EUROPEAN COMMISSION

Strasbourg, 22.11.2016

SWD(2016) 357 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU

{COM(2016) 723 final}
{SWD(2016) 358 final}

1. INTRODUCTION    

2. POLICY CONTEXT, ECONOMIC CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY    

2.1. Policy context    

2.2. Economic context    

2.3. Drivers and problems    

2.3.1. Drivers    

2.3.2. Problems    

2.4. Risks    

2.5. Baseline scenario    

2.6. The EU's right to act, subsidiarity, necessity and proportionality    

3. OBJECTIVES    

4. HIGH-LEVEL OPTIONS    

4.1. Description of high level options    

   Option 1: Maintaining the status quo (baseline scenario)    

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

   Option 3: Introducing an alternative, optional EU restructuring and second chance regime for cross-border cases    

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

4.2. Analysis of high level options and discarded options    

5. SUBSTANTIVE SUB- OPTIONS AND ANALYSIS OF THEIR IMPACT    

5.1. Early restructuring possibility    

5.3. Debtor in possession    

5.4. Plan approval by a majority of creditors    

5.5. New financing and interim financing, safe harbour provisions and third party releases    

5.6. Reducing the formalities relating to court proceedings    

5.7. Lowering and aligning discharge periods for natural persons     77

5.7.1. Entrepreneurs    

5.7.2. Consumers    

5.8. Measures to increase the effectiveness of restructuring, insolvency and second chance procedures    

6. THE PREFERRED HIGH-LEVEL OPTION 4    

7. ANALYSIS OF OVERALL IMPACTS OF THE PREFERRED HIGH-LEVEL OPTION 4    

8. MONITORING AND EVALUATION    

9. ANNEXES    

IMPACT ASSESSMENT REPORT

RESTRUCTURING AND SECOND CHANCE

1. INTRODUCTION

Insolvency rules in their widest sense cover a wide range of measures from early intervention before a company gets into serious difficulties, timely restructuring to ensure that viable business parts are preserved, giving a second chance to honest entrepreneurs and liquidation proceedings. A well-functioning insolvency framework covering all these measures is an essential element of a good business environment and it is a key condition for sustainable growth and jobs creation, which is a key priority of the European Commission. A reliable and predictable insolvency framework maximises the efficiency, predictability and effectiveness of insolvency proceedings, which ultimately results in an effective credit system and a favourable investment climate. Insolvency frameworks providing for transparent, predictable and cost-effective mechanisms for resolution of over-indebtedness should make it possible to save viable businesses in difficulties (by restructuring the existing company or by selling it as a "going concern") or make it easier to liquidate a company and its assets if the company does not have any prospect of survival. Efficient insolvency rules, thus, help increase the recovery rate of debts and avoid the build-up of non-performing loans in the financial system At the same time, allowing honest entrepreneurs to benefit from a second chance after overcoming bankruptcy is crucial for ensuring a dynamic business environment and promoting innovation. Restructuring and second chance for individuals are therefore critical parts of an appropriate insolvency framework.

Good insolvency frameworks should define procedures for dealing with

-    businesses in financial difficulties, but not yet insolvent (where the restructuring framework is most useful),

-    companies that are very close to insolvency or already insolvent (where any means of recovery the value for creditors are most important),

-    a possibility of a fresh start of economic activity for natural persons, in particular entrepreneurs (debt discharge).

The core of any insolvency law is the most efficient use of the resources used by a distressed company and allocation of potential costs. This primary economic efficiency objective is complemented by specific redistributive goals 1 which result from cultural and social value patterns of a given society and may vary between countries. Insolvency legislation therefore sets out conditions for initiating insolvency procedures, outlines creditors’ and debtors’ rights and obligations, describes the role of courts, as well as the steps and the timeframe to be followed once the procedure starts.

An effective insolvency regime should not only ensure a fair and timely distribution of assets among creditors through liquidation proceedings, but it should also allow viable debtors to restructure at an early stage and thus avoid insolvency and the related loss of value, jobs and know-how. In addition, in a cross-border context, each of the countries affected has an interest in regulating insolvency of an entrepreneur whose activities or assets are located on its territory 2 . An effective restructuring and second chance framework should also provide for safeguards against possible moral hazard risks which are inherent but which should not impede the adoption of restructuring and second chance frameworks. This brings about problems which cannot be resolved solely by rules determining the applicable law and jurisdiction. These aspects have been partly addressed through the Regulation (EU) 2015/848 on insolvency proceedings 3 (the Insolvency Regulation), which includes provisions on jurisdiction for opening insolvency proceedings, recognition and enforcement of judgments issued in such proceedings, as well as provisions regarding the law applicable to insolvency proceedings. However, even under such rules, in a number of situations, more than one law and jurisdiction will have a competence to handle the cross-border insolvency and the differences in these laws will hinder a successful resolution of such a case 4 .

2. POLICY CONTEXT, ECONOMIC CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY

2.1.    Policy context

Efficient insolvency frameworks play a key role in economic policy since they can contribute in a tangible way to create jobs and sustainable growth by helping companies in difficulties, but still viable, to get back on their feet and quickly taking companies beyond rescue off the market. For this reason, the issue has attracted considerable interest at the level of the European Union for quite some time. In 2011, the European Parliament adopted a Resolution on insolvency proceedings 5 which contained recommendations for harmonising specific aspects of substantive insolvency law, including restructurings, and company law. The recommendations regarding the harmonisation of specific aspects of insolvency and company law concerned certain aspects of the opening of insolvency, certain aspects of the filing of claims, aspects of avoidance actions, general aspects of the requirements for the qualification and work of liquidators, as well as aspects of restructuring plans. An accompanying study 6 confirmed that there were ‘certain areas of insolvency law where harmonisation is worthwhile and achievable', in particular as regards the efficiency of restructuring procedures. Also the Competitiveness Council conclusions of 2011 called on Member States to reduce the discharge period for entrepreneurs to 3 years.

Against this background and recognising the significant differences between national insolvency frameworks, the European Commission issued in December 2012 a Communication 7 which highlighted a need for a step-by-step approach as regards certain areas where differences between domestic insolvency laws could hamper the functioning of an efficient internal market 8 . The subsequent first action under this approach was the modification of Regulation (EC) No 1346/2000 9 accomplished by the adoption of the Insolvency Regulation. The Insolvency Regulation focuses on resolving the conflicts of jurisdiction and laws in cross-border insolvency proceedings, and ensures the recognition of insolvency-related judgments across the EU. It does not harmonise the substantive insolvency laws of the Member States.

As a next step, the Commission adopted in 2014 the Recommendation on restructuring and second chance (the Recommendation) 10 . The Recommendation focused on restructuring and second chance, since it was considered that in these two fields the action at EU level would bring most added-value 11 . The Recommendation invited Member States to put in place (i) effective pre-insolvency procedures with the aim of helping viable debtors to restructure and thus avoid insolvency and (ii) second chance provisions for entrepreneurs enabling them to have a discharge in no more than three years after insolvency. In particular the Recommendation focused on:

(i)    availability of a preventive restructuring framework,

(ii)    facilitating negotiations of restructuring plans, including appointment of a mediator or a supervisor, stay of individual enforcement actions and suspension of insolvency proceedings,

(iii)    restructuring plans, including contents of restructuring plans, adoption of restructuring plans by creditors, court confirmation of the restructuring plan, rights of creditors, and effects of a restructuring plan,

(iv)    protection for new financing, and

(v)    second chance for entrepreneurs, including discharge periods.

Following its adoption, an evaluation of its implementation was conducted 12 and two data collection rounds were carried out after one year and after two years, respectively. Already on the occasion of these two reviews which were carried out in 2015 and 2016 13 , it was apparent that most Member States which were already lagging behind in this area were not making sufficient progress.

These reviews also revealed that while the Recommendation has provided useful focus for those Member States undertaking reforms in the area of insolvency, it has not led to the desired impact in terms of consistent changes across all Member States, facilitating the rescue of businesses in financial difficulty and in giving a second chance to entrepreneurs. This was due to its partial implementation in a significant number of Member States, including those having launched certain reforms.

By way of example, it can be outlined that on restructuring, there are still several Member States where it is not possible to restructure a business before it is insolvent (DK, CZ, BG, HU, SK, LT). CY, SI and PL introduced new preventive restructuring procedures but they differ in certain points form the Recommendation (in SI commercial creditors for example cannot participate in preventive restructuring which is limited to financial creditors); while EL, ES, SL, RO and IT brought some limited improvements to their existing procedures 14 . On second chance, since the adoption of the Recommendation, several Member States (e.g. ES, RO, HU, HR) have introduced for the first time a debt discharge regime for natural persons. In EL, discharge for entrepreneurs was reduced to 3 years. However, in most Member States where reforms were recently introduced, the duration of the discharge period and the conditions for having access to discharge do not comply with the Recommendation: in general discharge periods are five year or more (ES, RO, HU) and sometimes there are impossible repayment obligations attached (in HU, 50% of debt needs to be repaid to benefit from discharge). In Romania, only consumers benefit from the discharge regime, but not the entrepreneurs. Other differences in the implementation of the Recommendation are described in more detail below in section 2.3.2. on problem drivers. Such differences in Member States frameworks translate into continuing legal uncertainty, additional costs for investors in assessing their risks, less developed capital markets and persisting barriers to the efficient restructuring of viable companies in the EU, including cross-border enterprise groups.

A comparative legal study on differences between insolvency and restructuring regimes in Member States concluded that "there appears to be the incomplete and inconsistent implementation of the Recommendation." 15  Following the adoption of the Insolvency Regulation, the Commission reflected on ways forward to deal with the disparities between substantive insolvency laws 16 . Evidence from the public consultation on the Green Paper on the Capital Markets Union 17 , which included explicit questions on insolvency frameworks, as well as the Doing Business data of the World Bank 18 on the global practices for resolving insolvency confirmed the critical importance of restructuring processes as workable alternatives to liquidation processes for viable businesses. In parallel, studies and reports on entrepreneurial activities 19 concluded that entrepreneurs should not be stigmatised when honest business endeavours fail. On the one hand, individuals should not be deterred from entrepreneurial activity, resuming consumption or taking up gainful employment; on the other hand, any rules providing for debt discharge should prevent abuse and incentivise careful debt management. In light of these assessments, it was apparent that non-binding measures at the European level would not be sufficient to bring about these changes.

The "Five Presidents' report" of 22 June 2015 on "Completing Europe's Economic and Monetary Union" listed the area of insolvency law among the most important bottlenecks preventing the integration of capital markets in the euro area and beyond 20 . 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. The inefficiency and divergence of insolvency laws make it both harder for investors to assess credit risk in general and particularly as regards cross-border investments. More cross-border risk-sharing, deeper and more liquid capital markets and diversified sources of funding for EU businesses will deepen financial integration, lower costs and increase the EU's competitiveness. This in turn will contribute to job creation and sustainable growth.

The 2015 Capital Markets Union Action Plan 21 therefore announced a legislative initiative on business insolvency, including early restructuring and second chance. This initiative is intended to address the most important barriers to the free flow of capital and build on national regimes that work well. In the public consultation of the Green Paper on the Capital Markets Union Action Plan which took place in summer 2015 the majority of stakeholders highlighted the need of further action going beyond the 2014 Recommendation on restructuring and second chance regarding on restructuring of companies, stay on individual creditor claims and definition of a common discharge period, efficiency and effectiveness of insolvency practitioners and the courts 22 .

At the same time, the Single Market Strategy stated that the Commission would support honest entrepreneurs and propose legislation to ensure that Member States provide a regulatory environment that is able to accommodate failure without dissuading entrepreneurs from trying new ideas again 23 .

More specifically as regards the banking sector, the Communication Towards the Completion of Banking Union 24 published in November 2015 confirmed that (i) there is a need for greater convergence in insolvency law and restructuring proceedings across Member States, (ii) the inefficiency and divergence of insolvency laws make it harder to assess and manage credit risk, and that (iii) enhancing legal certainty and encouraging the timely restructuring of borrowers in financial distress is particularly relevant for the success of strategies to address the problem of non-performing loans in some Member States.

The ECOFIN Council Conclusions of July 2016 on a roadmap to complete the Banking Union underlined the importance of the work carried out by the Commission to propose a legislative proposal for minimum harmonisation in the field of insolvency law in the context of the Capital Markets Union (CMU), noting that this may also support efforts to reduce future levels of non-performing loans. 25

More recently, it its Communication on Capital Markets Union - Accelerating Reform the Commission reiterated that inefficiencies and differences in national insolvency frameworks generate legal uncertainty, obstacles to recovery of value by creditors, and barriers to the efficient restructuring of viable companies in the EU, including for cross-border groups. 26

2.2. Economic context

In recent years, an average of 200,000 firms went bankrupt each year in the EU, resulting in direct job losses totalling 5.1 million over three years 27 . About one-quarter of these bankruptcies involved creditors and debtors in more than one EU Member State 28 . However, the single market dimension of the problems is even larger than these figures suggest since many companies avoid expanding or investing cross-border in the first place, due to the non-convergence of insolvency frameworks and uncertainty about the effectiveness of the applicable rules, as described in section 2.1. The trends in the number of corporate insolvencies are provided below as provided below in the table show the increasing number of insolvencies starting with the peak of the economic crisis in 2009 and still remaining high.

Table 1: Trends in number of business bankruptcies and other forms of unvoluntary business cessations selected Member States 2007 to 2014 29 – 2009=100 % (the numbers in the table are given in 100%) 30 .

