovery. Under this option, in addition to better equip insolvency practitioners to trace assets moved to another Member States, their ability to seize assets across borders would also be enhanced. A harmonised judicial mechanism could be set up in Member States’ laws by the help of which insolvency practitioners of other Member States could easily freeze bank accounts or seize other assets belonging to the insolvency estate. Such a streamlined mechanism would complement the existing legal possibilities for insolvency practitioners, which – according to qualitative evidence – do not ensure asset preservation flawlessly. 143

Furthermore, under option 2 a general principle would declare the shift of fiduciary duties of the directors of the company in the vicinity of insolvency. Hence, directors would be required to consider the interests of the creditors alongside the interest of shareholders. The requirements (and ensuing liability) would thus extend beyond a mere obligation to file for insolvency.

5.2.2.2.Measures targeting procedural efficiency

On procedural efficiencies, in addition to the special insolvency regime for MSE already set out under option 1, option 2 would also seek to harmonise the insolvency trigger (i.e. the start of insolvency proceedings) across Member States by putting forward a common liquidity criterion. This criterion would serve as the latest point in time by when the state of insolvency would have to be established. Member States would nevertheless be allowed to add a stricter (economic) test to bring forward the moment of the establishment of insolvency (but not to delay it). This harmonised liquidity test would set out the methodology for concluding on illiquidity of a company. It could for example set out that a company that was not in a position to meet its debt obligations within a pre-defined period (e.g. 90 or 180 days) would be deemed insolvent. Court discretion and case-by-case assessment would be limited to exceptional cases.

Two thirds of the respondents to the public consultation supported a harmonised trigger for insolvency. The notable exception were the responses from public authorities. The most popular proposed common trigger for insolvency was based on a liquidity test.

5.2.2.3.Measures targeting distribution of recovered values

On distribution of recovered values, option 2 would, similarly to option 1, include the rules on creditors’ committees. In addition to these rules, option 2 would also include a harmonisation of certain elements of the ranking of claims (without harmonising the full domain of ranking of claims that was deemed non-feasible and hence discarded upfront). Under this targeted harmonisation, rules would be introduced, for example, to exclude the privileged treatment of some unsecured claims, such as tax claims. The responses to the public consultation on the ranking of claims were met with certain opposition from at least some groups of stakeholders. Furthermore, there was overall opposition to the proposed harmonisation of the carve-out rules (i.e. when a group of creditors is given preferential treatment by being treated before any creditor in the ranking of creditors) and of rules to protect ‘new-financing’

5.3.Options discarded at an early stage

This initiative focuses solely on traditional insolvency proceedings, to complement the existing minimum harmonisation on preventive restructuring. Elements in insolvency regimes that deal with preventive restructuring schemes, i.e. mechanisms that can be accessed by the debtor before the state of formal insolvency under national law, were, thus, discarded upfront from being part of any option.

Table 3: Measures under the two policy options

The analysis in preparation of this impact assessment revealed that Member States’ starting positions on the harmonisation of ranking of claims are very different and are strongly linked with other national policy objectives, values and legal traditions (such as the protection of employees). Moreover, their interference with other parts of legal systems imply that harmonisation in this area is likely to affect in a significant manner in particular national property and labour laws. The option to introduce a comprehensive harmonisation of the ranking of claims was therefore discarded as potentially problematic from subsidiarity perspective and politically non-feasible.

The option to propose non-legislative measures was also considered at an earlier stage. The public authorities that replied to the public consultation expressed a strong preference for a recommendation, the insolvency practitioners for a combination of a legislative instrument and a recommendation, whereas all other participants (including corporates) favoured a legislative instrument (either on a stand-alone basis or in combination with a recommendation). Following an assessment, it was concluded, however, that non-binding measures, such as a Commission Recommendation, would be insufficient to entice Member States to conduct sufficient reforms in the complex area of insolvency. Non-binding measures are highly unlikely to be sufficient to ensure the harmonisation of insolvency regimes that are at present very different across Member States. This is corroborated by recent experience in the area of EU insolvency policy. The invitation addressed to Member States in the form of the Commission Recommendation of 12 March 2014 on a new approach to business failure and insolvency (2014/135/EU) was only sporadically followed by them. Even those who enacted national legislation on the basis of the Recommendation, have done this in a divergent and inconsistent manner, that did not produce convergence towards the standards suggested in the Recommendation. It has therefore  been deemed subsequently necessary to propose the Restructuring Directive. 144  

Given the proximity of the policy areas covered and the general sensitivity of the matters related to insolvency law, a similar outcome could be expected for non-legislative measures in the context of this initiative so that it seems justified to discard that as an option. Therefore, the impacts of a non-legislative measure that would contain the same elements as those set out in options 1 or 2 are not assessed in this impact assessment. Based on the recent experience referred to above one would have to expect a very limited uptake and, even in the event of an uptake, it would have to be expected to be uneven across those Member States that would take measures. Any impact from a recommendation would thus be at best a small fraction of the impacts identified under either of the two options, with the analysis highly conditional on (likely to be random and hence speculative) assumptions about the level of voluntary uptake in Member States.

6.What are the impacts of the policy options?

The initiative will improve tools in all Member States to create the conditions that could reduce the duration of the proceedings or recover more value. Whether this potential will be exploited will depend on the application in practice. It will for example depend on whether the judicial system has the capacity to deal with insolvency cases and IPs have no incentive to abuse the additional powers they would be entrusted with. The analysis of the impacts assumes that the two factors outside the scope of the initiative, i.e. the organisation of courts and the regulation of IPs, do not act as deterrent to the effective use of the enhanced tools at their disposal. Judicial capacity is likely to become an issue if the expectation of a higher number of corporate insolvency cases materialises. Most of the measures discussed in this impact assessment, however, are expected to lead to shorter procedures and lower judicial costs, with the exception of the MSE regime, for which the countervailing effects are further discussed in more detail below.

6.1.Benefits and costs of a targeted regime

6.1.1.Measures targeting asset recovery

Targeted measures in this area would increase the value that can be recovered from the liquidated estate, with the largest benefits expected in those Member States that have not yet implemented efficient practices in this area. In those Member States, insolvency practitioners, whose task it is to preserve the insolvency estate in the collective interest of the creditors, would be equipped with better tools to preserve value. More efficient rules would allow and encourage insolvency practitioners to focus on avoidance actions early in the administration, avoiding procrastination in ascertaining whether certain transactions may be revoked. Moreover, they would enable insolvency practitioners to collect the necessary evidence and be sufficiently meticulous in their investigation. 145  Almost 84% of the stakeholders in the public consultation favoured harmonised rules on assistance (including the interconnectivity of relevant registers) in the cross-border tracing of assets of the insolvent debtor. 146  In particular insolvency practitioners and researchers supported EU action in this area, whereas the support of public authorities, financial and non-financial business entities was somewhat less pronounced. Almost 90% of the stakeholders agreed that insolvency practitioners should have full access to property and collateral databases.

The possibility to use pre-packs in all Member States that do not permit this tool yet would improve the recovery value and could shorten the duration of insolvency cases in those Member States. The requirement for directors to file timely and the associated liability for them would further limit value destruction in the vicinity of insolvency. The public consultation revealed widespread support among stakeholders (81%) for minimum harmonisation at EU level of the directors’ duties in the vicinity of insolvency or when the company is insolvent. 147  Nevertheles, the extent of support varied depending on a stakeholders’ group. Whereas 93% of the practitioners/professionals supported minimum harmonization at EU level of the directors’ duties in the vicinity of insolvency, only 50% of the public authorities were of the same opinion. 148

More efficient rules on transaction avoidance – as supported by 84% of the respondents to the public consultation - would be beneficial for all creditors, whether they are domestic or cross-border. Nevertheless, given their inherent information disadvantage and resulting increased difficulties to influence the running of the proceeding, cross-border creditors would stand to benefit even more than domestic creditors if the rules on avoidance actions become more similar, efficient and transparent. Stakeholders signalled that the enforcement of in particular cross-border assets and the detailed and divergent rules applied across Member States have led to differences in the amount that could be recovered and the time it could take to claw back assets. Hence, more harmonised rules on transaction avoidance and asset tracing would help to level the playing field and to increase value recovery, notably in cross-border proceedings. Enhanced possibilities, through a more facilitated access to asset registries in other Member States to trace assets abroad, would also reduce the costs for insolvency practitioners (and insolvency proceedings overall).

For cross-border creditors, transparency and alignment of rules are particularly important. 149 For example, while cross-border creditors would benefit from the possibility to opt for a pre-pack procedure – another tool enhancing value recovery – they may see themselves disadvantaged if the rules governing the pre-pack are opaque and accountability is unclear. Only subject to the necessary safeguards for the protection of interests of all affected creditors in pre-packs, the measures would make it overall less costly for cross-border creditors, including by making it easier for them to find out about the respective rules in other jurisdictions and to assess the prospects for claw-back. Creditors from third countries face the same challenge as cross-border creditors within the EU.

Furthermore, creditors stand to benefit from improved tools for value recovery not only in insolvency, but also long before it – notably when making their decision to invest. Since the more efficient and aligned rules around value recovery increase creditors’ confidence to obtain better or fairer access to the debtor’s assets in case of insolvency, they allow for more certainty in assessing the cost of capital against which credit is granted. In particular, when rules are more aligned across Member States, creditors who give a loan to a debtor in another Member State will find it easier to evaluate the impact of transaction avoidance law of another Member State (compared to their own) in their assessment of the consequence of the debtor’s insolvency on their investment 150 .

The conduct of the insolvent companies and their directors is key to influence the prospects of value maximization and recovery rate in the concrete proceedings. The introduction of more efficient rules on directors’ duties and liabilities would address the moral hazard problem and reinforce the incentive to timely file for insolvency (as a counterweight to the aversion to acknowledge business failure), which is likely to increase the recovery value. Company directors would face higher liability risks, which may lead them to demand higher salaries, and likely higher premia for liability insurance. While honest debtors would not undertake measures to procrastinate the filing of insolvency, hide assets or divert them at the brink of insolvency, such opportunistic behaviour at the expense of creditors has been observed in practice. 151  The new measures would discourage and limit the ability of those debtors to hide assets.

The impact of changes in these areas on the public sector is expected to be small. Nevertheless, they can lead to lower incurred costs of judicial review if procedures become shorter. It is also possible that easier cross-border asset tracing and seizure leads to higher demand for court involvement. While it is not possible to provide numerical estimates to what extent this latter effect could impair judicial capacity, the analysis in Annex 4 suggests for which Member States judicial bottlenecks are more likely to be an issue (see also section 6.1.2). They are hence the ones more likely to (but not necessarily) be exposed to any possible adjustment costs (if such costs materialise) from the introduction of the proposed measures, leading to potential procedural delays. Since option 1 is calibrated to target only those elements in insolvency regimes where the harmonised rules do not introduce major inconsistencies with other pieces of national law, the impact in terms of the need to provide additional legal clarity or adjust other pieces of national law should be limited. Exceptions could stem from the need to address possible issues from avoidance actions on property rights and from asset tracing on data protection.

6.1.2.Procedural efficiency measures

In the presence of transparency about the key features of insolvency regimes, both creditors and debtors would be able to assess under which conditions an insolvency process starts and how it will run its course. It means procedures related to the beginning of protective measures (e.g. avoidance actions), beginning of insolvency proceedings (e.g. insolvency trigger), use of outside expertise (e.g. insolvency practitioners), governance supporting effective decision making (e.g. creditors committee). This allows debtors to react effectively (and if necessary pre-emptively) as well as for creditors to seek solutions. These measures towards procedural efficiency would allow to shorten proceedings at certain, more difficult phases, allowing for quicker and fairer decision making and for more efficient running of proceedings overall.

Transparency on insolvency triggers reduces uncertainty to creditors and in particular to cross-border creditors, who would incur lower information and learning costs. This should translate into a higher willingness of these investors to provide credit to companies at the beginning and lower cost of financing to those companies as a result. The Deloitte/Grimaldi (2022) study reports that insolvency experts attribute sizeable efficiency gains to more transparency in a cross-border context, supporting the notion that information costs are an important obstacle in practice (see Table 4 ).

In addition to better transparency, which would empower both creditors and debtors to use the most effective toolkit to ensure a more efficient proceeding, procedural rules could also be made more proportionate to a specific type of a company in insolvency. Thus, a dedicated MSE liquidation procedure, by reducing formalities, increasing the use of electronic means of communication and limiting the involvement of insolvency practitioners and lawyers would reduce the costs of the procedure. Together with the statutory debt-discharge, this would make the insolvency regime more attractive for ailing debtors (entrepreneurs). Better access to insolvency procedures would reduce the debtors’ (i.e. entrepreneurs’) bias towards keeping the company alive as long as possible. The conduct of insolvency proceedings even in cases where today such proceedings are not opened because the assets of the debtor do not cover the judiciary costs (so called ‘asset-less cases’), would generate additional costs for financing these proceedings (possibly for the public budget, the businesses or insolvency practitioners). These additional costs as well as the costs of dealing with a higher overall number of insolvency proceedings 152 are, nevertheless moderate as this simplified procedure would entail much lower costs than those of normal insolvency proceedings. The cost also needs to be considered against the potentially sizeable benefits of orderly winding down of distressed micro- and small businesses, coupled with a debt-discharge for the entrepreneurs concerned. Since the bankruptcy of a MSE has direct consequences for the entrepreneur, a fast and orderly liquidation through MSE procedures could accelerate discharge and help create a second chance for these entrepreneurs.

In general, cross-border creditors tend to be less exposed to MSEs given their low transaction value (also known as ‘investment ticket size’) compared to larger companies. However, once can observe that cross-border creditors started to take interest, for example, in very innovative start-ups that are prepared to pay high-risk premia for access to capital. In those cases, cross-border creditors would favour a possibility for a quick, efficient and low-cost winding down of a company. 153  Furthermore, with other policy measures ongoing at EU level to increase the visibility of SMEs across Member States (such as the creation of the European Single Access Point for company data 154 ), the number of cross-border creditors taking interest in SMEs is likely to increase in the future. Since the proposal seeks to ensure a quicker value recovery in MSEs, it makes MSEs more attractive for cross-border investors, complementing other actions under the CMU. An investor association indicated that risk-capital investors (e.g., private equity firms) see virtue in second chances and hence a quick debt discharge for innovative and driven entrepreneurs. For smaller creditors of MSEs (which are likely to be in majority for MSEs), ill-placed to absorb high fees of insolvency practitioners, the MSE regime would also help reduce legal costs. 

The fact that national insolvency frameworks are not always adapted to treating properly (and in a proportionate manner) insolvent MSEs represents a lost opportunity for the economy: these companies are in many cases deprived of the possibility to benefit from an orderly exit (if unviable) or from an adequate restructuring (if viable). This would apply to a very large number of EU companies, given that MSEs represent in some Member States up to 90% of the total count and 98% of the firms that exit. 155  The entrepreneurship capital becomes effectively locked in these companies, which become in many cases zombie-companies, with founding entrepreneurs unable to benefit from debt discharge in a timely manner and unable to start anew sufficiently quickly. Establishing a more proportionate regime for MSEs, and in particular granting access rights for MSEs to insolvency proceedings, would mean that more EU micro companies would be liquidated in a court insolvency proceeding (rather than outside one, which is often the case today).

Numerical estimates of the impact of this option on the length of proceedings and the outcome of the insolvency process are difficult to get by because by their nature, there is no good basis to estimate the level of information and learning costs. However, the insolvency practitioners surveyed by Deloitte Grimaldi (2022) point to a reduction in recovery time and an increase of the recovery value of about 12% if a harmonised MSE regime is introduced. They reported sizeable efficiency gains from the introduction of tools that provide transparency about insolvency triggers and other features of insolvency regimes, suggesting that the benefits could be sizeable.

Table 4. Indications from insolvency experts about the impact of harmonisation on the cost and time of insolvency procedures as a result of EU rules in the different areas.

Note: + share of the interviewed 120 insolvency experts that indicates the measure would lead to a decline in costs or time. % values are calculated as weighted average of the mean of the ranges indicates. They show by how much % the average insolvency expert thinks costs or time would decline. See Annex 4 for full numbers and more details. * A glossary of insolvency terms and of the equivalent professional figures in different jurisdictions, **A set of concepts and categories in the insolvency subject area and domain showing their properties and the relations between them, *** 0 indicates no efficiency gains, 0.5 marginal gains, 1 gains and 2 significant gains and likewise for negative values.

Source: FISMA with Survey data from Deloitte/Grimaldi 2022.

The public sector could benefit from a simplified MSE insolvency regime because it reduces the costs of judicial review. MSEs that already have insolvency proceedings opened (or will open them in the future) before the court under the ordinary procedure would switch to a more alleviated and quicker one, economising judicial capacity. For example, the introduction of an MSE regime in France in 2019 aimed to reduce the time of judicial review from more than two years to one; cost savings could be proportional to the expected time shortening. Member States may also realise cost savings by using their existing electronic auction platforms for seized assets to sell assets of insolvent estates to foster quick and cost-efficient realisation of proceeds. The creation of cross-border links between these auction platforms would enlarge the potential bidder base and therewith on the proceeds that can be realised. The new regime may also allow for a possibility for MSEs to have a full debt discharge in an out-of-court setting, e.g. before competent administrative authorities, with faster and cheaper procedures.

Furthermore, the introduction of a simplified regime for MSEs will not necessarily lead to a higher number of insolvency cases by micro enterprises across all Member States. For example, it has not been observed in France since 2019, following its introduction. 156 It is, however, likely to increase the case load in those Member States that practice to reject applications for opening insolvency proceedings because of a lack of assets in the insolvent estate. Deloitte/Grimaldi (2022) reported that some “Member States do not even open (i.e. Austria, Germany, Greece and Italy) or immediately terminate proceedings (i.e. Belgium and Spain) if the debtor does not have sufficient resources to cover at least the proceedings’ expenses.” In Germany and Austria, it applies to about 30% of the cases. 157  

Annex 3 provides some numerical estimates about the potential effect of the introduction of an MSE regime on judicial capacity under the assumption of a proportional increase in the case load for judges and no cost savings from other measures. The scenario analysis suggests judicial costs could vary between EUR 900 million up to a maximum of EUR 2 billion. The underlying calculations and assumptions are further detailed in Annex 4, Section 3.2. Nevertheless, key assumptions underlying these calculations are highly uncertain. Some aspects of the impact on the judicial capacity remain to be impossible to quanify.

The calculations do not incorporate two mitigating effects of the MSE regime that should reduce costs for the public sector. First, even when insolvency proceedings are not opened for MSEs due to a lack of sufficient assets, a judge still has to establish that the conditions of opening are not met and take the decision to refuse the opening of insolvency proceedings. These steps generate judicial costs, although they usually are lower than those of opening and conducting a full-fledged insolvency proceeding. Second, the opening of insolvency proceedings concentrates the handling of all claims against the debtor in the insolvency proceedings and makes it therefore inadmissible for creditors to enforce their claims through individual enforcement actions. If insolvency proceedings are not opened, individual creditors can and often go to court anyway to get a judgment that in reality may only become enforceable when the MSE has assets again. Courts therefore often have to deal with multiple proceedings on claims by creditors against the insolvent business, negatively impacting the available judicial capacity in a Member State. These effects are likely to mitigate significantly or even outweigh completely the additional costs (i.e. a possible negative impact on judicial capacity) from the new MSE regime. Finally, even in case the introduction of the MSE regime increases (which is not certain) costs for the public sector  due to the impact on judicial capacity, 158 it will have a positive impact on the economy and growth overall due to earlier discharge of failed debtors.

Annex 4, Section 3.2 attempts to identify which Member States’ judicial capacity could be particularly vulnerable to a higher caseload. The assessment uses two metrics of judicial efficiency – clearance rates and time of non-criminal court cases 159 . It is assumed that Member States with a currently already low clearance rate and longer duration of insolvency cases are likely to experience even more difficulties in coping with the consequences of introducing the MSE regime, notably if the latter leads to more insolvency cases to be brought before courts. Based on these metrics, Cyprus, Ireland, Spain and Malta were identified as the Member States that would potentially be the most exposed to a possible negative consequence from the MSE regime on their respective court capacity. Spain has, however, just introduced a special shortened insolvency procedure for micro-companies with a value of less than two million euros or with fewer than ten employees. Since this procedure is already available also for microcompanies with no assets, the EU MSE regime is unlikely to lead to a further significant impact (beyond that from the implementation of the national regime) on its judicial capacity. 

In addition to the costs for the public sector from a possible increase in insolvency proceedings, the public sector would also incur limited additional costs from developing the tools for better transparency on the features of insolvency regimes and insolvency triggers. 160  Since the basis for such tools is already available on the e-justice platform, it should be possible to achieve it without considerable additional investments. It is estimated that the development of factsheets for better transparency in all EU Member States may cost from EUR 67 000 to EUR 90 000. 161  These costs are mainly of a one-off nature and are likely to be by far outweighed by reducing the economic cost of legal uncertainty, such as a lower (than could otherwise be) level of cross-border investment and the need to procure expensive legal advice in the vicinity of insolvency.

6.1.3.Measures targeting the distribution of recovered values

Well-defined rules about the role of creditor committees and transparency about the ranking of claims would reduce the costs associated with deciding on how the recovery value should be distributed among the creditors. They may have little impact on the role of debtors. Nevertheless, as these rules could reduce the costs of negotiations with creditors, both the debtor and the insolvency practitioner tasked with the liquidation of a company would be expected to see their costs reduced.

Creditor committees allow creditors to cooperate and more effectively coordinate their decisions, which is important given that multi-creditor lending relationships are common in the EU. Creditors may have different views about the best way forward, face collective action problems and can generate holdout problems that may prevent the insolvency practitioners from achieving an agreement that maximises the collective interest of all creditors. Clear rules on the role of creditor committees reduce the time and costs to find common solutions, which reduces the risk of holdout problems and may increase the recovery value. The survey by Deloitte/Grimaldi (2022) asked insolvency experts whether EU rules on creditor committees could yield time savings: almost two thirds of those who voiced a view on this agreed. According to the respondents, the presumed reduction in time thanks to creditor committees could amount to 1.4%.

While creditor committees ensure that the common interest of creditors is adequately protected, representation in creditor committees is more costly for cross-border creditors and their bargaining with other creditors is more complicated. Hence, similar (i.e. more aligned) and efficient rules on key aspects of powers and roles in creditors’ committee can help especially cross-border creditors to exercise their rights and lead to a fairer treatment, thereby making cross-border lending more attractive and further reducing the cost of capital for companies.