Sources: London Economics based on data from AT: Kreditschutzverband; BE: Statistics of the Belgium Federal Public Service Economy; BG: provided by official of Ministry of Economy; CY: Department of Registrar of Companies and Official Receiver; CZ: CRIF from Insolvency Register of Ministry of Justice: DK: Statistics Denmark; EE: Krediitiinfo SA; ES: OECD; Statistics Finland; FR: Insee: EL: OECD; HU: Hungarian Central Statistical Office; IR: Dpt of Jobs, Enterprise and Innovation; IT: Cerved; LT: Statistics Lithuania; LU: Statec; LV: Lursoft; NL: Statistics Netherlands; PT: COSEC SA: Swedish Agency for Growth Policy Analysis; SE: SK: Ministry of Justice Slovakia; UK: Insolvency Service

Today in Europe half of all businesses do not survive the first 5 years of their existence. In a number of Member States, the peak of bankruptcies was reached during the initial years of the crisis, i.e. in 2009 (Austria, Estonia, Finland, France, Lithuania, United Kingdom) or in 2010 (Denmark, Hungary, Latvia). In another group of Member States the peak was reached in 2012 (Luxembourg, Portugal) or in 2013 (Belgium, Bulgaria, Cyprus, Czech Republic, Luxembourg, Netherlands, Spain and Sweden) 31 . However, even if the number of bankruptcies can be expected to stabilise and re-converge to pre-crisis trends, the economic case for more efficient and convergent insolvency frameworks remains.

In case of liquidation, companies trading with the insolvent company may not receive anything at all if their debt was not secured; also secured creditors have to take into account the possibility of a substantial reduction in value of their claims 32 . In case of restructuring, on the other hand, insolvency is avoided, contract debts are in general paid, and negotiations concern in most cases only the financial debt. Restructuring is in general beneficial for the creditors if the business is viable. Hence, restructuring instead of liquidation constitutes a gain for all stakeholders involved, provided that restructured companies are able to stick to their new repayment plan.

Regarding second chance, a distinction between entrepreneurs and consumers needs to be made, since the economic rationale for offering each of them a second chance is different in the two cases. Offering a second chance to entrepreneurs means that they have a chance to restart a business activity and there is evidence that those starting for a second time learn from their mistakes and their next businesses are more viable 33 . For consumers, the rationale of providing them with a second chance is not only economic but also social. Consumers discharged of debts can start buying services and products and therefore contributing to the rise of GDP. But most importantly, consumers and their families could avoid being caught in a debt-trap for life, with all the precarious social consequences that this situation may cause to individuals and families.

In some Member States natural persons entrepreneurs (with unlimited liability) constitute more than 50% of all businesses, since the creation or management of limited liability companies has not been facilitated in those Member States 34 . Therefore, a discharge, even for entrepreneurs or managers of single-member limited liability companies, could have a significant impact on the economy going beyond what is usually associated with local businesses. A number of such companies, registered as "sole traders", have cross-border activity which in other Member States is normally performed by their corporate equivalents.

Moreover, entrepreneurial debts are often intertwined with personal debts (e.g. using the same car both for business and private purposes). In addition, in order to start a limited liability company, credit institutions require a security on private houses as a prerequisite to a loan 35 . This means that economic consequences of entrepreneurial debts, and a possible discharge of them, go beyond the economic activity of an entrepreneur. 

The focus on restructuring of corporate entities and discharge of natural persons is complementary and allows dealing with the economic consequences of debts regardless of the legal form which created such debts. The debts of natural persons-entrepreneurs would be subject to discharge, whereas the debts of limited liability companies would be treated in restructuring or liquidation proceedings.

Enterprise mortality is closely linked to the problem of non-performing loans which is the most usual cause of liquidation of companies. The European Central Bank’s 2015 comprehensive assessment identified a total of EUR 980 billion in non-performing exposures in the banking system 36 . The table below compares the change in non-performing loans between 2004 and 2014 in the EU, the United States and Japan. It demonstrates that the Eurozone had the greatest difficulties in liquidating the large portfolios of non-performing loans. Whilst there are several reasons for this, it is clear that cumbersome and lengthy insolvency proceedings, as well as lack of modern restructuring and second chance frameworks contribute significantly to this problem 37 .

Chart 1: Non-performing Loans, Provisions and Write-offs in the United States, Eurozone and Japan

Source: Euro Area Policies, Selected Issues, IMF July 2015 38

Member States with less efficient insolvency frameworks to deleverage non-performing loans are faced with the weight of existing company debt which deters investors, holds back consumption, and creates a situation of debt overhang 39 . High levels of non-performing loans in banks' portfolios also undermine their lending capacity for banks and impacts job creation and growth. Studies and data from the International Monetary Fund 40 suggest that high indebtedness of EU companies and the problem of non-performing loans represent an investment barrier and prevent economic growth. As the graph above shows, in the EU the progress has been slower in resolving these impaired loans in comparison to the U.S. or Japan. As long as private debts remain at high levels, economic activity may struggle to pick up. The International Monetary Fund calculates that freeing-up capital disposed for non-performing loans could unlock new lending of between EUR 167–€522 billion, provided there is a corresponding demand for new loans 41 .

Efficient insolvency and restructuring laws can serve to avoid future build-up of non-performing loans since loans on which performance ceases could be enforced more efficiently. Improving legal settings of enforcement regimes will thus not resolve the issue of existing NPLs over which enforcement proceedings have already started. However, reinforcement of the judiciary setting could still help to speed up the remaining steps of the proceedings. High levels of NPLs have a direct consequence on the capacity of banks to support growth. According to the IMF Article IV review of the Euro area, “high levels of NPLs and debt have held back bank lending and investment, limiting the pass through of easier financial conditions.  42 ” In this way, reforms of insolvency laws can complement other ongoing reforms at the EU level in the banking sector and as regards capital markets.

2.3. Drivers and problems

2.3.1. Drivers

This sub-section describes the main drivers which give rise to the problems explained in section 2.3.2. These drivers were raised by stakeholders in the performed public consultations, in particular in the public consultation on the Green Paper on the Action Plan of the Capital Markets Union 43 . Overall, respondents indicated a number of specific issues within the area of insolvency which in their view should be harmonised at EU level, such as preventive restructuring proceedings, out-of-court and hybrid restructuring procedures, second chance for

entrepreneurs, regulation of qualifications, tasks and rights of insolvency practitioners, liability of directors and shadow directors, introduction of a time cap on insolvency procedures, establishment of an EU register with information on insolvencies and a harmonised form for petition claims. Stakeholders suggestions also aimed at harmonisation of requirements for opening insolvency proceedings, including a common definition of default and avoidance actions, restructuring of companies, stay on individual creditor claims and definition of a common discharge period. Other frequently quoted proposals for action suggested harmonisation of ranking of creditors' claims and the issue of personal insolvency 44 . Following the consultations with the group of insolvency experts, relevant stakeholders and Member States experts, all the issues raised were examined and most of them, although not all 45 , have been made subject to a deeper analysis and regulatory action as described in the following sub-section A. to E. and in section 5 on substantive sub-options.

A.    Preventive restructuring

A.1. Rules on the possibility of restructuring at an early stage

The later a business initiates restructuring proceedings, the higher the costs of restructuring and the lower the management powers and success rate. Therefore debtors in financial difficulties should have the possibility to restructure their debts before they are insolvent. That said, the risk of insolvency has to be apparent, for example, because the debtor is unlikely to be able to repay his debts as they fall due in the foreseeable future 46 . However, the overall general statistics demonstrate that less formal procedures are not applied very often in the majority of Member States 47 . The highest proportion of restructurings in relation to the overall number of insolvency proceedings in the EU appears to be in France with around 30 % of restructuring proceedings 48 . For instance, in Spain, where restructuring proceedings have been recently introduced and which shows a situation common to most Member States, out of all the agreements reached in 2014, only 9.7% were made in an early composition agreement. Since 2010, a smaller number of agreements has been made (with exception of 2013) compared with 2006, 2007 and 2009 where the rates were 22.4%, 25.4% and 21.8 respectively. Most agreements are made as part of ordinary insolvency proceedings and this is the case even more in the last years which might suggest that the latest changes in the law did not succeed in promoting less formal proceedings, or that debtors are using alternatives, such as the homologation refinancing agreement. This is despite the fact that the median value of recovery rates in the early composition agreements in 2014 was 68.7% of the nominal present value of the debt, whereas in the ordinary composition agreement it was only 44.3%. Additionally, recovery rates in early composition agreements were in general higher always higher than in the ordinary composition agreement (see figure below).

Chart 2: Comparison of median recovery rates in Spain between ordinary composition agreements and early composition agreements

Source: Own elaboration of VVA/ JIIP/ DTI/ Grimaldi consortium using the data provided by Colegio de Registradores de la Propiedad, Bienes Muebles y Mercantiles de España; * The recovery rates refer to the recovery expectations of the nominal present value for the normal creditors and under the supposition of full payment of what is agreed 49

A concern that such preventive procedures can be misused by debtors whose businesses are not viable, and should rather be liquated than rescued, has led some Member States to impose high thresholds for entering these procedures. Furthermore, in some Member States debtors are under an obligation to file for formal insolvency procedures as soon as they are over-indebted (balance sheet test), which may dissuade directors to file for preventive restructuring due to risks of personal liability. SMEs, in particular, are reported to have great difficulties recognising their financial difficulties and the need to act quickly to contain the damage 50 .

Table 3: Situation in Member States as regards access to restructuring frameworks

An early possibility of restructuring and a low threshold for entering into negotiations of a restructuring plan favours the saving of viable businesses channelling them away from liquidation 51 . The risk of misuse exists but should be addressed by a proper assessment of the viability of the business in the light of the restructuring plan, adopted by creditors, rather than by imposing strict entry conditions to access the procedures.

In the public consultation and during the 'Sounding Board' meetings, most of the stakeholders from business and the financial sector as well as practitioners in the field of restructuring underlined that many economically viable business that could have eventually avoid insolvency, end up in bankruptcy because they did not have the possibility to restructure effectively at an early stage. Business sector voiced that the death rate of companies can be reduced by the possibility of early restructuring for viable business in difficulties as it would shift the focus away of liquidation. Financial sector also stressed that since creditors’ recovery rates are in general higher where the insolvency framework allows for early and efficient restructuring of viable firms and quick resolution of the non-viable ones, the introduction of efficient restructuring procedures in EU will allow creditors to recover more than in the case of liquidation of an insolvent debtor. Trade Unions' representatives warned against the moral hazard risk that business may use restructuring frameworks strategically to reduce their liabilities towards workers.

A2.Rules on stay of enforcement actions (moratorium)

A stay on enforcement actions by a court suspends the right of a creditor to enforce its claim against a debtor 52 . A properly defined "stay" of individual or collective enforcement actions is a crucial element of any useful restructuring procedure 53 . Inadequate or overly restrictive stay provisions are likely to reduce the chances for a successful turnaround and damage the overall value of the business. The application of the stay, as one of the “fundamental debtor protections provided by the bankruptcy laws 54 , impacts on the prospects of viability of the company and may give higher rewards to creditors who started enforcement early 55 . This goal will be compromised, however, if creditors are able to seize assets that are essential to the carrying on of the company’s business 56 . It is thus essential to strike the right balance between the different interests at stake.

Table 4: Situation in Member States as regards rules on stay of enforcement actions

Most often the stay also means that formal insolvency procedures cannot be opened against the debtor. In some Member States certain actions cannot be "stayed" (e.g. in BE, DK and SE in respect of specific secured transactions; in EE in respect of employment claims).

During negotiations of a restructuring plan, the debtor should be able to apply to a court for a suspension of individual enforcement actions ("stay"), otherwise the success of the restructuring process is in jeopardy. The "stay" could be requested against any type of creditor. The stay would not be effective if, at the same time, the debtor's duty to file for insolvency were not suspended for the period of the stay or if creditors were allowed to enforce their rights through a collective action (i.e. opening insolvency proceedings) during this time 57 .

During the consultation process, the business sector and experts in the field of restructuring have pointed out that the absence of a 'breathing space' (stay on individual or collective enforcement actions) is likely to reduce the prospects of a successful restructuring. They were of the view that businesses in financial difficulties should have the possibility of a necessary amount of time to define a restructuring plan and avoid precipitate creditor action. In addition, the financial sector stressed that a stay of a proportionate and appropriate timeframe, along with the possibility for a creditor to lift it under conditions, can contribute to the efficiency of negotiations by striking a balance between the debtor's and creditors' interests.

A3. Rules on debtor-in-possession

The debtor-in-possession is a mechanism ensuring that the management of the debtor will not be displaced in favour of an outside insolvency administrator. The use of this mechanism encourages timely use of the restructuring option 58 . However, the debtor-in-possession is not available in all jurisdictions and not under the same conditions. The choice between debtor-in-possession and management displacement is not an ‘all-or-nothing’ one and there are in fact a plurality of possible approaches on this issue 59 . Evidence from the World Bank Doing Business Index suggests that average recovery rates for creditors in economies where insolvency administrators have a key role in deciding on the viability of the business are more than 10% higher than in economies where that determination is done by other means 60 .

Table 5: Situation in Member States as regards debtor-in-possession rules 

While the principle of a debtor in possession is not controversial as such, the role and level of involvement of insolvency practitioners must strike a balance between the need to ensure the success of proceedings, including the necessary confidence, and cost and effective access to such procedures, in particular for SMEs.

Most of the stakeholders consulted were of the view that the productive capacity of a company is undermined if the debtors do not have the possibility to keep control over the day-to-day operations of their business. In the public consultation, the business sector particularly mentioned that debtor-in-possession arrangements can promote operational efficiencies and realise significant cost savings. During the dedicated stakeholders' meetings, some business organisations also voiced that many SMEs are hindered from accessing restructuring, because of the costs and difficulties that the appointment of a supervisor/administrator entails. On the other hand, it was supported by the business and financial sector that the appointment of a practitioner sometimes is proved necessary, for example, in complex cases or where it is the only way to achieve full transparency for creditors and reduce the risk of abuse,

A4. Rules on the preparation and adoption of restructuring plans

A company’s ability to make use of a legal proceeding for the adoption of a restructuring plan is integral to any insolvency system aiming to avoid business failure where possible. The speed and rules of adoption of a restructuring plan are of crucial importance for a cross-border investor. Both secured and unsecured creditors need to know what the so-called cram down rules 61 are, if any, in the country where the investment is made and what it means for their own prospects of recovery. If the creditor is a shareholder, he needs to know the rights of shareholders in the adoption of the restructuring plan itself and the rate of recovery.