More transparency on insolvency rules partly compensates for the difficulties for cross-border creditors arising from language barriers, translation obligations and from being less familiar with the position of other creditors. Especially the complexity of the national insolvency rules pertaining to the ranking of claims may make the outcome particularly difficult to anticipate for cross-border creditors. Transparency about the ranking of claims means investors are better able to assess what part of the residual value of the company will be distributed to them.

When a company is wound down, employees, tax authorities and other public authorities including those administering the procedure often enjoy preferential treatment that puts them above other creditors. Transparency on creditor ranking and common rules on the role and powers of creditor committees would reduce tensions in the actual negotiations with other creditors, while leaving the choice about the actual ranking to the Member States. They are likely to lead to less disputes about the decisions of insolvency practitioners and fewer reviews by courts of their decisions, which would be to the benefit of both length and costs of insolvency proceedings for the public sector.

The role given to creditors’ committees in an insolvency regime is directly linked with the roles attributed to other actors (courts, insolvency practitioners) – and altogether these rules ensure the appropriate balance between the interests of creditors and debtors. Common rules on creditors’ committees may therefore require the public sector to ensure consistency with other laws governing property rights. This would lead to some adjustment costs for the public sector.

Table 5 summarises key benefits and costs for the different stakeholders involved.

Table 5. Key benefits and costs, by stakeholder type – Option 1 (see also Annex 3)

6.2.Benefits and costs of a comprehensive EU regime 

6.2.1.Measures targeting asset recovery

Option 2 foresees a wider harmonisation of the asset recovery measures, beyond the elements targeted in option 1 (transaction avoidance, asset tracing and directors duties) than the targeted measures.

More specifically, in comparison to option 1, option 2 includes two additional ambitious elements, which would allow for a more far-reaching insolvency reform at EU level: directors’ duties and options for IPs to seize assets abroad. If directors are under the obligation to consider the interests of the creditors alongside the interest of shareholders (and may be held liable if they fail to do so), they face an incentive to take less risks in their business decisions to avoid insolvency becoming a possibilility and initiate proceedings earlier than without such liability. Whether this stronger incentive leads to material changes in directors’ behaviour will depend on specific circumstances and is likely to be different across companies and directors. It will also depend on the courts’ capacity to ensure effective enforcement. If creditors consider their interests better protected uniformly across the EU, they would face lower transaction costs when considering credit to entities in other Member States. The flip side of stronger liability vis-à-vis creditors in the vicinity of insolvency are potential loyalty conflicts between shareholders and directors that shareholders need to consider when appointing directors.

Better opportunities for insolvency practitioners to seize assets would facilitate their work, speed up the recovery process and are likely to increase recovery values. Since they currently face hurdles to act in cross-border insolvency cases, their empowerment to asset seizures could significantly improve their efficiency. The stronger powers for insolvency practitioners could also reduce the likelihood that transaction-avoidance actions are carried out in the run-up to insolvency. Creditors would benefit from this action, especially when engaged in credit to cross-border companies. Honest debtors should not be negatively affected by these rules.

Overall, both these elements are likely to lead to a higher value recovery for investors, including cross-border creditors, in the EU. Deloitte/Grimaldi (2022) interviewed insolvency experts about their expectations regarding how an EU regime on the different elements would impact on the costs of recovery and the time of insolvency procedures. A large majority of the 120 respondent expects savings of cost and time from the comprehensive harmonisation of the different elements. Their numerical estimates suggest a significant improvement in the range 9-16%.

Table 6: Indications from insolvency experts about the impact of comprehensive harmonisation on the cost and time of insolvency procedures as a result of EU rules in the different areas

Note: + Share of the interviewed 120 insolvency experts that indicated the measure would lead to a decline in costs or time. % values are calculated as weighted average of the mean of the ranges indicates. They show by how much % the average insolvency expert thinks costs or time would decline. See Annex 4 for full numbers and more details.

Source: FISMA with Survey data from Deloitte/Grimaldi 2022.

However, at the same time, both elements are also likely to be much more difficult to fit into the existing legal orders of the Member States, potentially causing frictions with other areas of national law. For example, the redirection of directors’ duties from shareholders to creditors would conflict with the existing provisions in company law in Member States. Addressing these issues would lead to follow-on costs for the public sector because it would need to restore the consistency with these parts of national law. Furthermore, it is likely to lead to certain legal uncertainty, at least at the beginning (until the relevant aspects of national law are fully clarified and jurisprudence of the court is settled), and adjustment costs in companies if shareholders want to appoint different directors in anticipation of possible loyalty conflicts. This would lead to costs for companies and creditors who would have to revert to expensive legal advice. The insolvency specialists in the expert group advised that these costs could be substantial and may thus outweigh the incurred cost savings.

Respondents to the public consultation were on average as supportive to a clarification that directors should secure the interest of creditors in the vicinity of insolvency as to the introduction of an obligation to file for insolvency. 162 They were less supportive to introducing minimum standards at EU level that lead to the establishment of liabilities for directors. 163 The public sector and the stakeholder groups that represent potential debtors and creditors, i.e. non-financial and financial business, expessed the most critical view on the establishment of liability for directors, whereas insolvency practitioners and researchers were most supportive of such a measure. Although the public consultation did not explicitly ask for views on asset seizure, stakeholders that replied to related questions expressed stronger support for the less intrusive powers for insolvency practitioners. 164  The public support for harmonisation in this area may therefore be limited. Responses from public authorities and non-financial corporates on the debtors’ side were most critical, while those from research and financial corporations on the creditors’ side were on averge more supportive of more intrusive measures.

6.2.2.Procedural measures

In addition to the improvements to procedural rules foreseen in option 1, option 2 would seek to align across the EU the test for the insolvency trigger. By establishing a point when the company can no longer procrastinate the start of the insolvency procedure, a liquidity trigger would bolster recovery values. A common test would ensure a timely insolvency start over the debtor’s estate across the EU, removing differences across and inefficiencies in some Member States. In practice, it would harmonise the notion of insolvency that would introduce a harmonised reference point also for other elements of the insolvency regime, including for determining the scrutiny period for avoidance actions. 165

It follows from the broader scope that cross-border creditors would benefit more from a harmonised insolvency trigger than from the mere provision of transparency about the multitude of triggers across the EU Member States (foreseen under option 1). Since differences in insolvency triggers are sizeable at present, such harmonisation can generate sizeable savings for cross-border investment on information, learning and legal advice. Researchers and consultancy services supported overproportionally the harmonisation of insolvency triggers in the public consultation. Public authorities and stakeholders representing non-financial business were the least supportive. 166  Two thirds of respondents to the public consultation favoured a liquidity criterion. 167 The support was spread evenly across all stakeholder groups, except for respondents from the public sector, who favoured the combination of two triggers (a liquidity criterion complemented with a balance sheet criterion).

While a harmonised trigger reduces uncertainty to creditors and in particular to cross-border creditors, by removing discretion, in certain cases it may also negatively affect creditors. For example, financial institutions may need to write off in certain instances credit positions on their balance sheet faster, which reduces their capital buffer. Companies in those Member States that currently rely on an overindebtedness criterion would now need to file earlier for insolvency under the common liquidity trigger. To avoid that the trigger is enacted for technical (i.e. temporary), rather than structural (i.e. long-term) problems, companies in these Member States would need to adjust their business plans/cash flows to limit liquidity constraints, taking precautions for payment modalities. This leads to additional costs for these companies.

Debtors (i.e. companies) would benefit from clarity on the insolvency trigger primarily in the run-up to insolvency. An unclear trigger, where the court enjoys a considerable degree of appreciation/discretion, creates a situation of legal uncertainty. Once the liquidity threshold is breached, it inflicts reputational damage and will in many cases cut off the company from new financing. This accelerates the need to wind down the company and takes away (or considerably reduces) any possibility that it can remain a going concern. The setting of a clear trigger for the start of the process that leads to the liquidation of the company may, however, improve incentives for debtors to seek solutions in pre-insolvency proceedings.

In the presence of a common liquidity trigger, both creditor and debtor would be able to assess under which conditions an insolvency process starts, which should create incentives for debtors to react pre-emptively as well as for creditors to seek solutions before courts get involved. This helps avoid that the start of an insolvency procedure is postponed until the companies’ position deteriorates so much that prospect of value recovery is low.

The sizeable differences in insolvency triggers across Member States imply costs to adjust to the new harmonised regime for debtors that have planned their business along the existing rules and for investors that provided finance in the knowledge of the current regime. 168  Costs for companies would arise from the need to implement a more sophisticated cash-flow management to contain the risk of liquidity shortfalls. These adjustments would likely be transitory and could be mitigated through grandfathering rules. While costs for stakeholders to adjust and to familiarise themselves with new standards may not be negiligble, they are one-off costs and their importance declines with time.

Nonetheless, the introduction of a common regime would mean a fundamental regime change in those Member States that relied on a balance sheet criterion, i.e. where insolvency was defined through overindebtedness. These Member States would also need to address tensions with other parts of law, for example if the introduction of a liquidity criterion would compromise property laws and constitutional freedoms. The reservations expressed by Member States in the public consultations to a harmonisation of insolvency triggers suggests the adjustment costs could be substantial. The adjustment costs reflect the divergences across Member States in other parts of law, than financial or insolvency laws, that govern how business is organised and contracts with other business entities are concluded/governed. These are often ruled in substantial law with links to civil law or constitutional law. Although it is not possible to provide a cost estimate for the ensuring legal uncertainty and the costs of adjusting other laws, one of the few studies in this area found that the costs of substantial changes to legislation is a multiple of those that change rules on technical proceedings. 169  

6.2.3.Measures targeting the distribution of recovered values

In addition to the elements set out in option 1, option 2 foresees a partial harmonisation of the ranking of claims.

Debtors would have broadly the same benefits and costs as in option 1. Additional benefits to creditors accrue from enhanced clarity about the position of some privileged creditors. Since clarity about the ranking of claims is crucial for creditors to determine their recovery value, it is a key element of insolvency regimes from their perspective. 170  

Since it is rather common that little is left to an estate after the state’s claims have been fully settled, an abolishment of the privileged treatment of tax claims would allow a larger recovery value to be distributed to other unsecured creditors. Secured creditors would also appreciate that their claims become less contestable by other creditors. Their better protection should translate into a larger willingness to provide secured loans. However, changes to the ranking of creditors would entail distributional effects, which can be sizeable. The public sector would receive fewer revenues if tax claims are no longer privileged. Moreover, applying the experience of the banking sector, a rising share of secured credit can lead to asset encumbrance, implying less assets becoming disposable in insolvency cases overall (and hence to other creditors).

Any harmonisation of parts of the ranking of claims that would allow creditors to better and more easily assess, which share of the recovered value would be distributed to creditors, would be of particular benefit to cross-border creditors. The increase in transparency envisaged under option 1 would lead to a smaller reduction in their information costs than the harmonisation of the privileges of certain creditors under option 2. This should positively affect cross-border investment.

Consistent with this argument, financial stakeholders were over-proportionally supportive towards harmonisation of the ranking of claims in their replies to the public consultation. Researchers, consultancy services and financial stakeholders were the most supportive while public authorities were the least supportive of the proposal. The responses to the public consultation, however, showed no clear (i.e. across all stakeholder groups) preference for which elements of the ranking of claims should be harmonised as a priority. 171 Stakeholders from the non-financial sector gave most support to secured credit and those from the financial sector and business services to new finance. Both correspond to their business interest as debtors, creditors and consultants, respectively. Lawyers and insolvency practitioners expressed the highest support to shareholder loans, followed by public claims. In contrast, 90% of public authorities responding to the public consultation preferred to maintain the priority status of certain claims in insolvency proceedings. Responses from public authorities were thus the most critical to the harmonisation of the elements pertaining to the treatment of public claims than any other stakeholder group.