Table 6: Situation in Member States regarding the preparation and adoption of restructuring plans 

The rules on adoption of restructuring plans should reflect the different interests of creditors (e.g. secured and unsecured) and shareholders and their likely recovery in the event of insolvency. For example, creditors or classes of creditors and shareholders who can no longer profit should not have a decisive say in the adoption of such plans. By giving a bigger say to creditors and shareholders who are "in the money", that is those who can still financially contribute to the rescue of the business, restructuring plans would have bigger chances of success in the long term and help debtors avoid relapsing into financial difficulties soon after a first restructuring.

During the consultation process, business sector and practitioners in restructuring said that restructuring cannot be effective and successful if there are no clear rules on the adoption of the plan and on the need for the plan to balance among the different interests. Specifically, they were of the view that restructuring can have bigger chances to success if the plan is fair and reasonable and leave no creditor worse off than they would be in the most likely alternative scenario, i.e. liquidation. Financial institutions also underlined that uncertainty and higher financing costs can only be avoided by ensuring adequate safeguards for secured creditors in cram-down mechanisms. Trade Unions' representatives underlined the importance of preserving the workers' rights to information and consultation, which are conferred by EU law, in particular where restructuring involves a transfer of parts of the business.

A5. Rules on provision of new financing in restructuring

If new financing is necessary for the success of restructuring, the protection of the parties providing this funding is of vital importance for the rescued company 62 . In the absence of debtor-in-possession financing arrangements, under which a company under court-supervised protection can receive additional financing, a distressed company has to rely on existing creditors to meet its interim funding requirements whilst a restructuring plan is devised. The process with a large number of financial institutions having differing strategies and involved in complicated cross-border proceedings often leads to conflicting objectives 63 . Weak protection of parties providing new sources of financing diminishes the prospects of viability of the company and also of recovery rates 64 .

Table 7: Situation in Member States as regards provision of new financing in restructuring

Putting in place incentives for new financing is an essential element in ensuring a sustainable restructuring. Protection from avoidance actions 69 in subsequent insolvency proceedings is therefore an essential element of restructuring plans. It seems necessary to extend such protection also to interim financing, i.e. financing necessary to ensure the continuation of the debtor's business during negotiations (before the plan is adopted), in particular in respect of creditors who are stayed. Several Member States fall short of ensuring this basic protection. A super-priority status for new financing exists in some Member States, however while being very effective in protecting new financing it is more controversial as it is sometimes considered to come into conflict with the principle of legal certainty and protection of property rights for existing creditors.

During the public consultation and the ‘Sounding Board’ meetings, protection of new financing was deemed by most of the stakeholders as a necessary incentive for restructuring. The business sector underlined that if viable companies, in need of working capital, are left without the possibility to finance their day to day operations, they will be driven to liquidation, to the detriment of the real economy. In addition, business sector and financial institutions stressed that potentially interested creditors should be encouraged; when creditors decide to inject liquidity in a distressed company, they should be given a sufficient degree of predictability on the recovery of their claims.

A6. Intensity and quality of courts' and insolvency administrators' involvement

Preventive restructuring frameworks allow debtors and creditors to negotiate informally before insolvency starts. However a number of jurisdictions allow only for restructuring through formal insolvency: within these jurisdictions there are differences in the opening of the insolvency procedure that may generate problems in cross border situations 70 .

In most Member States, insolvency proceedings are administered by a judicial authority, through commercial courts, courts of general jurisdiction or through specialised insolvency courts. Sometimes judges have specialised knowledge and responsibility for insolvency matters, while in other cases insolvency matters are just one of a number of wider judicial responsibilities of the courts.

During the ‘Sounding Board’ meetings, most of the stakeholders, including the business and financial sector as well as practitioners in the field of restructuring agreed that rigidity, cost and time of the procedures can be reduced if there is less court involvement. The experts consulted were also of the view that court involvement should be required when there is a need to protect the interests of third parties and avoid abuse. Furthermore, in the public consultation, business and financial sector stressed that confidence in the operation of courts and efficiency of the restructuring procedures can be enhanced by improving the efficiency of insolvency practitioners as well as encouraging specialisation of judges.

The laws of Member States have different rules on insolvency practitioners themselves, namely their qualifications, eligibility for their appointment, licensing, regulation, supervision, professional ethics and conduct. The questions related to insolvency practitioners concern any type of mediators or supervisors engaged in the insolvency process. Depending on the extent of involvement of courts and/or insolvency practitioners one could distinguish:

Pure out-of-court agreements: private contractual arrangements that require all creditors' consensus;

Hybrid informal agreements: mechanisms which combine the benefits of judicial control and out-of-court easiness at low cost can rely on decisions by a majority of creditors.

The lowest degree of involvement of courts or insolvency administrators or practitioners is in out-of court proceedings, whereas the highest in formal insolvency proceedings. The degree of involvement has an impact on costs. However, in Member States where no insolvency practitioner is involved in restructuring procedures, the debtor is less likely to make use of the procedure and to do so quickly and effectively 71 .

The high quality of insolvency practitioners and judges matters for the time of the proceedings. Specialised insolvency practitioners and judges can contribute greatly towards reducing the length of procedures and bring other benefits 72 . Since cross-border restructurings and insolvencies presuppose a high level of cooperation between insolvency administrators and judges, it is even more crucial that they have a proper training and resources and that they adhere by common ethical standards.

Table 8: Situation in Member States as regards intensity of courts' and insolvency administrators' involvement

Providing for hybrid proceedings and the enforceability of private agreements would increase the effectiveness of insolvency frameworks, especially as regards preserving value for debtors and creditors. It would provide more options to companies, instead of always having to go for more costly involvement of courts or insolvency administrators. The efficiency could further increase if judges or insolvency administrators had a high level of specialisation in insolvency and restructuring. According to the 2016 public consultation, the degree of specialisation of insolvency administrators and of judges co-relates with increased recovery rates for creditors.

B. Insolvency (liquidation) procedures

Other drivers concern in particular rules related to formal insolvency (liquidation) proceedings such as: conditions for filing for insolvency (definition of insolvency), ranking of claims, the wider issue of avoidance actions, the length of formal insolvency proceedings, directors' responsibilities relating to insolvency. In the public consultation, although many stakeholders identified them as areas, which would merit some form of action at the EU level, they also acknowledged feasibility concerns due to the existing divergence of national rules, national specificities and implications on other areas of law. Moreover, most of the Member States expressed strong concerns with regard to those areas.

B1. Definition of insolvency

In the performed public consultation, the banking sector voiced that different definitions of insolvency result in different moments when insolvency is declared, therefore there is no clarity for creditors about the time span for the restructuring and when the opening of an insolvency proceedings in inevitable. In addition, some business organisations agreed that a common definition of insolvency, although difficult to achieve, would be very useful. However, the Expert Group on Insolvency 73 expressed the view that a definition would not be necessary in order to access early restructuring proceedings and that harmonising this aspect might have unintended consequences for other areas of national law, such as company law, employment law etc.. Certain experts were of the opinion that focus should be put on the triggering criteria, especially for early restructuring proceedings 74 . Against the background of the discussions with Member States' experts it appeared that there is opposition to a harmonisation of the definition of insolvency but also that this is less relevant for the purposes of restructuring than the critical guidance on when the debtor can access early restructuring, on the terms of such restructuring and on the impact on the debtors' duty to file for formal insolvency proceedings. So while it may be important to define concepts, a definition of insolvency did not appear to be indispensable to ensure the efficiency of preventive insolvency procedures while for formal insolvency procedures, although helpful, a definition would not be at this moment in time a priority.

B2. Order of priority of claims

The laws of Member States differ significantly as regards the priority of claims in insolvency. This has an impact on how insolvency proceedings are run and how debts are recovered. In the public consultation, some stakeholders supported that differences in the areas of ranking of claims affect to a large or to a considerable extent the operation of the internal market. Moreover, others supported that a general harmonisation in this area would increase recovery rates for creditors. However, the banking sector voiced that although this issue is important when doing business on a cross border basis, it is not necessarily the essential driver of the decision to invest or not. Moreover, business organisations expressed scepticism on the feasibility of EU action in this area given how it is deeply rooted in national legal traditions, which carries the risk of unintended consequences in case of intervention. In addition, during the dedicated meetings with the Member States, most of them, if not all, were opposed to a general harmonisation of ranking of claims because of national specificities and implications on other areas of law. Discussions in the Commission Expert Group revealed that this area is sensitive given that Member States have taken different approaches as regards preference for workers and state creditors (tax, social security etc.). This goes at the core of national discretion and competing values are at stake. Nevertheless to incentivise companies to restructure at an early stage, tax and state aid rules should not be more burdensome in early restructuring than in insolvency procedures.

B3. Avoidance actions

The laws of Member States also differ on possibilities for avoiding contracts detrimental to companies and creditors. Differences concern conditions under which a detrimental act can be avoided (avoidance actions) and the period within which such acts can be challenged. In the public consultation, a part of the respondents stressed that divergence on avoidance actions affect to some extent the operation of the internal market and that harmonisation of avoidance actions (in particular of suspect periods) would contribute to increasing recovery rates for creditors. They stressed that investors, companies and entrepreneurs would be more willing to invest or do business outside their Member States if they were provided with the assurance that certain types of transactions, entered into within a certain period of time, are prescribed throughout the EU. Particularly, the banking sector acknowledged that rules on avoidance actions are essential to decide whether to deal with a debtor in financial trouble and insolvency practitioners’ organisations voiced that different standards in avoidance actions create legal uncertainty and it gives rise to substantial legal costs in insolvency proceedings. However, discussions in the Commission Expert group revealed that while avoidance actions could in principle be harmonised across the board, it would be disproportionate to do so at this stage. Therefore, it was proposed to create a limited rule on avoidance actions, namely a harmonized safe harbour from avoidance actions for non-related party transaction related to restructuring negotiations.

B4. Liquidation of assets

In some Member States the rules on the actual liquidations of assets result in prolonging the proceedings. In the performed public consultation, when asked what are the key issues for the excessive length of insolvency proceedings, most of the respondents mentioned delays in the liquidation of the debtor's assets, activities related to the supervision of the debtors and litigation concerning the debtors' right and obligations. A smaller part of respondents considered lack of digitisation as a key issue for the excessive length of proceedings. Particularly, the banking sector explained that the foreseeable length of enforcement and insolvency proceedings are usually taken into consideration for investment decisions. Business organisations mentioned that measures to shorten the length of the proceedings would have a positive impact in recovery rates. . However, while some stakeholders were of the view that a target maximum duration for insolvency proceedings would be useful, a larger part were of the opinion that it would not be appropriate. Particularly, practitioners’ organisations expressed that the variety of proceedings is much too large for that and there are too many risks entailed.

When asked what incentives could be put in place to reduce the length of insolvency proceedings, the respondents mentioned: electronic means of communication; specialisation of courts; supporting the courts' resources; less court involvement/supervisory role only; clear requirements for entering to insolvency proceedings; ensuring that the thresholds are triggered early enough for restructuring; deadlines/time-limits for court proceedings; publicly accessible information as a (general) prevention; remuneration of insolvency practitioners.

B5. Directors and shareholders

In a company, directors exercise corporate powers which are generally balanced with duties of care prohibiting wrongful trading. Some Member States have certain obligations in place for directors in the period before insolvency occurs and impose liability for any harm caused by continuing to operate when it was either clear or should have been foreseen that insolvency could not be avoided. The rationale for such provisions is to create appropriate incentives for early action through the use of voluntary restructuring negotiations. It may also encourage directors to obtain competent professional advice when financial difficulties occur and thus avoid insolvency. Shareholders may obstruct a restructuring procedure which would return the company to viability. Allowing shareholders to oppose restructuring would likely reduce the number of successful restructurings.

In the public consultation, the majority of stakeholders 75 were of the view that directors of companies should be incentivised to take appropriate preventive measures if companies are in distress but not yet insolvent. Financial institutions voiced that it is necessary that directors should have a duty to act diligently in order to protect creditors and stakeholders. However, during the dedicated meetings with the Member States, although they acknowledged the need to incentivise directors for early restructuring, most of them were reluctant to mandatory detailed provisions on directors’ duties, due to the implications on company law.

On shareholders, many stakeholders from the business and financial sector said that the existing differences between the laws of the Member States regarding measures to clarify the position of shareholders of companies in insolvency or close to insolvency affect the functioning of the Internal Market either to a considerable extent or to some extent. Financial institutions and investor associations (EBF, AFME,) said that the shareholders' rights within creditors' committee might need to be limited in certain circumstances, i.e. when they prevent the plan from being adopted although this plan is likely to ensure the continuation of the company's activity and the recovery of the debts.

Overall, these other drivers while being relevant relate only indirectly to restructuring and second chance and are strongly dependent on the existing national legal frameworks and the social, economic and political choices made in other areas of law. They will be looked at more closely in this impact assessment report but only in connection with the aspects which are related to preventive restructuring and second chance. The assessment in the preferred option touches upon some specific aspects relevant for these additional drivers, such as the availability of early restructurings, definition of conditions for new financing and their priority, cram down requirements or reduction court formalities which would impact positively on the costs, length and recovery rates of both preventive restructuring and formal insolvency procedures.

C. Second chance

Discharge from debt is instrumental for those who wish to learn from their mistakes and have a fresh start. The need of discharge for natural persons is amplified by the fact that people starting business bring in their project also personal assets and credits taken in their personal capacity or help from the members of family 76 . Where debt settlement procedures are not available the entrepreneur will normally still have access to bankruptcy procedures available to corporate debtors 77 . At the same time, almost all Member States offer a debt settlement procedure to consumers 78 .

Table 9: Situation in the Member States debt restructuring for natural persons including discharge and second chance

Chart 3: Period of time to obtain full discharge

Source: Ecorys, Bankruptcy and Second Chance for Honest Entrepreneurs, 2014

Discharge from business debts (and personal debts of business people) under reasonable conditions and received after a period which is not excessively long gives a second chance to restart business. The impossibility of repayment and too difficult conditions of discharge cause both entrepreneurs and consumers to fall in a debt trap. In consequence, these natural persons do not contribute to economic growth (reduced consumption, withdrawal from labour market, lower potential for entrepreneurship) and instead of returning to economically productive life they may have to rely on social services support.

In the performed public consultation, the majority of the respondents were of the view that the absence of adequate second chance provisions hampers economic and entrepreneurial activities and that therefore a full discharge of debts, possibly subject to certain conditions, should be offered to both entrepreneurs and consumers provided that they are 'honest' debtors. Many stakeholders’ organisations, including practitioners in the field of restructuring, stressed the increasing number of sole entrepreneurs and the difficulties of distinguishing between debts arising from professional and private life; they were of the view that consolidation of the procedures is appropriate for an effective discharge. Businesses and entrepreneurs stressed that a second chance approach would increase trade, strengthen the real economy and be a driver for growth, since it would encourage entrepreneurship and stimulate consumer spending. However, they supported adequate safeguards in order to prevent moral hazard. The banking sector said that a responsible entrepreneurship model should be promoted in a way that a full discharge of debt is given to honest entrepreneurs only after the repayment of certain amount of debt. They were even more critical of consumer insolvency, saying that this policy area should not be pursued at this moment in time.

D. General effectiveness of procedures

A modernised insolvency framework could not achieve the objectives set if the quality and efficiency of actors involved is not improved. This conclusion came up consistently in the public consultation, during the expert group discussions and the dedicated meetings with the stakeholders, academics and practitioners. This no doubt translates into excessive length of procedures in some Member States and/or high costs of procedures. Although an ideal length of insolvency procedures has not yet been established, investors are reluctant to invest where procedures risk taking too long. In the EU, there are 10 Member States where the average time to resolve insolvency is more than two years 79 (in 8 of these MS the average length is 3 years or more).

The effectiveness of all procedures is dependent on the speed with which the courts can take decision, on the quality of the assistance or supervision performed by insolvency practitioners and by the level of digitalisation of procedures. These aspects are relevant across all insolvency spectrum, be it preventive restructuring, liquidation of second chance, a view which came across consistently during the consultations.

Specialised insolvency practitioners and judges can contribute greatly towards reducing the length of procedures and bring other benefits. In the public consultation and the ‘Sounding Board’ meetings, businesses, financial sector, insolvency practitioners and academics stressed that enhancing the efficiency of insolvency practitioners as well as encouraging specialisation of judges is of key importance in order to increase confidence in the operation of the system and improve the efficiency of the procedures.

E. Additional drivers

One additional important indirect driver is the lack of special arrangements for restructuring SMEs. SMEs often do not have the resources to undergo an early health check by a professional and therefore the number of early restructurings in this sector is relatively small. As a result, SMEs are disproportionately driven to liquidation rather than restructuring. Liquidation of SMEs can be value destructive in a disproportionate manner since a majority of countries do not have a simplified procedure for SMEs; a simplified liquidation procedure could speed up the process and lower the costs of liquidation, resulting in higher returns to creditors and a speedier second chance for directors or entrepreneurs. 80 Means to encourage SMEs to address their financial difficulties early include: early warning tools, including specialised low-cost advice; templates for restructuring plans; hybrid procedures or out-of-court work-outs with creditors.

Special small business rescue procedures do not exist in many Member States, including countries with mature, sophisticated economies such as Germany, Austria, Netherlands and the Scandinavian countries (Denmark, Sweden, Finland the comparator, Norway) 81 . Therefore, the creation of an EU-wide fast track procedure for SMEs would not seem in line with the approaches taken in most Member States. Instead, SMEs problems could be addressed throughout the whole framework focussing on specific points where access can be improved and made less costly and where SMEs can be encouraged to seek early advice on how to address their financial difficulties.

2.3.2. Problems

The differences and inefficiencies in national laws cause the following key problems:

Lost opportunities and excessive costs generated by barriers to cross-border investment (Problem 1),

Foregone benefits and additional costs for creditors and debtors related to liquidations of viable companies (Problem 2),

Lost opportunities and additional costs for natural persons (entrepreneurs and consumers) related to inefficiencies in insolvency frameworks as regards a fresh start (Problem 3).

Problem 1: Lost opportunities and excessive costs generated by barriers to cross-border investment

The suboptimal cross-border investment in the EU is caused by many factors. Inefficiencies in insolvency frameworks are an important element which has an influence on the level of cross-border investment 82 . Cross-border investment is hampered in the following ways:

(i)    difficulty to assess cross-border investment risks due to divergences in insolvency frameworks (and uncertainties as regards the outcomes), including the rules on restructuring and second chance. This means that at least to a certain extent cross-border investment is not taking place, since it is too difficult or it is too costly to quantify the risk;

(ii)    significant differences in recovery rates cross-border due to divergences in insolvency frameworks, including the rules on restructuring and second chance. This means that at least to a certain extent cross-border investment is not taking place, since the recovery rates for foreign investors are unsatisfactory.

When taking a decision about funding a project in another country of the EU, a prudent creditor or investor will seek information about the prospect of recovering his dues in case of failure. In order to evaluate the risk of any investment, the investor needs to be able to quantify both the expected risk of failure (probability of default) and the expected loss incurred if that failure happens (loss given default). In its risk assessment the prudent investor/creditor will look at the insolvency framework as a whole (prevention, recovery of value and discharge). Not only will he analyse major parameters of the formal insolvency proceedings (security of claims, distribution of value and time to resolution), but he will also want to know whether a debtor can restructure a business and whether it can do it with or without the agreement of its creditors. In order to make a cross-border investment, it is essential to know whether restructuring can be "imposed" on some classes of stakeholders. Also, it is critical to know whether an entrepreneur could be discharged of debts (at which moment and after which period) 83 .

Large asymmetries between Member States in the way restructuring proceedings and debt discharge are regulated generate additional costs for cross-border investors compared to those who invest in the EU only in one Member State 84 . The costs increase exponentially in case the investor would like to invest in more than one Member State. In particular, such costs could be prohibitive if the investment were to take place simultaneously in a number of Member States or would be done by an SME which does not have in-house legal department and would need to pay for the costs of foreign legal advice 85 .

Moreover, the investor in the EU may be obliged to pay not only for the assessment of multiple differing restructuring frameworks of individual Member States, but also for the assessment of the costs resulting from the coordination of the multiple applicable national restructuring frameworks. The more the insolvency frameworks, including restructuring and second chance, will differ, the more expensive the assessment of the coordination between their concurrent applications will be. Ultimately, this leads to additional costs of creation of corporate structures which will not be designed economically in the most efficient way but with the aim of circumventing the concurrent application of multiple insolvency and restructuring frameworks or at least those with low recovery rates or those under which restructuring is difficult. Certain transactions in EU Member States are under certain circumstances structured using complex structures with special purpose vehicles 86 to reduce the potential impact of insolvency if it occurs 87 .

According to the World Bank, the highest recovery rates for creditors are recorded in economies where restructuring is the most common insolvency proceeding 88 . For instance, 45 percent of OECD economies use restructuring as the most common way to save viable firms and have an average recovery rate of 83 cents on the dollar, as opposed to 57 cents on the dollar in liquidation 89 . This difference contributes to the creation of additional costs in the assessment of the risk under the foreign system.

Chart 4: Higher recovery rates are more likely in economies where restructuring is the most common insolvency proceeding,

Source: World Bank

A recent report shows that balanced and effective insolvency frameworks have a beneficial effect on the costs of borrowing via changes to credit ratings. It also proves that recovery rates remain a significant factor affecting the cost of borrowing, even when other institutional variables, beyond insolvency-related factors, are shown to have explanatory power 90 .

In the performed public consultation, stakeholders in banking and investment acknowledged that differences in insolvency frameworks between Member States can become a deterrent to cross-border corporate investment, since the difficulties of establishing the value of distressed debt, may increase the cost at which investors are willing to invest or even it could discourage investors from establishing their business activities in other Member States. Moreover, they voiced that creditors who decide to inject liquidity in a distressed company should be given a sufficient degree of predictability on the recovery of their claims. They agreed that a system that enables the rescue of viable companies, outside or within insolvency proceedings, is essential to mitigate the problem of non-performing loans. Moreover, insolvency practitioners supported that divergence and inefficiency in insolvency frameworks can create barriers to corporate lending and investment, including cross-border investment. They stated that uncertainty or difficulties over realising value from distressed debt may be particularly pronounced in the case of cross-border lending and investments and this may increase the cost at which investors and creditors are willing to invest in or lend to cross-border borrowers.

Also in the public consultation on the Green Paper on the Action Plan of the Capital Markets Union large number of market participants and investors noted that the diversity of regimes across the EU negatively impacts confidence in cross-border investment. Central banks and regulators of capital markets supported a comprehensive reform of insolvency frameworks to remove obstacles to cross-border investment in the EU posed by differing national insolvency regimes. Also from the point of view of commercial banks, pension funds and other financial intermediaries, in this consultation the widespread divergence in Member States' insolvency regimes constitute a key deterrent to cross-border investment. Banks further argued that a targeted harmonisation of certain aspects of the differing national insolvency regimes would be a positive contribution to the Capital Markets Union. Member State governments and Finance Ministries adopted a more cautious approach suggesting the performance of a step-by-step approximation. Likewise, business associations showed more divided positions both on the impact of differing national insolvency regimes and on the form of possible actions to tackle those differences. Representatives of the SMEs would appreciate improvements in the

efficiency and effectiveness of insolvency practitioners and the courts. Labour unions called for a wide ranging harmonisation of national insolvency frameworks. Other respondents, such as research institutes, considered that a better insolvency framework allows for a better re-allocation of capital and more growth, and that a targeted harmonisation of certain aspects of national insolvency frameworks would bring an added value in a Capital Markets Union 91 .

Problem 2: Foregone benefits and additional costs for creditors and debtors related to liquidations of viable companies

A successful restructuring of a financially distressed, but economically viable enterprise is conditioned by a number of pre-requirements, in particular the resolution of the problem of the “race to grab” debtors' assets 92 (the need for a stay of enforcement actions at least for the period of preparation of the restructuring plan) and the “hold-out” problem 93 of individual creditors (the need for a qualified majority, not unanimity, for the adoption of the restructuring plan) and some additional requirements 94 . Moreover, cross-border groups of companies have to deal with additional coordination costs of multiple national restructuring proceedings.

In the performed public consultation, business sector and practitioners voiced that unnecessary liquidation of viable businesses can increase costs for all stakeholders and result in a loss of productive capacity.

The absence of an easily accessible and well-functioning restructuring framework generates three types of costs: relocation costs, coordination costs and lost benefits from financially distressed companies which due to the difficult access or low-quality of restructuring frameworks have to be liquidated instead of being rescued.

a)    Relocation costs

Relocation costs represent costs for companies that could not use a good restructuring framework in a Member State where they were located and were obliged to relocate to other Member States for the purpose of restructuring and avoiding insolvency. Relocation costs also include the costs for creditors to inform themselves about the laws of the "new" Member State (the one to which the distressed company moved).

Great discrepancies between the restructuring regimes in Member States create incentives for relocation. Relocation triggered by differences in restructuring regimes might lead to the application of a different insolvency regime than originally expected by creditors. Debtors who want to free themselves of long-standing re-payment obligations at home gain from re-locating to another Member State with less stigmatising regimes. This may adversely affect minority creditors even though the restructuring itself could be beneficial to the body of creditors and the company as a whole. At the same time, creditors at home risk to be adversely affected if debtors relocate too soon, particularly if they are taken by surprise and have to incur legal and administrative expenses trying to enforce their claim in another Member State.

In the case of SMEs, relocation is usually not an option because of the anticipated legal complexity. Luxembourg has been mentioned as one of the countries where relocation to other European Member States happens more frequently. Consulted stakeholders stated that it is quite common among Luxemburgish companies to move to the UK due to its more favourable pre-pack insolvency regime (better adapted procedures and higher chances of business survival), under which companies can be restructured. Such relocation is ‘common’ merely among large companies, being way too costly for SMEs and individual entrepreneurs 95 . Total relocation costs for both debtors and creditors amount to an estimated € 9 million per year in Europe. Of course, this figure is a rough estimate which does not account for all types of cases (e.g. a large multinational bank declaring insolvency abroad after relocation) 96 .

Table 10: Estimation of relocation costs incurred by debtors in the EU

Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers 97

The forum shopping 98 phenomenon has been used in the EU in situations where debtors and creditors have sought to utilise more friendly non-insolvency based restructuring procedures existing in other Member States than insolvency based restructuring schemes available in Member States where they had they their centre of main interest (COMI). In particular, there has been a recent trend for non-English companies to restructure under the English law scheme of arrangement 99 . In some circumstances, the ability to institute proceedings in a different and more favourable jurisdiction may be helpful to a company in distress, but this is not available to all companies (particularly medium or smaller companies), and may often be more costly and inefficient than proceedings in the debtor’s own jurisdiction 100 . The costs for the creditor may discourage enforcing of claims and lead to small or inexistent recovery. Additional costs will arise for creditors after the relocation, i.e. costs of legal advice and the costs related to a shift in centre of main interests (COMI) 101 ; this may be a barrier for creditors to properly manage their interests in recovering the debt, especially when it is relatively low.

However, as these examples only cover large companies, they may not be representative of the total amount of relocations, nor of the average economic impact. It seems likely that many more relocations happen 'behind the scenes' and involve smaller enterprises 105 . The fact that a debtor opts for another jurisdiction could be related to the court efficiency or certain features of the chosen jurisdiction's preventive procedure (e.g. the possibility to bind dissenting creditors to a restructuring plan 106 which helps save a business from bankruptcy and liquidation) 107 .

b)    Coordination costs

Coordination costs represent additional costs for groups of companies, which have subsidiaries in other Member States, or lost benefits from an unrealised restructuring of a viable cross-border group which due to the differences in restructuring rules of affected Member States had to be liquidated instead. The difference in costs between purely domestic and cross-border insolvency proceedings could not, in most cases, be quantified, although cross-border insolvency proceedings were acknowledged as costlier. This increase was assumed to be 10%, based on the results of the consultation carried out 108 . The average difference in length between cross-border and domestic proceedings (as indicated by the stakeholders who provided a quantitative estimate) is 55%. Much longer proceedings for cross-border insolvencies than for purely domestic insolvencies is one of the key drivers for costlier proceedings for both debtors and creditors 109 .