Table 7: Key benefits and costs, by stakeholder type – Option 2 (incremental benefits/costs versus option 1

The public sector would suffer from revenue shortfalls in those Member States where tax revenues are currently privileged and would have to be deprioritised. This might seriously affect fiscal revenues of a Member State with an insolvency backlog. At the same time, a deprioritisation of public claims would support companies’ and in particular SME’s access to finance since private creditors need to factor in that in case of an insolvency, their claim will be junior to those of the public sector. In those cases where the public sector steps in and pays employees’ due wages, a deprioritisation of public claims would reduce the incentive for the public sector to support employees. 172  

7.How do the options compare?

7.1.Benefits and costs across the elements of insolvency regime

The introduction of the described measures under option 1 on avoidance actions, asset tracing, directors’ duties, pre-packs target to preserve the best value of assets in a liquidation case and would lead to a significant improvement over the base line. The harmonisation of some key features of avoidance actions and directors’ duties and the better asset tracing in cross-border cases would also provide assurances to cross-border creditors and reduce their information costs. Some measures in the option are likely to reduce the time of insolvency processes (e.g. pre-packs have a specific feature to allow for a quick approval of the sale; better asset tracing possibilities (access to registers) will also reduce the time to reclaim assets, MSE insolvency proceedings will be more proportionate). Although these measures will lead to some adjustment costs for the public sector, insolvency practitioners and companies, they should not be substantial because the targeted elements under option 1 are not expected to produce major inconsistencies with other areas of law.

A special regime for MSEs and transparency on insolvency triggers would increase the recovery value because more MSEs would be subject to an orderly liquidation and faster debt discharge. The MSE regime would be designed to deliver a shortening of the insolvency process and decrease the costs incurred for MSEs, which would both improve their situation compared to the baseline. This would also reduce debtors’ incentive to procrastinate. Transparency on the insolvency triggers may not reduce the duration of the proceedings, but would rather allow creditors and debtors to better anticipate the start of insolvency and for creditors to better price the risks. These measures are likely to lead to further costs for the judicial infrastructure dealing with an increased number of MSE insolvency cases and to the public sector in charge of the production of comparable and simple yet meaningful information on insolvency regimes. But such costs are expected to be far outweighed by the benefits described above.

The primary target of more harmonised rules on creditor committees in option 1 and 2 and improved transparency on the ranking of claims in option 1 is to reduce legal uncertainty and information costs for cross-border creditors relative to the baseline. Creditor committees improve the articulation and representation of the interest of creditors with a particular benefit for cross-border creditors. It is not evident whether they would have an impact on recovery values. It is likely that they would have a positive effect on the willingness of creditors to cooperate and thus possibly reduce the length of the proceedings. While the production of the information for the transparency tool would give rise to some (limited) administrative costs mainly of one-off nature, more harmonised rules on creditor committees should not have any notable cost effects compared to the baseline.

A comprehensive EU regime (option 2) on asset recovery measures would lead to further effectiveness gains relative to the baseline because the additional elements on asset seizure and directors duties may further increase value recovery and its speed relative to option 1. The addition of asset seizure is likely to lead to a stronger impact than the addition of fiduciary duties in option 2 relative to option 1. About 75% of the insolvency experts surveyed in Deloitte and Grimaldi (2002) indicated a more than minor increase in the efficiency of insolvency cases from access to cross-border registers for the purpose of asset tracing.  173  The larger scope of option 2 would also contribute more to the reduction of legal uncertainty and information costs for cross-border investors than under option 1. The higher effectiveness with regard to the preservation of asset value and shorter insolvency proceedings would make the market exit of firms less costly under option 2. The more comprehensive coverage of elements in Option 2 would also contain the risk of forum shopping more strongly than option 1, albeit the sparse evidence that this is a material risk. 174

New types of compliance costs would arise under both options compared to the baseline, with comparatively higher compliance costs for option 2. The harmonisation of elements at EU level would require that Member States undertake further legislative measures to restore consistency with other pieces of law (in particular under option 2, where conflicts with other areas of law are likely). In addition under option 2, courts would have to provide timely jurisprudence on the general principle of shifting the fiduciary duties for directors, at least in Member States where this principle has not existed so far. Some of the measures would increase compliance costs for companies and insolvency practitioners, which would have to comply with stricter requirements (more under option 2 than under option 1).

The more ambitious measure on insolvency triggers under option 2 may reduce legal uncertainty and information costs for cross border creditors relatively more than under option 1 and lead to earlier openings of insolvency procedures with positive effects for asset recovery and the length of proceedings. Adjustment costs for stakeholders and costs for the public sector to ensure that the harmonised insolvency trigger is consistent with other areas of national law (company and property laws) would however be substantial under option 2.

Since the ranking of claims is a major source of uncertainty, the inclusion of common rules on the ranking of claims would have a more sizeable effect on cross-border creditors’ legal certainty and information costs than the transparency requirements under option 1, even if the harmonisation is limited to a narrow subset of the universe of creditors. The impact of such reforms for Member States would nevertheless be sizeable because the ranking of claims touches upon the central elements of property rights and have strong implications on how the public sector will behave in the run-up to an insolvency. Apart from the risk of foregone public revenues from the deprioritisation of tax claims, the public sector may become less supportive of companies in distress, with potential far-reaching consequences for broader economic performance.

7.2.Quantification of effectiveness

The Deloitte Grimaldi survey asked insolvency practioners to assess the impact of the different measures on recovery values and time to recover. Table 8  translates these estimates into changes to the recovery rate, 175 using the EBA numbers for the average EU recovery number and time to recovery as baseline. It is shown that the recovery rate would increase by just under 2 percentage points under option 1 and almost 3 percentage points under option 2 relative to the base line. The measures on asset recovery contribute most to the higher recovery rate. Reductions in time and the saving of costs under options 1 and 2 are almost at par in their contribution to the increased recovery rate. Note, that the difference in the effect between option 1 and option 2 is largely driven by the underlying assumptions. 176  

Table 8: Induced changes to costs and time of recovery and resulting increase in the recovery rate

Note: Assumptions are a recovery value of 40.4%, recovery time 3.4 years, judicial costs 1.4%, interest rate 1.36%. For more details, see Annex 4, Section 3.

7.3.Assessment of judicial efficiency and adjustment costs

The elements discussed under both policy options would improve the efficiency and effectiveness of national judicial systems in dealing with insolvency proceedings, which is in the scope of the initiative, addressing both the first general objective and specific objectives. For example, an earlier start of proceedings (due to enhanced duties for directors to file for insolvency) as well as better means to avoid asset misuse, and better means to trace the already misused assets, should facilitate (and expedite) the work of courts and insolvency practitioners. The creation of an MSE regime is the only measure in this initiative that may lead to a possibly higher workload of courts. While these costs may be substantial in some Member States, these costs could (at least in part) potentially be outweighed by newly gained efficiencies of a more streamlined regime, which are, however, not possible to quantify. Member States would also be expected to put in place additional measures, using their discretion, to address a possible strain on court capacity due to the MSE regime.

Other measures in the competence of Member States, that they may undertake individually, or past measures already adopted, may further improve the efficiency and effectiveness of national insolvency frameworks but are considered as out of scope drivers. These could, for example, relate to setting up specialised courts (or court chambers), dedicated exclusively to insolvency proceedings, or better training of insolvency judges. In addition, there could also be additional measures that Member States can take building on recent EU law setting out rules for insolvency practitioners (e.g. on conflict of interest). Finally, any negative impact may be further mitigated by ongoing wider improvements to court proceedings, such as the upcoming digitalisation of the judicial system 177 , as well as the ongoing efforts in Member States to improve the efficiency of their judicial system.

Comparing the costs of the different options is difficult. Option 1 is expected to simplify and shorten the insolvency process, and should hence reduce the costs involved. It, however, requires that the public sector adjusts the existing legal provisions and introduces transparency enhancing measures. The resulting costs for adjusting legislation in principle should not be large. 178  The introduction of the MSE regime may potentially lead to a higher burden for the judicial system if the efficiency gains from a simplified regime are outweighed by the costs from more MSE insolvency proceedings (which is not certain). In this case, higher costs for the public sector would result from granting acess to insolvency proceedings for assetless entities. Estimates of both costs to the public sector and benefits to the broader society are included in Annex 3, which also documents the assumptions used and the underlying uncertainty of the estimates.

It is expected that option 2 would lead to higher costs than option 1. All costs identified under option 1 would also be relevant under option 2. Option 2, however, gives rise to additional costs on top of those identified under option 1: the loyality conflicts between directors and shareholders, possible legal disputes in cross-border asset seizure, the need for implementation of more advanced cash-flow management by firms, short-falls for the public sector resulting from less fiscal revenue and rising asset encumbrance in insolvent firms. Some of the measures considered under option 2, notably cross-border asset seizure and a liquidity-driven insolvency trigger may lead to inconsistencies with other areas of law in some Member States. This would likely create (at least initially) a considerable degree of legal uncertainty (unlike in option 1) for stakeholders that the public sector would have to address, thus incurring substantially higher (additional) costs. 179  This is the reason why option 2 scores lower that option 1 in terms of efficiency.

7.4.Coherence with national and EU law

Discussions with insolvency experts in preparation of this impact assessment helped identify those elements, which focus on narrow and technical improvements to national insolvency rules that do not interfere with broader legal systems in Member States and the principles established in the EIR. Since option 1 is limited to these elements, it is coherent with the Member States’ broader legal frameworks. The changes envisaged in option 2 would possibly lead to conflicts with the fundamental principles in other pieces of national law and necessitate costly efforts for Member States to resolve them. Option 2 therefore scores worse on coherency compared to option 1.

Both options are considered to be in full coherence with other EU legislation in this field, notably the DRI and the EIR, and address problems, which this other existing legislation does not tackle. The initiative instead focuses on the areas that were left outside the scope of the DRI, i.e. the substantive insolvency law. The two options set out in the impact assessment do not contain any changes to the areas that are affected by the implementation of the relevant provisions of the DRI.

The initiative is coherent with the Environmental Liability Directive (ELD) and does not impair the effectiveness of the ELD, which aims to limit the accumulation of environmental liabilities and to ensure compliance with the ‘polluter pays’ principle. ELD obliges Member States to take measures, including financial mechanisms in case of insolvency, with the aim of enabling operators to use financial guarantees to cover their responsibilities under ELD. These mechanisms aim to ensure that claims will be served even in cases where the debtor becomes insolvent.

7.5.Synthesis

Table 9 synthesises the qualitative and quantitative arguments in an ordinal ranking of the two policy options. Double or triple pluses or minuses were allocated when the difference from the baseline was assessed as significant or very significant in line with the reasoning in this section. They were allocated with the objective to accomplish a ranking that is consistent across the different dimensions and sub-options of options 1 and 2. The effects of suboptions were aggregated because their effects cumulate. The three dimensions of effectiveness were aggregated into an overall score through a simple average, which implies an equal weight of each dimension. The overall score is the balance of benefits (+) and costs (-).

The markings suggest that option 2 is superior to option 1 in terms of its effectiveness for value recovery and reducing legal uncertainty and information costs. However, option 1 and option 2 rank (more or less) on equal terms in their effectiveness with regard to the procedural efficiency and the distribution of recovery value, where advantages are outweighed by some disadvantages. For example, more predictable triggering of the insolvency procedure needs to be balanced against the disadvantage that the liquidity trigger removes the scope for discretionary choices from the system. Furthermore, the advantage of clarity on the ranking of public claims has largely a re-distributive impact whereas the impact on information and learning costs might be small.

Overall, there are crucial trade-offs between the two options. Option 2 would be more effective in tackling the long-standing divergences in insolvency regimes, while it would carry higher costs and coherence issues for many Member States. In terms of effectiveness, option 2 would lead to a greater improvement of recovery rates due to more effective asset seizure and greater (overarching) liability for directors. It would also lead to a greater reduction of legal uncertainty and information costs for cross-border investors than under option 1 due to a targeted harmonisation of insolvency triggers. However, option 2 would be more costly than option 1, as it would lead to inconsistencies with the existing broader national legal systems which would imply large costs for Member States and make this option more politically challenging. For example, any harmonisation in relation to the ranking of claims in insolvency (even if limited to the treatment of public sector claims, as proposed under option 2) would have wider implications for the treatment of claims in general and raise broader issues of tax law as well as of social security legislation. Therefore, the overall advantage of option 2 over option 1 in terms of its effectiveness in achieving the objectives comes at the cost of cost-efficiency and lower coherence. Option 1 allows to achieve the objectives at lower costs and is more coherent with EU and national law, and is therefore preferred over option 2.

Table 9: Comparison of options

The trade-off between benefits and costs also transpires in the views from stakeholders. Although the average responses to the public consultation were biased by the overrepresentation of German stakeholders, which gave a more sceptical view than those from other Member States, the breakdown by stakeholder groups in Figure 8 yields interesting insights. Researchers and representatives of business services, amongst which most were from consultancy firms, voiced overall the most supportive view. Insolvency practitioners were more ambitious in particular on some aspects of the reform (but not all), whereas public authorities advocated for a more cautious approach in almost each area. All stakeholder groups (except for public authorities) gave higher scores for the existence of a problem than for the need of reform. Financial stakeholders were overall supportive of more ambitious harmonisation than non-financial corporations, including on the ranking of claims and the insolvency trigger (part of option 2). This is consistent with the perception that the most visible benefits are likely to accrue to creditors while benefits for debtors would be more indirect and less visible, such as better access to credit.

Figure 8: Average reply by stakeholder group to the public consultation: In which area do you consider the insolvency framework of the jurisdiction where you operate is to be reformed? Scale 0-5

8.Preferred option

Based on the comparison of effectiveness, efficiency and coherence, option 1 is selected as the preferred option. Option 1 delivers similar benefits to option 2 in terms of a shorter duration of insolvency proceedings, although a somewhat lower impact on bettervalue recovery. However, option 1 will accomplish the objectives in a more cost effective manner than potion 2.  The preferred option is both internally and externally coherent. In terms of ‘internal’ coherence, the proposed measures fit together as they address various key phases of insolvency proceedings 180 and do so with the underlying policy objectives in mind to improve the efficiency of the insolvency proceedings and increase the recovery value.

The measures on transaction avoidance and on asset tracing mutually reinforce each other in the maximisation of the value of the insolvency estate. This, combined with an obligation of the directors to become active early and the possibility of maximizing the value of the business at an early stage through pre-packs, makes the preservation of the business as a going concern more likely. There is, in effect, a higher likelihood that a pre-pack deal may actually materialise because there is more value and directors have a strong incentive to take action earlier. The simplified regime for MSEs could be seen as slightly less efficient than the rest, considering the potential impact on judicial capacity that was discussed above. However, it would create clear benefits for both MSEs ( simplifying the review and debt discharge process) and creditors (leading to higher recovery rates), which would improve the efficiency of the overall insolvency regime to the benefit of the economy as a whole.

The preferred option is also externally coherent, by fitting well with previous EU interventions in the area of cross-border insolvency (the EIR and of preventive restructuring (the DRI). The EIR, in particular, covers the potential conflicts of laws (and jurisdictions over the proceeding) arising in cross-border insolvencies. The preferred option focuses instead on targeted harmonisation of measures for key areas of insolvency proceedings, which were not addressed previously. It therefore complements the EIR and other EU policy interventions taken over the years in the area. The comparison of options in section 7 has considered this together with the coherence with Member States’ law overall.

Economic impacts

In terms of economic impacts, the preferred option is expected to bring significant benefits for creditors, companies, including SMEs, and the wider economy.

Creditors will benefit from expected higher value recovery arising from better possibilities for IPs to counter transaction avoidance and trace assets, including across borders, less asset deterioration from earlier and faster insolvency procedures and better opportunities to use pre-pack sales. Creditor committees will also allow them to more effectively coordinate their decisions. Cross-border creditors will further benefit from higher transparency on key characteristics of insolvency regimes and ranking of claims, which is expected to significantly reduce related information and learning costs.

Companies, especially those operating in a cross-border context, will face more uniform conditions and lower legal uncertainty of what will happen if they become insolvent. This sets incentives to act in time in case of financial turmoil, which increases their chance of survival. For those firms that do not manage overcoming financial distress, the more efficient framework should lead them to look for either preventive restructuring or liquidation. They benefit indirectly from the higher chances of settling parts of the business as going concern. Directors will face higher liability risks, which may lead them to demand higher wages. The initiative should not lead to higher compliance costs in general.

The initiative is expected to indirectly improve the competitiveness of the EU business sector through better prospects to wind up zombie companies. This should contribute to the reallocation of capital and labour to more productive means and hence have positive impacts on the broader economy. Since better predictability of the outcome of insolvency procedures fosters credit provision from domestic and cross-border actors, it facilitates access to finance, which improves the competitive position of companies.

Insolvency practitioners will benefit from lower costs due to easier access to asset tracing registries and better opportunities to recover value from asset disposal. There will be a higher demand for their services due to more MSEs becoming orderly wound down. Since a share of MSE are likely to be asset-less at the time of filing for insolvency, insolvency practitioners may not be able to recover their expenses, depending on how the treatment of asset-less cases will be financed.

In terms of magnitudes, the model scenario suggests that pursuing the preferred option would reduce the cost of recovery by approximately 40% (in terms of relevant judicial costs) and the time of recovery by 50% relative to present conditions. These benefits are conditional on the good application in practice of the new rules and on that neither limited capacity in courts and IPs nor IPs abuse of their enhanced possibilities impair the performance of insolvency systems. Using the end-2021 interest rate as discount rate, the average recovery rate would increase from 37.2% to 38.7%. This implies a non-trivial improvement that results from more efficient public proceedings.

Taking the empirical estimates in Annex 4 and in the economic literature presented therein at face value, a 1.5 percentage point increase in the recovery rate could translate into a 1.5 basis point compression in debt funding costs and a 1.5 percentage point increase in intra-EU cross border portfolio asset holdings 181 . Further sizeable savings are expected in information costs for cross-border investors from more harmonised rules across Member States and from the transparency-enhancing measures. 182 Since the initiative addresses a major obstacle to capital market integration, the envisaged changes are expected to lead to a non-trivial increase in cross-border investment on the single market, with positive spill over to other policy measures under the CMU umbrella towards this end. A full harmonisation of insolvency regimes that also includes the insolvency trigger and the ranking of claims could deliver even larger gains in terms of capital market integration, as set out earlier in this impact assessment.

Impacts on SMEs

The SME test concluded that this initiative is relevant for SMEs since the dominant part of insolvency cases concern SMEs. 183  The measures in this inititative would increase the recovery rate for businesses including for SMEs. This would reduce risks for creditors and would make financing for SMEs cheaper and more easily accessible (i.e. with less or even no collateral), ceteris paribus. SMEs are even more likely to benefit from this as they are inherently more risky and hence more likely to face insolvencies.

The SMEs would also benefit directly from the creation of special insolvency regimes for MSEs that are more proportionate to their needs than the currently existing “one-size-fits-all” proceedings. It should allow more MSEs to be wound down in orderly procedures. Their improved access to orderly liquidation in asset-less cases reduces moral hazard. Entrepreneurs concerned by the liquidation of MSEs can expect easier debt discharge, which gives them a faster second chance.

The initiative does neither impose reporting burden nor compliance costs on SMEs. They would need to familiarise themselves with the new rules if they approach the state of insolvency. Under the assumption that most solvent SMEs are not familiar with insolvency rules under the current regime, these information costs should not be substantially higher than now (in fact they could be lower due to new transparency measures put forward by the initiative).

Costs related to “one in, one out”

The initiative is expected to give rise to some costs, but no cost impacts related to the ‘one in, one out’ approach have been identified. Costs for businesses may arise from the need to familiarise themselves with the new rules and indirectly as a result of the increased liability for directors, but these are not of administrative nature 184  Limited administrative costs are expected to arise for the Member States with the production and updating of factsheets providing greater transparency on national insolvency frameworks (since they materialise for public sectors only, these costs are out of scope of the Commission’s “One-In-One-Out” commitment). Those Member States that do not yet have an electronic judicial auction platform would need to bear the cost of setting one up and those Member States that have such platform, but do not use it for insolvency cases would need to adapt them for the purpose of auctioning assets of MSEs.

Cost savings are overall expected for judicial system (insolvency lawyers and courts) as some procedures set out at a Member State level will be made simpler. Only in the second step, these will be passed on to creditors in the form of higher recovered value and then to businesses in the form of cheaper (or more accessible) financing. Hence, these costs savings, while potentially sizeable, do not count under the under Commission’s “One-In-One-Out” principle. Similarly, the cost savings from a dedicated simplified insolvency procedures for MSEs relate to the simplification of national rules and not to administrative obligations under EU legislation and are therefore not counted under the “One-In-One-Out” commitment.

Annex 3 further elaborates on expected benefits and costs.

Environmental impacts

No direct environmental impacts and no significant harm, either direct or indirect, are expected to arise from the implementation of the preferred option. The initiative may have some indirect positive impacts on fostering the transition to a more sustainable economy by reducing the share of zombie companies in the economy. This could enable reallocation of capital and labour towards companies with a higher rate of innovation and productivity and thus may indirectly contribute to accelerating structural change towards more sustainable production. This effect would however be indirect and is not possible to quantify. It also does not interfere with measures under the ELD. On the contrary, a more efficient insolvency framework would contribute to a speedier and more effective recovery of asset value overall and hence would facilitate the compensation of environmental claims of an insolvent company even without having recourse to financial security instruments, in full consistence with the aims of the ELD. With regards to these claims, it would partially contribute to the predictability for investors and other economic actors which is one of the objectives of the European Climate Law, though greater transparency on the ranking of claims – and hence this initiative is considered to be consistent with the objectives of the European Climate Law.

Social impacts

Employees are not directly impacted. The stronger incentives for entrepreneurs and directors to avoid insolvency resulting from the higher predictability of the outcome of insolvency procedures increases employees’ changes to keep their jobs in going concerns parts of the business. The position in gone concern parts of the business is unchanged relative to the baseline. Often, the government compensates employees for outstanding wages and salaries. The incentive for the government to provide this compensation should not be affected by the measures. No further significant social impacts are expected.

Impact on Sustainable development goals (SDGs)

This initiative is expected to directly or indirectly contribute to the achievement of SDG no. 8 (Decent work and economic growth), SDG no. 9 (Industry, innovation, and infrastructure) and SDG no. 16 (Peace, justice and strong institutions). Annex 3 provides more detail.