In other words, a financially distressed, but viable group of companies located in one Member State will have much higher chances of being rescued than a group in the same situation which operates in two or more Member States because the latter will have to overcome the differences of multiple national restructuring procedures. In case of a cross-border group of companies in financial distress, if in one Member State restructuring takes place in formal proceedings and in others in informal (or is not available at all), this may even lead to a collapse of the whole restructuring. If there is no consolidated proceeding for a group of companies with domestic and foreign subsidiaries, there is a need to involve lawyers, administrators and trustees in all the different countries where there are subsidiaries 110 . In particular, higher costs arise when there is a need for coordinating formal procedures in some Member States and less formalised procedures in other Member States. These differences in restructuring frameworks will make the cross-border restructuring much more expensive than a purely national restructuring. Often they will prevent any restructuring from happening, and force an otherwise viable group of companies into liquidation. For the reasons listed above, no restructuring plan involving the continuation of the business of groups of companies has ever been accepted in more than two jurisdictions 111 . Even when a group of companies is represented by a mother company and one subsidiary in another Member State (for example an SME which has acquired one of its foreign suppliers), a common restructuring plan may be hard to be adopted.

According to the April 2011 report of the Reflection Group on the Future of EU Company Law, the international group of companies has become the prevailing form of European large-sized enterprises, in which business activity is typically organised and conducted through a multinational network of subsidiaries. About 20% of large enterprises (ca. 8,500) have foreign subsidiaries or joint ventures 112 . There are more than one million SMEs in Europe which have subsidiaries or joint ventures abroad 113 .

Where the rules for the content and adoption of an early restructuring plan are complex and cumbersome and the conditions vary from Member States to Member States, the restructuring of the whole group of companies in financial distress is hardly an option for the management board. Although ad hoc solutions have been found in practice (mainly through the relocation of the firm to a Member States with an efficient preventive regimes, such as UK), where the legal uncertainty and costs for all parties involved is an obstacle to the functioning of the Single Market.

The additional coordination costs of cross-border restructuring, where such restructuring will not be impossible, can lead ultimately to extra costs for debtor. Creditors are likely to compensate the legal uncertainty due to the differing restructuring rules by raising their interest rates on loans, mortgages and other forms of credit or on reducing the amount they lend.

c)    Additional costs and lost benefits from unsuccessful rescues of viable companies

Viable companies in financial distress should have the chance to be rescued instead of being directly liquidated 116 . If this were the case, a number of financially distressed, but viable companies could be saved and a number of other companies in the EU internal market would not become insolvent due to liquidation of other companies (knock-on effect). This could be achieved if all Member States had the necessary elements of a restructuring framework with an optimal economic potential. This could therefore lead to an efficiency gain in each Member State.

Table 11: The costs of a formal rescue procedure (administration) compared to the less formal procedure (company voluntary arrangement or CVA) in the UK 125 .

Assessment of additional costs due to cross-border dimension

Table 12: Total costs at EU level for domestic and cross-border insolvency proceedings: SMEs (incl. entrepreneurs)

Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers 126

Table 13: Total costs at EU level for domestic and cross-border insolvency proceedings: large companies

Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers 127

First, it is important to note that these figures do not represent the additional costs of the cross-border dimension of insolvency proceedings, but the total costs incurred by all cross-border insolvency proceedings in the EU. Second, while the two methods used yield very different results (since the total number of formal insolvency proceedings per year in the EU has been estimated as 152,000 with the first method and 289,000 with the second method) the reality is believed ‘reality’ to lie in between, around 220,000 total insolvency proceedings per year in the EU, close to the European Commission figure of 200,000 firms going bankrupt each year in the EU. With 220,000 insolvency proceedings every year, total proceedings costs in the EU would amount to €895 million for domestic proceedings, and €70 million for cross-border proceedings 128 . The additional cost of the cross-border dimension of insolvency procedures is estimated as follows:

Table 14: Difference between domestic and cross-border insolvency proceedings costs - SMEs

Source: own calculations based on respondents’ answers 129

Table 15: Difference between domestic and cross-border insolvency proceedings costs - Large companies

Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers 130

If viable companies become insolvent, rather than restructured at an early stage, this has consequences for the whole chain of trading partners of these companies (knock-on effect). In the performed consultation, organisations of small business stressed that in some cases, since, start-ups have a smaller client - base as well as a smaller financial buffer than “older” companies, the insolvency of a client might have a larger impact on start-ups. One in six corporate insolvencies are the result of knock on effects from other insolvencies. Moreover, the 2016 Eurobarometer on insolvency showed that 17% of companies (SMEs) have foreign debtors. For those who have foreign debtors for many (50%) foreign debt constitutes more than 6% of turnover. It is higher for bigger and also for newer companies. It is true that companies less frequently enforce foreign claims, but it may be the effect of giving up certain foreign claims since they are more difficult and more costly to enforce 131 .  

Government intervention is necessary to mitigate this network externality from business failures and reduce the impacts on employment and productivity. European companies have large networks of cooperation: on average, export constitutes 17,6% of supply provided by those companies. Thus there is a substantial risk that insolvency of a client will impact its supplier. Large companies, although only representing 0.2% of European companies, provide 30% of jobs in the EU and produce 41% of gross added value. According to the April 2011 report of the Reflection Group on the Future of EU Company Law, the international group of companies has become the prevailing form of European large-sized enterprises, in which business activity is typically organised and conducted through a multinational network of subsidiaries. About 20% of large enterprises (ca. 8,500) have foreign subsidiaries or joint ventures 132 . There are also more than one million SMEs in Europe which have subsidiaries or joint ventures abroad 133 .

Problem 3:    Lost opportunities and additional costs for natural persons (entrepreneurs and consumers) related to inefficiencies in insolvency frameworks as regards a fresh start

Failure and over-indebtedness are situations that affect natural persons, whether entrepreneurs or consumers. Business failure is an unavoidable risk inherent to any enterprises, especially young ones. In Europe, every year, more than 200,000 companies go bankrupt 134 . Since the financial crisis, due to lowering incomes and increasing unemployment, over-indebtedness has impacted more than 10% of European citizens (recent data show that 11.4% of consumers are permanently in arrears 135 ).

Different discharge regimes may lead natural persons to relocate to more debtor-friendly jurisdictions. This involves costs for the debtor who needs to seek information, legal advice and relocate their centre of main interest 136 . Likewise, creditors would also bear costs following the relocation as they would have to adjust to the change of their debtors or even have to give up the recovery of these debts. For smaller value loans, which are typically granted to natural persons, the cost of recovery may discourage the enforcement of claims or lead to very low recovery. This would impact in particular creditors that have many debtors with smaller value loans.

Additional costs for natural persons may stem from the stigma of insolvency and the related "reputational damage" of insolvency. Entrepreneurs are likely to find it more difficult, hence more costly to find new trading partners for their new business or simply to continue the existing (restructured) business. For a natural person, finding a new job, for instance, after winding up a business, or new apartment to rent will also tend to be more difficult and the whole transaction more costly.

Personal and business debts of individual entrepreneurs are often intertwined: entrepreneurs take personal loans to start and run their business, for example because they guarantee their business loan by personal assets, such as car or a family; or natural persons use consumer credit to buy assets which they use also for professional activities. Since any debt, including the one contracted by the natural person, whether entrepreneur or consumer, can become unpaid, almost all Member States have systems that allow for discharge of natural persons from debts which they can no longer service. The chart gives a broad view of how entrepreneurs are treated in insolvency proceedings in EU Member States.

Chart 5: Treatment of entrepreneurs in insolvency proceedings in the 28 EU Member States

In several MS there is one single regime for discharging personal debt whether the debtor is a consumer or whether he is an entrepreneur (e.g. Finland, UK). These regimes are more efficient in affording second chance since all personal debts are consolidated into one procedure. In other MS, there are different regimes for entrepreneurs and consumers (e.g. France, Romania).

Debt discharge frameworks in Member States still substantially, in particular in terms of the conditions of access, repayment schedules and periods (one to eight years in depending on the legal regulations in individual Member States 137 ), restrictions on performing certain activities and asset disposals etc.

A lost benefit consists in a reduced economic activity of individuals resulting from a limited access to new credit for natural persons stigmatised by insolvency. While in some cases refusing a credit is justified, possibly even in the interest of the borrower (e.g. for persons unable to manage their budget) this should not be applied systematically to all persons who have had payment difficulties. A further lost benefit of excessively long discharge periods for natural persons resides in the continuing poverty and financial exclusion of bankrupt individuals. Poverty has negative impacts on public spending, and the state of health and security in a country 138 . As to financial exclusion 139 , it is also detrimental to the providers of financial services who lose a part of their potential customers.

The lack of harmonised rules on consumer insolvency impacts negatively on cross-border selling of retail financial services 140 . Legal uncertainty for creditors in the case of default of a natural person was identified as a barrier to cross-border lending, by several reports such as the report of 2009 on the functioning of the Directive on Distance Marketing of Financial Services 141 and the study on the consumer credit market in Europe 142 . Cross-border lending to households, which is now at the level of approximatively 5% of the total of household lending, could be substantially increased. At the same time, the overall costs of credit could decrease if natural persons had an easier access to loans offered in other Member States 143 .

The Recommendation invited Member States to implement the discharge principles developed for entrepreneurs also to consumers. Many Member States have in recent years adopted or reformed (ES, RO, HU, HR, LU, CY, SI) national laws on consumer insolvency recognising the importance of enabling consumers' discharge of their debts and obtain a second chance. The discharge periods for over-indebted consumers remain very long in AT, BE, CZ, EE, EL, ES, LT, PT, SI, SE, RO (5 years or more). In addition, in DE, SK, HU and CY discharge after 3 years is conditional upon repayment of a certain percentage of the debt (e.g. 35% in DE, 50% in HU).

2.4. Risks

A. Moral hazard

A prevailing concern in deciding how to design an insolvency system is the risk of moral hazard. Many insolvency systems take a harsh stance in favour of liquidation because it provides for safeguards against such risks, in the form of full court involvement, a general and automatic moratorium, an insolvency practitioner acting in the interests of creditors taking over the business, with powers to avoid transactions etc. Member States may equally opt for long discharge periods or very strict conditions of access to discharge as a means of fending off potential risks of moral hazard.

However, experience from those Member States which have well-functioning restructuring and second chance frameworks shows that it is possible to achieve more restructurings, save more companies and jobs, help more entrepreneurs to re-enter the productive economy without creating further moral hazard risks. Any action in this area should provide therefore for appropriate safeguards against such risks. These risks will be considered in more detail in relation to specific options in the impacts sections below.

B. Employees' rights in early restructuring procedures

A number of Directives (Directives 98/59/EC 144 , 2001/23/EC 145 , 2002/14EC 146 , 2008/94/EC 147 and 2009/38/EC 148 ) guarantee the right to information and consultation before restructuring and/or collective redundancies. Directive 2001/23/EC aims at safeguarding workers' rights in case of transfers of part of the undertaking. Early restructuring procedures should not curtail such rights which provide important safeguards to employees.

Furthermore, Directive 2008/94 imposes an obligation on Member States to put in place guarantee institutions to guarantee the payment of employees' outstanding claims resulting from contracts of employment or employment relationships in the event of the employer's formal insolvency proceedings in relation to the employer. Member States have the possibility to extend the coverage of such guarantee institutions also to other types of procedures, but they are not obliged to do so. Where such claims are not guaranteed under national law, an early restructuring procedure which gives the debtor the benefit of a temporary stay of enforcement actions would risk negatively affecting employees' claims and protection. Special arrangements should therefore be put in place to ensure that employees receive appropriate protection in preventive procedures, equivalent to what they would receive in liquidation procedures.

2.5. Baseline scenario

The 2008 financial crisis and the following global economic downturn adversely affected businesses around the world, resulting in financial difficulties for many firms. Hence, the need for efficient and speedy restructuring regimes covering in particular several countries. Disparities in restructuring laws will not be resolved or determined by market forces due to an intensive regulation of Member States of insolvency and restructuring proceedings 149 . Stakeholders will approach each restructuring with their own agenda and strategy, often looking for positions of control and influence to gain leverage, and not seeking common ground and consensus. In addition, policymakers in various local jurisdictions will use political considerations or historical and cultural practices as justification for avoiding reforms of their insolvency and restructuring frameworks.

Many Member States have reformed or are in the process of reforming national insolvency laws. However, fashioning ad hoc restructuring frameworks around national or market driven influences results in greater transaction risks and higher costs of capital. When Member States introduce changes, they will only take into account the national perspective. As a result, the heterogeneity of existing rules will continue to inhibit cross-border investment and the divergent and inadequate insolvency regimes will continue to limit the potential of the private sector to attract investment. The absence of a consistent and predictable EU-wide restructuring framework would thus continue to create a considerable layer of uncertainty, increase costs and, to some extent, alter the economic rationale of capital markets transactions.

Given the substantial divergences between national restructuring and second chance frameworks in the EU, it is highly unlikely that Member States individually would be able to ensure the overall coherence of their legislation with other Member States' insolvency legislations. Several Members States took or have taken action independently and have recently enacted or started preparatory work to adopt new rules aiming at improving the preventive restructuring framework and second chance, such as Cyprus, Croatia, Poland, Portugal. Reforms are being discussed in other Member States (Luxembourg, Italy) but there is yet no concrete timeline. However, these national rules differ widely in content and, as a result, they provide an uneven level of transparency and protection for investors. Although this does not mean that investors do not invest cross-border, it does mean that the current regulatory framework inhibits them to play a more optimal role within the internal market. It is to be expected that other Member States will follow this trend if the EU does not act. Besides, given the heterogeneity of the restructuring market, it would be difficult for it to overcome the existing legal complexity and fragmentation.

2.6. The EU's right to act, subsidiarity, necessity and proportionality

The Union’s right to act in this field is set out in Article 114 of the Treaty on the Functioning of the European Union (TFEU). Its first paragraph empowers the European Parliament and the Council to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. Article 114 TFEU allows the EU to take measures, not only to eliminate current obstacles to the establishment and functioning of the internal market but also to address barriers that dissuade economic operators from taking full advantage of the benefits of that market (in particular investing in other Member States). On that basis, the European Union has a right to act to improve the conditions for creditors, debtors, investors and other stakeholders in the context of restructuring viable businesses in financial difficulty. Should an instrument address also consumer insolvency, according to Article 114 (3) TFEU, a high level of protection must be taken as a basis.

The case law of the Court of Justice of the European Union shows that if a measure addresses real obstacles to free movement or distortions of competition, present or future, it can be based on Article 114 despite the fact that it may touch on important social aspects 150 . It has been used in fields as diverse as environment, health, consumers, worker protection, telecommunication networks (roaming), circulation of personal data, advertising and promotion of tobacco products, the establishment of the European Network and Information Security Agency. It allows taking measures both with regard to existing and future obstacles, among others to prevent the emergence of divergent development of national laws. Future obstacles/distortions of competition must be real, not only address an abstract risk.

The increasing cross-border nature of investment suggests the need for coordinated action by Member States hosting business entities (companies and entrepreneurs). As the Eurobarometer on insolvency has showed, 17% of companies (SMEs) have foreign debtors. but that many cross-border claims remain un-enforced. This entails additional costs of doing business cross-border in particular for SMEs.

When lending to or investing in business entities in other Member States, creditors are confronted with different mandatory rules resulting from the lack of harmonised tools available to businesses in financial difficulty. The problems described above, creating costs and foregone benefits, obstruct fundamental freedoms (in particular free movement of capital) and thus have a direct effect on the functioning of the internal market.

However, investment in businesses does not mean only lending but can also take the form of ownership (the investor is not a creditor, but a shareholder of a company). Foreign investors do establish and run local business entities in other Member States, which themselves do not have cross-border activities. The barriers to cross-border investments have, therefore, a direct effect on the functioning of the internal market. These additional costs for investors may only be eliminated, if there is a general convergence of regulatory frameworks in Member States covering both cross-border and domestic cases (while an artificial distinction in the scope of restructurings on the basis of their expected or actual cross-border nature would just reinforce legal fragmentation). A convergent EU framework on insolvency would thus remove barriers also for foreign investors from outside the EU: looking at one set of restructuring and insolvency indicators valid for two or more of the EU Member States where an investment is foreseen would reduce the additional costs associated with assessing risks of investing in EU Member States. The additional costs grow exponentially where the foreign investor looks at several Member States in order to establish where to invest (e.g. where to set up a plant or a distribution point from where the whole EU can be covered). Building up the CMU is an EU priority also as regards making the EU a more interesting place for foreign investors from outside the EU.

The internal market problems are not limited to purely cross-border scenario. Even purely national insolvencies may have an impact on the functioning of the internal market through the so-called domino effect. Companies operating cross-border (about 25% of bankruptcies in EU involve creditors and debtors in more than one EU Member State 151 ) have in their supply chain suppliers some of which may be purely domestic businesses. When a supplier experiences financial difficulties and cannot be saved, this may have negative impacts which may trigger the insolvency of the cross-border company. Good restructuring frameworks are necessary in order to avoid a domino effect of insolvencies. According to the Flash Eurobarometer survey carried out in June 2016 among small and medium sized enterprises in 28 European countries, on average, 17% of those companies had debt claims against foreign debtors over 2015 fiscal year. However, in some countries this situation was much more frequent: 49% in Luxembourg, 45% in Slovenia, 31% in Austria. Half of the companies with foreign debt claims say foreign debt claims represented at least 6% in their 2015 turnover. Frequency of outstanding foreign debt claims as compared to domestic claims and also relative difficulty to recover them depended on the general economic situation in a given country. In the countries with internal economic difficulties recovery of domestic claims was perceived as more difficult, while in some countries not experiencing those difficulties (UK, Germany, Finland, Sweden) recovery of foreign debt was similarly or more difficult as recovery of domestic debts 152 . As 17% of small and medium sized companies have foreign debts, and in half of them they make a substantial proportion of their turnover, the probability neither of the fact of cross-border insolvencies nor of their importance for creditor companies cannot be neglected 153 . In the UK alone, 27% of insolvencies are triggered by the insolvency of another company 154 . In the light of the domino effects of insolvency, it is necessary to act not only in purely cross-border insolvency scenarios, but also in domestic insolvency cases. The possibility of an insolvency regime limited to cross-border insolvency or restructuring proceedings must therefore be discarded since such a limited solution would not solve the internal market problem.

In addition, a crystal-clear distinction between domestic and cross-border cases is particularly difficult in the context of insolvency. First, in most cases it is impossible to anticipate in advance (at the opening of proceedings), if the case will have a cross-border element in course of the proceedings. The cross-border nature of a restructuring proceedings (in the context of the Insolvency Regulation) depends of various different circumstances and factors which simply may not be anticipated by the debtor or by the court in advance, at the opening of the proceedings or beginning of the negotiations, even having carried out the highest diligence. If a debtor has a creditor abroad or some assets of the estate of the debtor are situated in another State, this alone qualifies the insolvency proceeding as having cross-border elements. These factors generating the cross-border element may, however, appear also in course of the proceedings, once negotiations are already on-going. For example this is the case where a domestic creditor changes domicile during the proceedings concerning the debtor or where during preventive restructuring assets are sold to a buyer in another Member State and later insolvency proceedings are opened and the insolvency practitioner aims at avoiding those transactions. These circumstances alone transform the domestic nature of the case to a cross-border situation.

As regards second chance, a distinction needs to be made between natural persons entrepreneurs and consumers. Different discharge periods may lead bankrupt entrepreneurs to exercise their free movement rights and relocate to a more debtor friendly jurisdiction (such movements were observed for instance from Germany to UK and France). This movement however raises two types of internal market problems: first, creditors and investors, whether at home or abroad, will face uncertainty as to what legal regime might ultimately apply to their claims against the debtor and whether in practice they will have no claim after 1 (UK), 3 years (UK, FR, NL, FI) or 7 years (CZ). Second, the costs of obtaining a discharge for the entrepreneur who wants to benefit from a second chance sooner rather than later are considerably higher if he has to relocate to another jurisdiction (there is now a presumption in the reformed Insolvency Regulation that a debtor must be established in another MS for at least 6 months in order to be able to open discharge procedures in that state). This problem is not solved by the fact that entrepreneurs can set up a limited liability company to protect themselves: the concept of entrepreneurs includes also professionals, craftsmen, traders which may not opt for such a possibility (these may be lawyers, artists, midwives, cleaners etc.). These categories of persons will incur personal liability for their work-related activities.

Contrary to entrepreneurs, who constantly search for any sources of investment (often cross-border), consumers tend to be provided, at this stage, by local financing (loans from local banks). Therefore, it is not self-evident that the problem of consumers' over-indebtedness, which is real, should not be tackled first at national level. At this moment, there are attempts to attract cross-border lending to consumers, but this market has not been developed so far. Therefore, principle sources of debt for consumers are most often based on loans provided by local creditors.

A well-functioning EU internal market requires a coherent restructuring and second chance framework, capable of addressing the cross-border dimension of firms, as interaction between companies located in different Member States has become increasingly common. EU action will therefore add value by facilitating cross-border investing in the EU, ensuring that viable businesses in financial difficulty, wherever they are located in the internal market, will benefit from more choice of accessible tools aiming at preventing their insolvency; at the same time, entrepreneurs will profit from the possibility of using reasonable discharge periods in their Member States. This could not realistically be achieved by the Member States acting alone. Despite ongoing efforts to improve European insolvency and restructuring procedures, important differences persist across Member States. World Bank indicators 155 suggest that resolving insolvency can take between less than one year in Ireland, Belgium and Finland and more than three years in Bulgaria, Romania, Greece and the Slovak Republic. The recovery rate varies between 30% in Croatia and Romania and 90% in Belgium and Finland.

In addition, ensuring that cross-border creditors and investors involved in such a restructuring process have at their disposal appropriate safeguards will have positive economic effects. The proposed rules will create legal certainty for creditors and investors which want to lend in other Member States. At least, they would in many cases receive the necessary information to take informed decisions.

The proposal is designed to respect the principle of proportionality. The means it uses will be tailored to achieve the objective of ensuring the proper functioning of the internal market. The future EU instrument should set common objectives and general rules, while leaving freedom to Member States to define how to achieve those objectives. All policy options will therefore be assessed with regard to their compliance with the proportionality principle. Options that would not be in line with this principle will be discarded.

3.    OBJECTIVES

General 

Reduce the barriers for cross-border investment which are related to restructuring and insolvency frameworks and increase investment and job opportunities in the internal market

Reduce the number of unnecessary liquidations of viable companies and increase the possibilities of cross-border restructurings in the internal market

Reduce the costs and increase the opportunities for honest entrepreneurs to be given a fresh start

Specific 

Reduce the costs of assessing ex-ante the investment risks and improve recovery rates

Reduce the costs of restructuring, including for groups of companies, so that viable companies are rescued rather than liquidated and maintain jobs

Reduce the number of entrepreneurs who would need to relocate to escape a debt-trap and thus reduce costs of second chance and increase the number of persons who would re-integrate in the economic life to support a dynamic business environment

Operational objectives

Enable efficient possibilities of early restructuring

Improve chances of negotiations by allowing the debtor a "breathing space" from enforcement actions (stay/moratorium)

Facilitate the continuation of debtor's business while restructuring (debtor in possession)

Disallow dissenting minority creditors and shareholders to jeopardise restructuring efforts while safeguarding their interests (majority voting; inter-class cram-down; treatment of shareholders in restructuring)

Increase chances of success of the restructuring plan (protecting new financing; safe harbour for non-related party transactions; release of third parties)

Reduce costs and the average length of all types of restructuring, insolvency and second chance procedures (minimum necessary court involvement in restructuring and second chance frameworks, raising court expertise, capacity to respond quickly, use of modern technology; harmonise quality of the profession of the insolvency practitioners)

Enable discharge in a reasonable time for entrepreneurs who are acting in good faith

4. HIGH-LEVEL OPTIONS

4.1. Description of high level options

Option 1: Maintaining the status quo (baseline scenario)

The expected evolution of status quo is described in section 2.4.

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

Under this option, key elements of at least one type of preventive restructuring procedure would be fully harmonised. For restructuring, in addition to the main principles which were defined in the 2014 Recommendation, many more rules would need to be harmonised, including for example the definition of 'insolvency' or 'likelihood of insolvency', the majorities required for plan adoption (e.g. a plan should be adopted by 75% in value of creditors' claims), the treatment of shareholders in restructuring (e.g. whether they should be treated as a separate class and given a right to vote or not) and protection on new financing (e.g. whether new financing should be given super-priority status in subsequent insolvency proceedings). Other more technical rules which make up national restructuring frameworks are those relating to whether to bifurcate secured claims according to the value of the collateral, or how to treat contingent and contested claims. On second chance, such harmonisation may include rules on the conditions for repayment plans, on filing of claims, on determining the disposable income of natural persons from which creditors can be repaid for the period of the discharge period etc.

Option 3: Introducing an alternative, optional EU restructuring and second chance regime for cross-border cases

This option would imply establishing, alongside national restructuring and insolvency procedures, an alternative EU procedure which could be chosen by the party initiating it, for example, the debtor, or the creditors with the debtor's consent 156 . This European procedure could be available in principle in both cross-border insolvency cases and in domestic cases 157 , but the experience with other European civil procedures shows that Member States will not accept the application of European procedures to purely domestic situations 158 . In order to operate as a stand-alone restructuring and second chance framework, this option would require a full harmonisation as described in Option 2 above.

An optional regime available in both cross-border and domestic cases would need to be based on Article 114 TFEU. An optional regime available in cross-border cases only would need to be based on Article 81 TFEU on judicial cooperation in civil law matters.

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

High level principles accompanied by more targeted rules where necessary would follow in the steps of the 2014 Recommendation and provide an appropriate follow up response. It would allow Member States to choose the means of implementing these principles and rules. For example, the rule that creditors should vote in separate classes on the adoption of the plan, would need detailed rules on for example on how to deal with secured claims where the value of the collateral is lower than the claim (whether to bifurcate such claims or not). National law will also need to specify the majority(ies) needed to adopt a plan, be it one single majority in all classes (either simple majority or qualified majority), or different majorities for different classes (e.g. simple majority for unsecured creditors' class, qualified majority for secured creditors' class).Whilst the general rules would be established at the EU level to ensure coherence and consistent application, the detailed implementation rules would be established in national law .

This option would make binding the principles and rules set out in the 2014 Recommendation, but would significantly reinforce the framework with additional efficiency elements. For restructuring frameworks, such rules would be for example include early warning tools, the treatment of shareholders in restructuring procedures, the protection for interim financing necessary to keep the operations going throughout the negotiations; the duties of directors in the vicinity of insolvency. Furthermore, rules on the effectiveness of all restructuring, second chance as well as formal insolvency procedures could be envisaged, such as rules on the specialisation of judges and/or courts, on enhancing the quality of insolvency practitioners and on digitisation of procedures.

4.2. Analysis of high level options and discarded options

Option 1: as already demonstrated in the assessment of the baseline scenario (point 2.4 above), if no further action is taken, the solutions between Member State laws will continue to diverge. This is likely to lead to important delays in concluding insolvency procedures and a low success rate for cross-border restructurings which would ultimately result in more unnecessary liquidations of viable companies, instead of restructuring and entrepreneurs and consumers being trapped in debt for too long 159 . It would also be a deterrent to cross-boder investments. This option needs therefore to be discarded.