Digital by default

This initiative has slightly positive impact on digitalisation, arising notably though higher degree of process automation in the simplified insolvency procedure for MSEs and use of digital portal (e-Justice portal) to provide user-friendly information on the key features of insolvency regimes and ranking of claims. Based on our assessment, it can be considered future-proof.

External impacts

While this initiative does not specifically target third countries or their entities, creditors from third countries are also expected to benefit from the measures. The benefits would materialise through the same channels as for intra-EU creditors and also the magnitude of the benefits should be comparable. As a result, more efficient and harmonised insolvency regimes in the EU Member States could increase investment flows from abroad. The impact on the financial and the current account is, however, not quantifiable without recourse to a large set of economic assumptions.

Impact on fundamental rights 

The preferred option respects the rights and principles set out in the Charter, in particular those in Article 17 (right to property), Article 16 (freedom to conduct a business), Article 15 (freedom to choose an occupation and right to engage in work), Article 47 (2) (right to a fair trial), Article 27 (Workers’ right to information and consultation within the undertaking) as well as Article 8 (protection of personal data) and Article 7 (respect for private and a family life). The free movement of persons, services and establishment constituting one of the basic rights and freedoms protected by the Treaty on the European Union and the Treaty on the Functioning of the European Union is relevant for this measure.

The preferred option shall not have any negative impacts on fundamental rights since most Member States recognize that the need to safeguard the rights of creditors must be balanced against the rights of debtors and the general interest of saving companies and jobs. Fundamental rights of right to property and right to an effective remedy and to a fair trial are guaranteed under this preferred option. Overall, the impact on fundamental rights will be neutral. Although certain elements may affect the right to property and the right to an effective remedy and to a fair trial, safeguards will be foreseen in each case in order to ensure that these are proportionate in view of attaining the objectives and respect the rights and principles set out in the Charter of Fundamental Rights.

9.How will actual impacts be monitored and evaluated?

The proposal is expected to follow normal implementation procedures for directives. Ex-post evaluation of all new legislative measures is a top priority for the Commission. The Commission shall review the outputs, results and impacts of this initiative five years after the legal instrument becomes effective.

The key indicators to measure the impact of this policy initiative in relation to the selected objectives include recovery rates, recovery time and costs of insolvency proceedings (as percentage of the recovered value). While separating the effect of the initiative from external factors will arguably be challenging and will only be possible to do in an evaluation, Commission services plan to create and monitor the following data sources that could be useful for the review:

·Recovery values and time of recovery in the enforcement of bank loans will become available from the insolvency benchmarking exercise, which the Commission committed to undertake in the 2020 CMU Action Plan. Preparations for this exercise are currently ongoing with the EBA. While this data is limited to bank loans, it is certainly an important number considering that most of companies funding is through (secured and unsecured) bank loans. 

·New data on the length of procedures, and possibly the recovery rate and the size of the debtors involved in such proceedings (medium, large or micro-enterprises), as well as the outcome of the procedures opened will become available, following the adoption of an implementing act under the DRI, which imposes reporting obligations on Member States. It will allow the Commisison to analyse the length of insolvency procedures, the breakdown of insolvencies for different sizes of companies and, dependent on Member States’ ability to provide relevant data, recovery values and job losses due to insolvencies. Notwithstanding the upcoming adoption of the Commission proposal for the implementation act, it would, however, take at least several years to collect the necessary time series to perform a robust analysis of any impact.

·Surveys with insolvency and investors to gauge the effect of the different measures. It can be envisaged to run a suvey among insolvency practitioners and experts akin to the survey conducted by Deloitte/Grimaldi.

·The development of the number of insolvencies, credit volumes and costs and cross-border capital flows and home bias in international investment based on the statistics produced by Eurostat, ECB, EBA JRC and national actors (statistical offices and court statistics). These data would then be used by the Commission to analyse the impact of the intiative.

An evaluation is envisaged 5 years after the implementation of the measure and according to the Commission's better regulation Guidelines. The objective of the evaluation will be to assess, among other things, how effective and efficient it has been and to recommend whether new measures or amendments are needed.

Annex 1: Procedural information

1. Lead DG, Decide Planning/CWP references

Co-lead DGs: Directorate-General for Justice and Consumers (DG JUST) and Directorate‑General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA)

Decide Planning: PLAN/2020/8631 – Initiative to increase the convergence of substantive corporate (non-bank) insolvency laws

2. Organisation and timing

A Commission inter-services steering group (ISSG) was established in September 2020 for preparing the initiative. It was chaired by Directorate-General Justice and Consumers (DG JUST) and was steered in close cooperation with Directorate‑General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA). The following DGs and services participated at the inter-service group: Legal Service (SJ), Secretariat General (SG), Directorate-General for Competition (DG COMP), Directorate‑General for Economic and Financial Affairs (DG ECFIN), Directorate-General for Employment, Social Affairs and Inclusion (DG EMPL), Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG GROW), Directorate-General for Mobility and Transport (DG MOVE), Directorate-General for Communication (DG COMM), Directorate-General for Trade (DG TRADE), Directorate-General for Taxation and Customs Union (DG TAXUD), Directorate-General for Structural Reform Support (DG REFORM), Directorate-General for Environment (DG ENV).

Given the fact that the Insolvency initiative was included in the Commission work programme 2022, the previous ISSG was replaced, in line with the Commission working methods, with a new ISSG chaired by the Secretariat-General in November 2021. The new ISSG had the same members.

The ISSG held so far three meetings:

on 14 September 2020, where it discussed and validated the inception impact assessment report, the consultation strategy and the questionnaire to the on-line public consultation,

on 25 May 20201, where it discussed and validated the terms of reference of the external economic study supporting the preparation of the Impact Assessment by the Commission,

on 18 May 2022, where it discussed and validated the Impact Assessment report to be submitted to the RSB.

On 7 September 2022, where it discussed how the comments by the RSB were accommodated.

Another meeting of the Steering Group is scheduled to discuss and validate the Commission proposal.

3. Consultation of the RSB

Before the finalisation of the Impact Assessment report, DG JUST and DG FISMA received advice from the members of the Regulatory Scrutiny Board (“RSB”) at an upstream meeting organised on 8 February 2022.

The Impact Assessment report was then examined by the Regulatory Scrutiny Board and received a negative first opinion on 24 June 2022. The Board noted a lack of evidence of how insolvency proceedings affect cross-border investment and considered the analysis of divergences across Member States as insufficient. The Board also called for a better articulation of the link of this initiative to the RDI and the EIR. It also missed an analysis of the impact on the Member States’ judicial capacity, information on views of different stakeholder groups, a more balanced assessment of options and a clear presentation of the trade-offs. It asked for a more robust assessment methodology and transparency on underlying assumptions.

The Commission services revised the impact assessment in accordinace with the opinion received from the Board. More concretely, the Commission services further substantiated, where required by the Board, the elements in the core text (including by moving certain parts from the annexes), added more details about the Member States’ insolvency systems in the core text as well as added methodological clarifications to the annexes. The analysis about the relationship between this initiative and the RDI, the motivation and impacts of the policy options were deepened and the presentation of methodological steps and trade-offs improved. Additional analysis was carried out on the impact of the initiative on judicial capacity in Member States and on SMEs. The views of various stakeholder groups in the public consultation were consistently added across the core text of the impact assessment (in particular, in sections 5 and 6). Tables with details about the Member States’ insolvency regimes were added to annex 5, the responses to the public consultation to Annex 2 and an SME test in Annex 7. The table below presents a point-by-point list of the RSB critcisism and how it was addressed.

The RSB examined the revised impact assessment and issued a positive second opinion on 10 October 2022 without reservations. The board noted that the impact assessment substantially improved, following the second submission. The board only made a very few suggestions for further improvements. Firstly, it suggested to detail more the analysis of factors that are likely to affect court capacity. Secondly, it proposed to further elaborate on the plans to collect data for future monitoring and evaluation. The final text of the impact assessment accommodated these comments to the extent possible, by adding additional detail on other factors that may influence court capacity and on data collection.

4. Evidence, Sources and Quality

In the preparation of this impact assessment, DG JUST and DG FISMA consulted a wide range of experts and stakeholders and used several different methods to gather evidence.

Evidence used in this impact assessment was gathered based on a Commission’s consultation strategy, which included: (i) public feedback to the inception impact assessment; (ii) an open public consultation; (iii) a meeting with stakeholders ; and (iv) and a meeting with Member States representatives. (v) DG JUST and DG FISMA also received expertise through a collaboration with the Commission Expert Group on Restructuring and Insolvency Law consisting of both individual experts appointed in a personal capacity (so called “Type A” experts) and experts appointed to represent a common interest shared by stakeholder organisations in a particular policy area (so called “Type B” experts). The Commission held nine meetings with the expert group between April 2021 and January 2022, which helped to inform the development of policy options, especially the legislative ones. The results of all these consultation activities are presented in ANNEX 2 of this report.

DG JUST and DG FISMA also gained further insight into the subject of this report with the help of available resources, such as existing literature, reports and studies. The detailed list of these sources are to be found in the list of references at the end of this report, the list below covers only those external studies, which the Commission itself has launched for the purpose of preparing this initiative:

·Deloitte/Grimaldi (2022), Study to support the preparation of an impact assessment on a potential EU initiative increasing convergence of national insolvency laws, Draft Final Report, DG JUST, March 2022.

·Spark, Tipik, ‘Study on the issue of abusive forum shopping in insolvency proceedings’, DG JUST, February 2022 (specific contract nr. JUST/2020/JCOO/FW/CIVI/0160) .

·Spark, Tipik, ‘Study on tracing and recovery of debtor’s assets by insolvency practitioners’ DG JUST, March 2022 (specific contract nr. JUST/2020/JCOO/FW/CIVI/0172).

·European Commission, ‘Improving the evidence base on transfer of business in Europe : annex C : case study on the cross-border dimension of business transfers,’ Executive Agency for Small and Medium-sized Enterprises, Publications Office, February 2021, available at: https://data.europa.eu/doi/10.2826/94014 .

·Stanghellini, Mokal, Paulus, Tirado et alii, Best Practices in European Restructuring - Contractualised Distress Resolution in the Shadow of the Law , 2018.

·Steffek, F., ‘Analysis of individual and collective loan enforcement laws in the EU Member States’, DG FISMA, November 2019, available at https://ec.europa.eu/info/publications/191203-study-loan-enforcement-laws_en .

·McCormack, G. et al., ‘Study on a new approach to business failure and insolvency, comparative legal analysis of the Member States’ relevant provisions and practices’, DG JUST, January 2016, available at https://op.europa.eu/en/publication-detail/-/publication/3eb2f832-47f3-11e6-9c64-01aa75ed71a1 .

All of these external studies have deployed a variety of different methods for data collection, including desk research, on-line public surveys (targeted or public), structured interviews with stakeholders or validation workshops. In these studies data collection encompassed all 27 Member States, and the analytical methods used were able to deliver results in a representative manner, almost all studies are accompanied by national reports per Member States.

In general, the report was based on solid theoretical understanding gained in particular through desk research, collaboration with participants of the expert groups and research and data collection by the external contractors of the studies mentioned above. Moreover, many stakeholders have shown great interest and willingness to share their views through the consultation activities described above. The report thus draws on that thorough feedback. All EU jurisdictions were represented in the consultations.

With regard to the robustness of the data and information received, the quantitative and qualitative nature of the meaures at hand, a detailed description can be read in Annex 4 to this report.

Annex 2: Stakeholder consultation

In line with its Consultation Strategy, the Commission carried out different and complementary consultations of stakeholders.

The Inception Impact Assessment was published on 11 November 2020, and received feedback from 26 stakeholders. Replies came in from various stakeholders from the financial sector, some stakeholders from the trade and industry sector, from three central governmental bodies (Portugal, Finland, Austria) and from different representatives of the insolvency practitioners, among them from the European umbrella organisation of insolvency practitioners (INSOL Europe). The feedback can be read on the dedicated website of the Commission. 185

An on-line public consultation was launched in order to receive input from all the concerned stakeholders. The public consultation was launched on 18 December 2020 and after an extension of the original consultation period by more than two weeks ended on 16 April 2021. 129 contributions from 17 Member States and from the UK were submitted, with almost 45% of the responses coming in from Germany, more than 9% from Italy, 8.5% from Belgium and equally 4.65% of the responses from the Netherlands, Spain and Lithuania. One third of the replies were made on behalf of practitioners and professionals with interest in the field of insolvency (this category includes insolvency practitioners as well as lawyers). Approximatley 17% of the responses were submitted by stakeholders in the financial sector, almost 12% by stakeholders from the business and trade sector, 7% from social- and economic interest organisations and 5.5% from the members of the judiciary (judges). In addition, 10 replies (7.75%) were received from the public authorities of 8 Member States, with only 7 replies originating from the central governmental level.

As to the substance of the responses, they were in general in favour of the initiative. Stakeholders indicated that the problems created by differences in Member States’ insolvency frameworks to the further development of the internal market are reasonably serious, and that differences in national insolvency frameworks deter cross-border investment/lending. According to the perception of the stakeholders, the current fragmentation affects the functioning of the internal market in particular with regard to: 1) avoidance actions; 2) the tracing and recovery of the assets belonging to the insolvency estate; 3) the duties and liability of directors in the vicinity of insolvency and 4) how insolvency proceedings are triggered. Consequently, the overwhelming majority of stakeholders were in favour of an EU action enhancing convergence in this policy field (either in form of a targeted legislation /37.21%/, as a recommendation /23.26%/, or as a combination of both /27.13%/).

As to the specific issues pertaining to insolvency law, there was widespread support (81.4%) for minimum harmonization at EU level of the duties and obligations of directors in the event of vicinity of insolvency or when the company is insolvent. Those respondents flagged, in particular, that the most beneficial aspect of harmonization would be to impose a duty on the director, once the company is insolvent, to file for insolvency proceedings (70.54%). Similarly, there was widespread support amongst stakeholders for harmonisation the various aspects vis-a-vis the duties, responsibilities and powers of the IPs. With regard to the issue of ranking of claims, whereas certain areas of reform were supported (i.e. abolishing the priority status of tax and other public claims), this section saw a higher proportion of opposition to harmonisation. There was overall opposition to the proposed harmonisation of so called ‘carve-out’ rules (a proportion of assets recovered on the claims of secured creditors should be distributed to unsecured creditors). A number of stakeholders felt that the financial position of employees in the context of insolvency proceedings might be appropriately protected by enhancing the protections available under employment law directives, in particular, by strengthening the safeguards available under national wage guarantee funds. Furthermore, there was a wider support for a more comprehensive harmonisation of avoidance actions, encompassing the harmonisation of the different avoidance grounds, of the objective and subjective conditions leading to avoidance, as well as the time periods prior to the opening of insolvency which count as relevant for avoidance claims. Finally, respondents spoke in favour of simplifying and improving the conditions of asset tracing and recovery (e.g. 87% supported the idea that insolvency practitioners have full access to property and collateral databases)

The Commission organized a dedicated meeting with a group of selected stakeholders (on 8 March 2022). A workshop composed of selected stakeholders with particular interest in insolvency proceedings. The selection has been made on the basis of the scale of representation (stakeholders with European representation activity were invited). Invitees included representatives of the financial sector, the business- and trade, employees, practitioners and professionals working in insolvency proceedings, the representatives of employees and consumers, as well as academic areas and think-tanks. In the meeting, stakeholders proactively contributed by reporting on practical difficulties resulting from the fragmentation or different performance output of the national insolvency frameworks. They also expressed support towards a greater convergence in the legal landscape of insolvency proceedings in Europe.

The preparation of the initiative was supported by the Group of experts on restructuring and insolvency law. This Expert Group of the Commission consisting of individual experts was set up originally for the preparation of the proposal leading to the Directive on Restructuring and Insolvency. This time, the group was extended with 10 individual experts appointed as representatives of a common interest shared by shareholders in a particular policy area (the interest groups represented were financial creditors, trade creditors, consumer creditors, employee creditors, insolvent or over-indebted debtors). Between April 2021 and January 2022, the expert group held nine meetings. The detailed list of experts, as well as the meeting reports are available in the Register of Commission expert groups accessible on https://ec.europa.eu/transparency/expert-groups-register/screen/expert-groups/consult?do=groupDetail.groupDetail&groupID=3362 .

In connection with the preparation of the proposal, the Commission launched and carried out two external studies dealing with specific areas of insolvency. Both studies were carried out by a consortium consisting of Tipik and Spark Legal Network. The first one, assessing abusive forum shopping practices in insolvency proceedings after the 2015 amendments to the EIR addresses also the question to what extent differences between national insolvency frameworks serve as incentive for stakeholders to abusive forum shopping. The second study is dedicated to the analysis of the subject of asset tracing- and recovery in insolvency proceedings. Both studies included empirical analysis, for which data collection by the contractor involved both public on-line surveys and structured interviews with a range of stakeholders from all Member States of the EU. Both studies are available at the website of the Commission.

The Commission also consulted Member States in several iterations throughout the preparation of the proposal. The initiative has been addressed several time by the finance ministers of the Member States, where support was expressed towards the initiative. The Council Conclusions (ECOFIN) of 3 December 2020 on the Action Plan 186 encouraged the Commission to deliver on this initiative. These Conclusions were confirmed by the Euro Summit statement of 11 December 2020. 187 In April 2021, ministers of the Eurogroup area concluded that national reforms of insolvency regimes shall progress in coherence with parallel work streams led by EU institutions, which were undertaken in the CMU Action Plan 188 . Similarly, the statement of the Euro Summit meeting of 25 June confirmed that “structural challenges to the integration and development of capital markets, particularly in targeted areas of corporate insolvency laws, need to be identified and addressed”. 189  

At the same time, given the close link of insolvency laws to other areas of national law (such as property law and labour law), and the differences concerning the main policy objectives of insolvency law, seven Member States sent a joint letter to the Commission to express reluctance to engage in substantial harmonisation discussion. Two others have separately expressed the same reluctance.

On 22 March 2022, the Commission organised a workshop with the governmental experts of the Member States in connection with the upcoming initiative. Here, Member States underlined the need for a deep and detailed problem analysis, as well as the importance of having a clear diagnosis of the actual practical problems, their scale, on the scope of stakeholders affected by them and on their actual impact on the internal market. Similarly, as to the nature of a future action at European level, these Member States reiterated their words of caution, and suggested that measures shall focus on the improvement of efficiency of insolvency proceedings.

Appendix to Annex 2: Summary report – online public consultation

1.    INTRODUCTION AND OVERVIEW OF RESPONDENTS

Discrepancies in Member States’ national insolvency laws create barriers to the free movement of capital in the internal market. Such discrepancies, in particular, make it more difficult to anticipate the outcome for value recovery in cases of insolvency. In 2015, the Commission concluded in its original Action Plan for a Capital Market Union that “convergence of insolvency and restructuring proceedings would facilitate greater legal certainty for cross-border investors and encourage the timely restructuring of viable companies in financial distress”.

Although minimum harmonisation rules were set out by the Directive on Restructuring and Insolvency (Directive (EU) 2019/1023), significant differences continue to exist in core areas of insolvency law, such as a common definition of insolvency, the conditions for opening insolvency proceedings, the ranking of claims, avoidance actions, and the identification and tracing of assets belonging to the insolvency estate.

The present initiative complements the Directive on Restructuring and Insolvency and thus focuses on aspects of insolvency laws not addressed there.

This public consultation helped prepare this initiative by gathering the perception and views of affected stakeholders on a range of issues including: the liability and duties of directors of companies in the vicinity of insolvency; the status and duties of insolvency practitioners; the ranking of claims; avoidance actions; identification and preservation of assets belonging to the insolvency estate; core procedural notions.

Figure A2.1: Respondents to the Public Consultation questionnaire by group

Figure A2.2: Size of organisations that responded to the questionnaire

Figure A2.3. Country of origin of responses, overall

2.    OUTCOME OF REPLIES

2.1.    Fragmentation of insolvency frameworks and the need for greater convergence

Stakeholders indicated that the problems created for the internal market by differences in Member States’ insolvency frameworks are reasonably serious, and that differences in national insolvency frameworks deter cross-border investment/lending. According to the perception of the stakeholders, the fragmentation affects the functioning of the internal market in particular with regard to 1) avoidance actions; 2) the tracing and recovery of the assets belonging to the insolvency estate; 3) the duties and liability of directors in the vicinity of insolvency and 4) how insolvency proceedings are triggered. Consequently, the overwhelming majority of stakeholders were in favour of an EU action enhancing convergence in this policy field (either in form of a targeted legislation /37.21%/, as a recommendation /23.26%/, or as a combination of both /27.13%/).

Figure A2.4 – Assessing the scale of problems posed by differences in insolvency frameworks in the internal market. Replies in % to “Do differences in corporate (non-bank) insolvency frameworks in EU Member States pose a problem for the functioning of the internal market?” where 0 means 'no problem' and 5 means 'extremely significant problems'

The majority of stakeholders were in favour of the introduction of legislation, either alone or in combination with a recommendation.

2.2.    Directors’ liability in the vicinity of insolvency proceedings, disqualification of directors

There is widespread support (81%) for minimum harmonization at EU level of the duties and obligations of directors in the event of vicinity of insolvency or when the company is insolvent. In particular, the most beneficial aspect of harmonization would be to impose a duty on the director, once the company is insolvent, to file for insolvency proceedings (71%).

Figure A2.6 – On the minimum harmonisation of Directors’ duties. Replies to “should there be any minimum harmonization at EU level on the duties and obligations of directors in the event of vicinity of insolvency or when the company is insolvent?

2.3.    Insolvency practitioners

Overall, a majority of stakeholders felt that the following areas would benefit from harmonization at EU-level: 1) The licensing and registration of IPs (53%); 2) Their regulation, supervision and enforcement of professional obligations (51%); 3) The qualification and training of IPs (56.59%); 4) the appointment system of IPs (50%); 5) work standards and ethics (54%); and 6) the legal powers and duties of IPs (51%).

There is considerable support for a set of principles 190 laying down parameters for the qualifications of insolvency practitioners/insolvency office holders to guide their performance of their function, with all proposed principles gaining at least 66% support. These overlap with the areas named above, but also include the remuneration of IPs, and that IPs should be subject to a duty to keep all stakeholders regularly informed of the progress of the insolvency case.