Option 3 (optional instrument) has to be discarded as well since creating a European procedure competing with national procedures could prove highly contentious without bringing the desired benefits. First, litigations would arise in situations where at least some of the creditors would have more rights or more favourable treatment under the otherwise applicable domestic law 160 . Second, debtors (when initiating the restructuring) and creditors (when considering whether to support the restructuring efforts) would likely make an assessment of whether the European or the domestic procedures are better suited for their interests. This assessment exercise – whether carried out ex ante, when investing or trading cross-border, or ex post when restructuring efforts start – would increase legal costs, decrease legal certainty and, in the ex post scenario, delay the restructuring procedures 161 . For the same reasons, a fully-fledged discharge framework for entrepreneurs and consumers defined at the EU level would not be a feasible variant either. Third, an optional instrument would not guarantee the necessary uptake to address the EU level scale of the problem and would likely not be applied by Member States anyway.

Additionally, there are also some political constraints to be considered under this option. Although in principle an optional regime could stand alongside national regimes and be 'chosen' in domestic cases also, this option would most probably be restricted in scope to cross-border insolvencies, as several European procedures show 162 .

Option 2 (full harmonisation) would facilitate the restructuring of groups of companies, increase legal certainty and reduce risk assessment costs for investors investing in more than one Member State. It would also reduce the number of unnecessary liquidations of viable companies in favour of successful restructurings. For such a solution to work efficiently, harmonisation of certain key formal insolvency aspects, such as the ranking of claims and avoidance actions in the event of the insolvency of the debtor, would also be necessary, including a single maximum discharge period for natural persons across the EU 163 . While this option would be most effective in ensuring full legal certainty of insolvency laws across the EU, it would at this juncture be premature, too intrusive and does not seem feasible as an initiative at this stage given the current diversity in Member States' restructuring and insolvency frameworks 164 and the political reticence that such a proposal would face. This option must also be discarded, as politically unfeasible and clearly disproportionate.

Option 4, i.e. a binding instrument in the form of a Directive setting up a minimum harmonised framework covering a number of key aspects is conducive to effectively achieving the policy objectives in the areas of restructuring and insolvency 165 , which are highly regulated at the national level.

It is true that in terms of addressing the full spectrum of drivers identified as triggering difficulties due to fragmented national legislation this option could be considered to remain below that of Option 2 (full harmonisation). However, fully harmonised rules in relation to these problems may seem to be a preferable solution only at first sight, but not necessary a workable solution required for overcoming the full set of problems. More specifically, a full harmonisation of insolvency law in general is a very complex option, not advisable at this stage for several reasons.

Firstly, account needs to be taken of the fact that these drivers are not isolated but have to be considered in the context of the entirety of national insolvency tools and that a certain degree of flexibility is needed to enable Member States to apply them in a suitable fashion. A minimum harmonization Directive would allow Member States to retain the most appropriate means to make those tools work in their national context. Secondly, in the light of numerous links of insolvency law with connected areas of national law, such as tax law, employment law, social security laws (to a good extent outside EU competence), fully harmonising only insolvency law could still not produce the desired effect of complete uniformity. Therefore, continuing to have a certain level of differences between Member States’ regulations (and as a consequence still some costs relating to the need to identify and assess these differences), appears unavoidable. And thirdly, consideration of subsidiarity and proportionality of the EU intervention would have to be duly considered as regards a full harmonisation of insolvency related aspects.

Option 4 would be a tangible approach to substantial convergence of national frameworks based on key common rules applicable in all Member States to companies in financial difficulties, but viable and therefore susceptible to successful restructuring, as well as on the other individual aspects highlighted in this document. This would ensure major progress towards a functioning internal market. Under such a convergent framework cross-border investment would no longer be inhibited by concerns that, for example, preventive restructuring of the debtor is not effectively possible in all Member States or that shareholders may bloc a plan which is supported by creditors.

For these reasons, it appears most appropriate to consider high-level Option 4 the preferred option and to assess in detail a number of sub-options only with regard to this high-level Option.

In terms of the material scope of a minimum harmonized legal framework, Option 4 focuses on early restructuring and second chance frameworks, but also aims at achieving more effectiveness of formal insolvency (liquidation procedures) and at amending such procedures in order to make early restructuring more attractive.

As regards early restructuring, the key aspects for consideration are as follows:

the objectives of increasing recovery rates for creditors, saving jobs and know-how is best served by early restructuring of a viable company than by liquidation;

early restructuring is also the first port of call for transforming a non-performing loan into one which performs;

currently, the early restructuring frameworks in the Member States are developing, but there is little coherence between them,

given the current diversity of rules, it is impossible to have a restructuring of a cross-border group of companies with members in more than two MS;

the need to focus on restructuring rather than liquidation was confirmed by the results of two public consultations (one on CMU in spring 2015 and one on restructuring, insolvency and second chance in spring 2016), by discussions with a specially created expert group and a group of stakeholders representing a wide range of interested parties as well as by the two meetings with governmental experts from the Member States.

As for liquidation procedures, a thorough analysis of what could be harmonized for the purposes of improving the effectiveness of the procedures was performed. On the basis of this analysis only provisions directly linked with shortening the length of such procedures and to making early restructuring effective appear adequate to be covered at this stage by this EU initiative for the following reasons:

in liquidation, the most important is legal certainty and the speed of the procedures, hence the provisions on courts, insolvency practitioners and digitalisation of procedures which are horizontal

harmonising substantive liquidation issues such as the definition of insolvency, ranking of claims and avoidance actions would touch upon fundamental values in the Member States, such as the protection of workers and the safeguarding of security rights.

in liquidation, there are important links with other areas of law, such as company law (definition of insolvency), property law (ranking of claims and avoidance actions), criminal law (disqualification of directors) which makes harmonization on the basis of minimum standards a disproportionately complex exercise.

early restructuring happens 'in the shadow' of the alternative, which are formal insolvency (liquidation) procedures. For this reason, insolvency rules on avoidance actions need to be adapted to ensure that the early restructuring of companies in difficulty is attractive for new investors and creditors, i.e. provides for sufficient guarantees that their investment will be protected in subsequent insolvency procedures.

Nevertheless, the measures to increase the effectiveness of the procedures have a horizontal scope and are equally valid for restructuring and for liquidation, or indeed second chance. In all types of procedures timing is of the essence: increasing the specialisation of courts and the professionalism of insolvency practitioners and by introducing the digitalisation of all types of restructuring and insolvency procedures should be able to address these issues. As a means to ensure the effectiveness of procedures, the collection and analysis of data on number and outcome of restructuring and insolvency procedures is of paramount importance.

Some elements of substantive law could therefore not be addressed at this stage, given the current diversity in Member States' restructuring and insolvency frameworks: harmonising the definition of insolvency, ranking of claims and avoidance actions (with the exception of those actions concerning transactions directly linked to preventive restructuring) would touch upon fundamental values in the Member States, such as the place of workers and of state creditors, and the safeguarding of security rights.

Because an initiative could not at this stage reasonably be able to fully harmonise all insolvency-related aspects, investors would still face additional costs when assessing or defending their rights in restructuring and/or insolvency. It is certain however that costs will be significantly reduced for investors.

First, the minimum harmonisation of some restructuring rules would mean that investors may still need to assess their position in the jurisdiction of the COMI state. For example:

-    investors will have legal certainty as to the fact that a debtor in financial difficulties will have the right to a temporary, limited in time stay of individual enforcement actions and that they (the investors) will have a right to ask for the stay to be lifted in certain circumstances; however, investors may still need to investigate in which Member States that stay can be prolonged and for how long;

-    while it will be possible to adopt restructuring plans by a majority of creditors and while creditors will have the certainty that they will have voting rights proportionate with the amount of their claim and in a class of similar claims, there will still be differences as to the exact proportion of claims needed under national law to adopt a plan;

-    investors will have legal certainty that new and interim financing is protected everywhere in the EU from avoidance actions, but new investors may wish to know in which Member States they will be given even better protection by way of super-priority status in subsequent liquidation procedures;

-    finally, even if it is not possible to harmonise at this stage the raking of claims in the event of liquidation under national law, by incorporating the best interest of creditors' test and the absolute priority rule into the restructuring framework, creditors will have legal certainty as to the de minimis returns they have a right to in restructuring procedures.

Second, leaving large parts of the liquidation procedures non-harmonised would indeed mean that investors would still experience additional costs needed to assess ex-ante their rights where the debtor goes into liquidation as well as ex-post costs to manage liquidation procedures in Member States where they have not contemplated that the COMI will be situated. However, even in the absence of harmonisation of liquidation procedures, this proposal would have positive effects in terms of increasing legal certainty for creditors, e.g. vis a vis avoidance actions of new and interim financing given in preventive restructuring procedures or the reduction of length of liquidation procedures and the increased participation of creditors via distance means - both leading to higher recovery rates for creditors.

Third, a discharge of debt alone may in some Member States not be enough to allow the entrepreneur to take up a new business activity. For example, where bankruptcy triggers a disqualification order which lasts for longer periods of time and which may be issued without consideration being given to whether the entrepreneurs was acting in good faith or not. In order to give honest entrepreneurs an effective second chance, disqualification orders linked to over-indebtedness should also be limited in time to expire at the latest when the discharge period ends. Other potential impediments to second chance stemming from the retention and use of personal data linked to an entrepreneurs over-indebtedness beyond a certain period of time, for example in credit rating databases, are sufficiently addressed by the provisions of the General Data Protection Regulation 166 .

On second chance aspects, this option would give Member States the flexibility to determine the most appropriate means to achieve the following objectives:

- access of all honest debtors to a full discharge of debt after no more than 3 years;

- debtors must have effective access to early warning tools, just as business debtors;

- debtors unable to pay any part of their outstanding debt could be provided an opportunity of discharge without obligation of repayment;

- on expiry of the discharge period, debtors would be discharged of their debts without the need in principle to re-apply to a court.

As personal debts of professional and non-professional nature are often intertwined (and also that of families), Member States could try to consolidate such proceedings to achieve a coherent outcome, or, at the very least, should coordinate them.

As to consumers, their discharge treatment is in many Member States not different than that for entrepreneurs. Indeed, there is no apparent reason why consumers should have a different discharge regime than entrepreneurs: in both cases what is at stage is the personal liability of the debtor and in most cases it is very difficult or even impossible to distinguish between the professional and non-professional debts of the debtor 167 . However, in view of the business focus of this initiative and its objective to primarily tackle internal market problems relating to the investment of capital and the freedom of establishment for entrepeneurs as self-employed persons and in view of the differences between discharge periods for entrepreneurs and consumers respectively particularly as regards the degree of an internal market problem 168 binding rules for consumer discharge periods should remain outside the scope of a potential instrument. Nevertheless, taking into account that many Member States treat the discharge and second chance for natural persons in the same way irrespective of whether the indebted person is a consumer or entrepreneur it should remain possible and be encouraged, if outside the context of legal obligations, to coordinate of debt resolution procedures regarding sole entrepreneurs and consumers. Concrete sub-options concerning consumer discharge will be assessed in the light of these considerations.

5.    SUBSTANTIVE SUB- OPTIONS AND ANALYSIS OF THEIR IMPACT

To achieve the objectives above, various substantive sub-options can be envisaged. The choice between the various substantive sub-options has no influence on the type of the instrument.

The objective of the instrument is to ensure that certain essential minimum standards are in place. As to the parameters of the restructuring procedure to be harmonised, the described substantive options are those which have most impact on ensuring a swift and efficient procedure. In general, these elements (i) early restructuring, (ii) shorter discharge periods for entrepreneurs, (iii) raising the quality and efficiency of courts and insolvency practitioners and (iv) digitalisation in all types of restructuring and insolvency procedures (including liquidation).

On most points, it suffices to introduce clear general principles without entering into too detailed and prescriptive regulation (e.g. shareholders should not be able to block a restructuring, debtors should remain in control of their assets and affairs). On certain points, however, it is necessary to be more specific in order to ensure a useful effect of the instrument. For instance, in order to prevent obstructing shareholders from blocking the adoption of a restructuring plan, the general principle should be established while leaving to Member States the exact details of how this may be achieved. On the other hand, when it comes to the stay of enforcement actions, one needs to address the duration of the stay and the conditions for its extension need to be addressed in order to meet creditors' concerns and reduce the length of restructuring procedures. The period of the stay (in principle no more than 4 months) has been established by looking at recent reforms in Member States e.g. DE, FR, ES, IE, PT, SI).

For the key sub-options on debtor-in-possession, stay of enforcement, cram-down, new finance the inspiration came originally from the work of INSOL Europe at the time of the 2014 Recommendation on restructuring and second chance 169 , from best practices in this area, from the elements of restructuring identified in the World Bank Index, from the review of the implementation in the Member States. These rules have been further developed with the assistance of a specially created representative group of restructuring and insolvency experts from across the EU, also in the light of the results of two specific public consultations, on Capital Market Union (spring 2015) and on restructuring, insolvency and second chance (spring 2016) . For example, a new rule on the effects of the stay on early termination clauses in contracts was suggested by this group, as was the additional rules on safe harbour from avoidance actions provisions (there was high support for harmonising the rules on avoidance actions in the 2016 public consultation). Some other rules were inspired by the responses to the public consultation (e.g. the rules on early warning are supported by Business Europe, UEAPME and other business organisations, those on the specialisation of courts and IPs are supported by the Association of Financial Markets in Europe). Where valid concerns where advanced by stakeholders, certain sub-options were not retained: this is the case with the rule on the release of third party guarantees.

5.1. Early restructuring possibility

5.1.1 Description of sub-options

Sub-option 1: Since the concept of 'likelihood of insolvency' is not defined in the Insolvency Regulation, one option would be to simply leave it up to the Member States to define the concept, however diverse their approaches.

Sub-option 2: Legal certainty could be enhanced by having a common definition of 'insolvency' or at least of 'likelihood of insolvency'. However, Member States are almost unanimously opposed to such a harmonisation. Nevertheless, the situations could be improved if Member States which apply the over-indebtedness test as a trigger for the duty to file for insolvency would enable directors of viable debtors to enter preventive procedures at any time before the business becomes illiquid.