2.4.    Ranking of claims

While certain areas of reform were supported in relation to the ranking of claims (i.e. abolishing the priority status of unpaid taxes), this section saw a higher proportion of opposition to harmonisation. There was overall opposition to the proposed harmonisation of carve-out rules and of rules protecting ‘new-financing’. Over one-third of academics and half of the public authorities felt that no harmonisation of insolvency law is needed regarding the position of employees in the event of insolvency. A number of stakeholders felt that the financial position of employees in the context of insolvency proceedings might be appropriately protected by enhancing the protections available under employment law directives, in particular, by strengthening the safeguards available under national wage guarantee funds.

Figure A2.7 – Less than 50% support for reform in most aspects of the rules on ranking claims- % of replies to “According to your opinion, which aspect of the rules on the ranking of claims would benefit most from a harmonization at EU level?” ˙(Multiple replies were possible.)

Figure A2.8 – On abolishing the priority status of unpaid taxes- % of replies to “Do you agree that the priority status of unpaid taxes and other public contributions in the context of insolvency proceedings shall be abolished at EU level?

2.5.    Avoidance actions

There is support for harmonized rules on avoidance action in relation to the following transactions: 1) preferences (transactions benefitting one creditor to the detriment of the general body of creditors); 2) transactions at an undervalue, including gifts to a creditor or third party; 3) securities created in the ‘suspect period’ in order to convert a debt from being unsecured or being secured (invalidation of securities); and 4) transactions to defraud creditors. Support for harmonizing the above transactions was particularly strong in the business, financial and academic sectors.

All stakeholder groups showed support for all of the proposed subjective criteria to be used as possible conditions to qualify a transaction as avoidable action (under “subjective” criteria the questionnaire listed conditions which involved the subjective knowledge/awareness of the debtor/beneficiary on the real nature of the transaction). Also, the use of objective criteria was supported. The most popular objective criteria were that: 1) The transaction happened within the ‘suspect period’ (77%); 2) the transaction is to the detriment of the general body of creditors (70%); and 3) the debtor was insolvent at the time of the transaction (53%).

The majority of stakeholders (74%) agree that the ‘suspect period’ should be harmonized at EU level, as shown below.

Figure A2.9 – On whether the ‘suspect period’ should be harmonised, replies to “Should the time-periods before the opening of insolvency proceedings in which a transaction must have been entered into for it to be avoidable (the “suspect period”) be harmonized at EU level?

A majority of stakeholders also support common rules on specific time-limits:

Figure A2.10 –time-limits for suspect period proposed by respondents

2.6.    Harmonising procedural issues concerning formal insolvency proceedings

There is support for a harmonised definition of insolvency, with the notable exception of public authorities. The most popular proposed definition of insolvency is based on a liquidity test (see Figure A2.12). There was reasonable overall support for harmonised rules on how insolvency proceedings are opened, especially amongst practitioners. All stakeholders were strongly in favour of the idea that such rules provide creditors with a right to file for insolvency and oblige an insolvent debtor to apply for insolvency. While all stakeholder groups showed a majority support for harmonising the national rules on the time limits for creditors to lodge their claims, no clear majority emerged on a specific time limit.

Importantly, stakeholders underlined that the national insolvency registers and the interconnectivity of national insolvency registers at EU level are not functioning properly.

71% of stakeholders suggested that there should be harmonised rules on judges’ minimum training requirements or professional qualifications (see Figure A.2.13). In addition, there was overwhelming support (84%) for Member States to designate specialised insolvency chambers at the appropriate court instances to increase the efficiency of insolvency proceedings (see Fig. A2.14).

2.7.    Preservation, identification and tracing of assets

All stakeholder groups support the harmonization of ipso facto clauses (76% overall support) to enhance legal certainty and predictability for businesses. Under ipso facto clauses the questionnaire understood any contractual provision that allows one party to the contract to terminate or modify the operation of the contract upon the occurrence of a specified insolvency related event. Support was especially strong amongst academics and practitioners. Furthermore, 84% of stakeholders favour harmonised rules on assistance (including the interconnectivity of relevant registers) in the cross-border tracing of assets of the insolvent debtor. Such rules would be most useful in relation to the following types of assets: real estate (78%), company interest (60%), bank accounts (75%) and claims (other than arising from bank accounts) (46%).

Stakeholders want insolvency practitioners to have the following powers and duties in order to trace, secure and recover assets: 1) the power to compel the production of books and records (including from lawyers, accountants and banks) (75%), 2) the power to conduct audits (65.%) and 3) the duty to report suspicious transactions to law enforcement authorities (53%). Almost all stakeholders agree that IPs should have full access to property and collateral databases.

Figure A2.15 – On giving IPs full access to property and collateral databases- replies in % to “Should Insolvency Practitioners have full access to property and collateral databases?”

3.    VIEWS OF VARIOUS STAKEHOLDER CATEGORIES

This section provides a detailed analysis of the responses given to the public consultation by group of stakeholder. Since stakeholders’ economic and social interests influence their views, the 129 stakeholders replies were reattributed to a functional breakdown that is closer to their economic and social background than above 2, which relies on stakeholders’ self-classification.

This alternative breakdown makes use of additional information that stakeholders revealed about themselves when replying to the consultation. For some doubtful cases, stakeholders’ internet websites were used to guide their attribution to a stakeholder group. Entities that responded as business and companies or their associations were distinguished into financial corporations and non-financial corporations, assuming that the former represent creditors’ interest and the latter debtors’ interest. Among the financial corporations are a few that specialised in debt collection, i.e. are not in the business of credit provision, but may have similar interest than for example banks. A significant number of the non-financial companies that replied to the consultation provide advisory services to other firms, i.e. consultancy, accounting and auditing. They were taken as independent third business group since their interest would be different from that of debtors. Most “EU citizens” and “other respondents” that submitted replies identified themselves as lawyers, legal experts or active as insolvency practitioners and were clustered accordingly. Four respondents represent social protection interests. The few respondents that classified themselves as EU citizens without activity as lawyer or insolvency practitioners had all academic credentials and were therefore attributed to the group of researchers. Figure A2.16 shows the breakdown of stakeholders in the revised breakdown.

Respondents had comparable assessments of whether the current insolvency regimes represents a problem and would require policy measures on a scale between 0 and 5 each (Figure A2.17). Public authorities were most positive about the functioning of the current rules. They were the only group that expressed a higher need for policy action than they considered the current rules as a problem. Insolvency practitioners and lawyers were also relatively positive on the current status quo and expressed less urgency for policy measures than other stakeholder groups. Researchers were most critical on the status quo, followed by the business sector, in which those that represent interest of advisory services gave the most severe indications. Non-financial corporations gave slightly more critical marks than financial corporations, which is unexpected. None of the social protection entities responded to this question.

Figure A2.18 shows the views of the different stakeholders about which areas of insolvency law they consider the most significant barrier to the single market on a scale 0 to 5. The replies look consistent with the economic and social interest of the different stakeholder groups. Insolvency practitioners consider avoidance actions and asset tracing most severe. Financial institutions take most issues with the trigger of the insolvency process and the ranking of claims whereas non-financial business does so with asset tracing and the ranking of claims. Firms that provide advisory services flagged the insolvency definition and trigger, directors’ duties and even the ranking of claims as most concerning. Researchers’ put their weight on avoidance actions and the ranking of claims. None of the social protection bodies responded to this question.

Figure A2.18: Stakeholders’ assessment to what extent the different elements of insolvency regimes act as a deterrent to the single market on a scale 0 to 5

Stakeholders had different views with regard to both whether EU measures were desirable in different areas (Figure A2.19) and how the EU should address the problems (Figure A2.20). Public authorities gave the least supportive responses, in particular with regard to the introduction of a common definition and common directors’ duties, while their backing for asset tracing is not much lower than that of the business sector. Researchers, insolvency practitioners and legal experts were strongly supportive of EU measures that target directors’ duties and asset tracing. Financial institutions gave a larger share of supportive replies to asset tracing and the introduction of a common insolvency definition. The lion’s share of both financial and non-financial business supported EU measures in these three areas, with the weakest backing given to directors’ duties, which is however the most important among these three areas when looking at firms that provide advice to business. Researchers and public authorities represent polar cases with respect to which instrument the EU should use. The majority of the former is in favour of a binding legal instrument, the latter group has a preference for a recommendation. The business sector holds disperse views. Advisory and financial entities place a large weight on the combination of both, similar to insolvency practitioners.

Private and public respondents expressed opposite views on the suitability of a common definition of insolvency along a liquidity criterion (Figure A2.21). Public authorities favour a combination of a balance-sheet and a liquidity criterion or the possibility to opt between both. Only a minority of the private stakeholders backs the combination or optional solution. They dominantly favour a liquidity criterion, though financial and non-financial corporations were less supportive to a liquidity criterion than the other private stakeholder groups. Hardly any respondent, except a few legal experts favoured a balance sheet criterion.

The different views of stakeholder groups about the ranking of claims is also reflected in the variation of their views when asked which types of credit claims would benefit from common rules at EU level (Figure A2.22). Researchers are the most positive and public authorities the most negative stakeholders across the types of claims. Few of the social protection bodies that participated in the consultation see generally benefits of EU rules, not even on the claims of unpaid employees. Both financial and non-financial business express low support for common rules on the subordination of shareholder loans, while other private respondent groups do. Financial corporations‘ preference for common rules on new finance is shared by researchers, lawyers and insolvency practitioners. On the opposite side, non-financial companies have least interest in rules for new finance. More researchers, legal experts and insolvency practitioners see benefits from common rules on public claims than the business sector, i.e. financial, non-financial and advisory stakeholders.

Overall, perceptions of the problems suggested in the questionnaire differ across stakeholders. When asking stakeholders to what extent they see the lack of harmonised rules in the various topics of insolvency law as an impediment to the proper functioning of the internal market, public authorities and respondents belonging to the trade- and business sector did not perceive this as a significant problem (70% and 60% of the responses being in the ‘less significant’ range, respectively). In contrast, 69% and 55% of the insolvency practitioners or from the financial stakeholders who responded to this question saw this as a significant problem. Interestingly, the low rate of problem perception was not necessarily followed by a low rate of support for an EU harmonisation of insolvency laws. For instance, around 80% of the business- and trade sector respondents supported the idea of an EU harmonisation of the duties and obligations of directors in the vicinity of insolvency, or agreed with the abolition at EU level of the priority status of unpaid taxes in the insolvency proceedings. Similarly, more than 2/3 of them supported harmonisation on the professional regulation of insolvency practitioners or vis-à-vis avoidance actions.

Annex 3: Who is affected and how?

1. Practical implications of the initiative

The preferred option will imply the following obligations for companies facing insolvency and for the Member States.

Obligations for companies facing insolvency:

Companies facing insolvency would have to familiarise themselves with the new rules and adapt some internal processes to comply. Directors would have to comply with stricter duties in the vicinity of insolvency (in particular, with the duty to timely file for insolvency). Distressed MSEs will have the option to follow a more orderly winding up based on a new simplified liquidation procedure proportionate to their needs. To be able to use it, MSEs will have to get familiar with this new regime.

Obligations for Member States

Member States would be required to further enhance transparency of the key features of their respective insolvency rules, by making such information easily accessible to investors on a public website and in a pre-defined user-friendly format. Member States would also be expected to ensure that their judicial systems make it possible for MSEs to benefit from simplified insolvency procedures and for companies to opt for a pre-pack procedure.

2. Summary of costs and benefits

The tables below summarise expected benefits and costs arising from the implementation of the preferred option (option 1) as an aggregate. The impacts of various measures can be considered additive, but not having further synergies (which could also be the case, but it may not be prudent to assume this). Main impacts summarised in the table and further information about the assumptions used are further explained below.