Sub-option 3: it is not sufficient to enable debtors to restructure at an early stage. Additional measures need to be taken to incentivise SMEs in particular to access early restructuring procedure. For example, SMEs should be helped to detect early their financial difficulties and to obtain support in drafting good restructuring plans and making the necessary disclosures to creditors adaptable to the needs of every SME.

5.1.2. Assessment of impact of the sub-options and the preferred sub-option

Summary assessment of the preferred sub-option: Sub-option 3 is the preferred sub-option since it ensures an early possibility of restructuring which can be effectively used also by SMEs. By lowering the thresholds on access to such procedures, the preferred sub-option will ensure a higher number of applications from viable enterprises at an early stage. Certain downside risks which could be associated with the possibility of early restructuring have been identified and can be addressed in a proportionate manner. First, there may be a concern that allowing the debtor an easy access to preventive restructuring procedures will lead many unviable enterprises in financial difficulties to enter restructuring negotiations simply to postpone the moment of filing for insolvency and thus potentially deplete assets from the insolvent estate. On the other hand, a too restrictive access into such procedure discourages debtors and translates in very low numbers of filings. There should be therefore a balance between the possibility of debtors to enter easily into such procedures, but at the same time to have in place possibilities for creditors to terminate negotiations where they are not likely to lead to a successful restructuring. Second, this sub-option may bring about a risk of misuse or high costs. However, the fact that there need to be a likelihood of insolvency suggests a real threat to the existence of the company.

This sub-option does not have negative impacts on fundamental rights, as most Member States have now recognised that the need to safeguard the rights of creditors must be balanced against the general interest of saving companies and jobs, and for this reason some interference with (dissenting) creditors' rights in order to make restructuring effective is justified. The social impacts of such procedures should be positive, as one of the main objectives of early restructuring procedures is to save jobs by saving the companies which employ them. While it is true that as a result of a restructuring some jobs might be lost, such losses would have to be expected as being greatly lower than in a liquidation scenario, and putting a company back on a growth part has also the potential of creating new jobs. For example, the restructuring of an old-fashioned factory may require the introduction of more modern technologies which require less operating personnel. But the loss of machine-operating jobs may be compensated by the creation of other types of jobs, such as product design, sales or marketing.

Most Member States supported the idea of early restructuring already at the time of the Recommendation on restructuring and second chance. In the performed public consultation the majority of respondents were in favour of early restructuring procedures while a smaller part believed that restructuring should be available at any time. Member States 170 agreed on the necessity of preventive measures enabling early restructuring of viable businesses. During the dedicated meetings with the Member States, they were of the view that when the viability of the business is threatened due to over-indebtedness, the businesses should have a right to access an early restructuring framework. However, almost all MS (e.g. AT, EE, FI, DE, IE, PL, PT, ES, SE) were opposed to harmonising the definition of insolvency or that of the likelihood of insolvency. All the Member States advocated for early warning mechanisms and tools, but there was no consensus regarding the modalities how these systems should be established and operated (whether they should be funded and monitored by the State or by the private sector). As for model restructuring plans, although the majority of Member States expressed concerns regarding the effectiveness, they were in favour as long as these models are optional and can be adapted to each case.

The business sector (Eurochambers, Independent Retail Europe, EUAPME) was strongly in favour of early restructuring for viable businesses when there is a likelihood of insolvency and they underlined the importance for early warning tools. Some business organisations (Independent Retail Europe, EUAPME) also stressed that models for restructuring plans could be used as a starting point in order to reduce costs for SMEs, as long as they are optional and flexible.

Legal practitioners, insolvency practitioners and academics were in favour of early restructuring for viable debtors, when there is a likelihood of insolvency, including when the viability of the business is threatened due to over-indebtedness. They were also in favour of early warning mechanisms and facilitating access to advice. As for the model restructuring plans, although some professionals (ACCA) expressed feasibility concerns, others (CCBE, ELI) were in favour.

The financial sector (EBF, AFME) supported option 3 and advocated for more efficient alert mechanisms, such as tax and social security authorities flagging a negative development of a business.

Trade unions (ETUC) agreed that an early restructuring framework should be available to viable debtors in financial difficulties when there is a likelihood of insolvency. However, they reminded of abusive practices by which insolvency proceedings, and in particular restructuring, are deliberately used to evade responsibilities under labour law. An easier access to preventive restructuring framework should be counterbalanced by safeguards against 'tactical insolvencies', for the protection of workers’ rights. Additionally, they advocated that the EU labour acquis should not be affected.

5.2. Stay of enforcement actions (moratorium)

5.2.1. Description of sub-options

Sub-option 1: In order to ensure that the debtor can effectively conduct restructuring negotiations, the legal framework must allow it a 'breathing space', i.e. the possibility to address the problem of hold-out creditors who might have an interest in enforcing their individual claims immediately rather than participate in the negotiation process and saving the debtor. The exact configuration of the stay can vary but it should also suspend the duty to file for formal insolvency procedures in order to be effective.

Sub-option 2: Contracts usually contain clauses enabling one of the parties to terminate early or the counter-party enters insolvency proceedings. Such clauses are also often extended to situations where the debtor enters restructuring procedures. As a minimum, such clauses should not be enforceable for the period of the stay in respect of essential supplies necessary for the continuation of the business.

Sub-option 3: Creditors' rights are safeguarded by limiting the duration of the stay and by giving them the right to ask for the stay to be lifted in certain circumstances.

5.2.2. Assessment of impact of the sub-options and preferred sub-option

Summary assessment of the preferred sub-option: Sub-option 3 is the preferred sub-option since it balances the interests of all parties and does not have detrimental effects on the availability and cost of credit while also supporting the continuation of the debtor's business. Certain downside risks have been identified and addressed by the preferred sub-option. First, there is a risk that the stay will not fulfil its purpose of supporting negotiations but rather be misused to delay the initiation of insolvency procedures, thus leading to further devaluation of the business. This potential risk is addressed by the short stay period, the possibility of lifting it at the request of creditors and the conditions which need to be fulfilled for its potential extensions. Second, there is a risk that the right to property or the right to a fair trial may be negatively affected. Several safeguards will need to be put in place to ensure that fundamental rights are not affected (stay cannot be grated or extended and it can be lifted where creditors are unfairly prejudiced, court oversight when an extension of the stay is sought etc.). Third, in terms of social impacts, workers could be negatively affected if the stay of enforcement would suspend their possibility to recoup salaries and if the Member States have not provided for the means to ensure the payment of workers 'salaries (eg. by extending the coverage of insolvency guarantee funds also to preventive procedures). Member States would therefore need to make available safeguards to adequately protect the payment of salaries for the period of the stay.

A tendency in Member States which have a stay is to have shorter stays up to three or four months as a consequence of their reforms in past decades. Longer stays are becoming more and more an exception. Moreover a number of safeguards to prevent that the exemption situation (1 year) turns into the majority practice would need to be in place, such as: the extensions of the 4 month period can be granted by the court only, it can be granted only on the basis of a justified request and is conditional upon evidence of progress in the negotiations.

In the public consultation, the majority of stakeholders agreed that a stay of individual enforcement actions should be available in preventive procedures. The vast majority were in favour of limited stay periods with a possibility of renewal in certain circumstances, or of any time limit set by the court. Particularly, in the public consultation and the dedicated meetings with the stakeholders, businesses and business support organisations were in favour of a short limited stay (2-3 months) for individual enforcement actions, while some of them (UEAPME) underlined that a stay should be granted for a period set by the court.

Financial institutions were of the view that a short stay (2-3 months) should not be automatically pronounced by the court, but only ordered in specific situations, with the possibility to be lifted at the request of the creditors.

Legal and insolvency practitioners were in favour of a short stay of 3-4 months with the possibility of renewal under certain circumstances and be lifted by the creditors. Some of them (INSOL Europe) underlined that where creditors are stayed from enforcing their rights it is advisable to institute effective supervision.

Trade Unions underlined that workers should not be treated worse in preventive restructuring scenarios than in case of insolvency proceedings.

Member States in general supported a short stay (4 months) with the possibility of its prolongation under certain circumstances, while diverse views were expressed as to the maximum period envisaged. Some Member States (FI, SE) were in favour of a general stay, while others (NL) supported only a stay on individual enforcement actions. Most of the Member States (PL, PT, ES, SE, IT, AT) were in favour of an automatic stay (which can be ordered without the obligation for the debtor to prove chances of success of the restructuring), but with the possibility to be lifted by the creditors.

5.3. Debtor in possession

5.3.1. Description of sub-options

Sub-option 1: An obligation to appoint in court a professional insolvency practitioner in all cases may increase the costs which can make the procedures prohibitive for SMEs. However, in certain circumstances a mediator is necessary to broker a deal with the creditors, especially in cases of companies with few financial creditors, sometimes one bank, and a few main clients. In other cases (for example where transactions out of the ordinary course of business need to be concluded during this period), the debtor would need to be supervised if he is to benefit from protection from avoidance actions later on.

Sub-option 2: Having a mediator and/or supervisor appointed in every case may enhance the trust in the procedure but it would also raise costs.

5.3.2. Assessment of impact of the sub-options and preferred sub-option 

Summary assessment of the preferred sub-option: Sub-option 1 is the preferred sub-option since it allows for a reduction of the costs of procedures, which could be significant for SMEs, while at the same time it ensures necessary assistance and supervision from an independent insolvency practitioner in more complex cases. This possibility is not hampered by the principle that appointment of a mediator or a supervisor needs to be made on a case-by-case basis. This option does not have any apparent impacts on fundamental rights or social impacts. The downside risk that debtors may abuse of the debtor-in-possession possibility to engage in transactions affecting negatively the rights of creditors is addressed to some extent by rules on liability of directors and on avoidance actions which are already in place in the Member States.

In the public consultation the vast majority of respondents were of the view that debtors should be allowed to keep control over the day-to-day operation of the business, in order to maintain the productive capacity of the debtor.

From the public consultation and the dedicated meetings with the stakeholders, businesses and business support organisations were strongly in favour of sub-option 1. They particularly underlined that if the appointment of a supervisor/mediator is optional, this could reduce costs for SMEs. Some of them were also of the view that when rights of third parties are not affected, the decision of the appointment of a supervisor should be confidential.

Practitioners were in favour of debtor-in-possession principle with the possibility for appointing a supervisor. They were however reluctant to harmonising the conditions for appointing an insolvency practitioner.

Credit and financial institutions were of the view that the debtor should in principle remain in possession and they fully supported the principle according to which the appointment of a mediator in a preventive restructuring framework should not be mandatory, but made by the court on a case by-case basis. They also underlined the importance of transparency of information for creditors.

Trade Unions supported the debtor-in-possession principle, but underlined that the workers’ rights to information and consultation should not be affected.

Almost all the Member States (AT, BE, EE, DE, EL, HU, IE, FR, FI, IT, LV, LT, PL, SK, SI) were in favour of the debtor remaining in possession, but subject to supervision by a suitably qualified mediator/ supervisor/ court. They also agreed that the appointment of a mediator or supervisor (insolvency practitioner) should remain optional, but were not in favour of harmonising the conditions for appointment.

5.4. Plan approval by a majority of creditors

5.4.1. Description of sub-options

Sub-option 1: Creditors act individually and are unaware of the broader impact that their actions will have on businesses, causing rescue to become more difficult and therefore worsening the position for creditors as a whole 173 .

Sub-option 2: This sub-option includes the first sub-option and, in addition, allows Member States to foresee that the plan can be adopted if the required majority in at least one class of creditors is in favour of the plan, provided that dissenting classes are not unfairly prejudiced (inter-class cram-down).

Sub-option 3: Equity holders may also oppose the adoption of restructuring plans in some Member States, even when the value of the company is so low that they are no longer 'in the money'. Appropriate safeguards for equity holders should accompany any such measure (e.g. business valuation test, right to challenge the plan in court) to ensure that they are not effectively expropriated.

5.4.2. Assessment of impact of the sub-options and preferred sub-option 

Summary assessment of the preferred sub-option: Sub-option 3 is the preferred sub-option since it is the most likely to lead to a higher number of adopted restructuring plans. The risk that, in the absence of full harmonisation, the Member States could set a too high majority (e.g. 90%) or a double majority (both in amount of claims and in number of creditors) which would effectively raise the obstacles to plan adoption should be addressed by limiting the maximum majority which can be required by Member States (e.g. 75%) and by establishing a simple majority only (i.e. in amount of claim). In order not to negatively impact fundamental rights (i.e. the right to property of dissenting creditors and shareholders) and to avoid opportunistic behaviour on the part of a majority of creditors to the detriment of the minority, this option must be accompanies by several safeguards (eg. the best interest of creditors' test, the absolute priority rule). Member States will be able to set up the majorities they consider appropriate, although a qualified majority of the value of claims should be recommended. Given the sensitivity of reducing shareholders' rights, Member States should have greater flexibility in deciding which measures are more appropriate to achieve the objective of enabling plans to be confirmed despite the shareholders' opposition when this is not justified. In respect of social impacts, this procedure will be without prejudice to the workers' rights to information and consultation which are laid down in other EU instruments. Where they are affected as a class, workers will have the same rights to vote on a plan as other creditors.

In the performed public consultation, most respondents were in favour of a plan binding on secured creditors, while a smaller part of stakeholders said that secured creditors should be exempted. The majority also supported a cross-class cram-down, provided that appropriate court supervision and the principle of "no creditor worse-off" are observed. More specifically, business organisations and insolvency practitioners supported in general that the plan should be adopted if the required majority in every class is in favour provided that the minority creditors are not unfairly prejudiced and that all classes of creditors should be affected by the plan. They were strongly of the view that secured and unsecured creditors should be treated in separate classes.. As for shareholders' position, various views were expressed; some stakeholders were more reluctant to introducing mandatory provisions regarding shareholders in preventive restructuring, while others (EBF, AFME) were of the view that although shareholders should be involved in the negotiations, they should not have a hold out position if they are out of the money.

Financial institutions were not opposed to sub-option 3, but they underlined that adequate safeguards should exist for secured creditors, because the write off of claims of a secured creditor without individual consent could generate the type of uncertainty that may result in higher costs of financing. They were also of the view that shareholders' rights might need to be limited in certain circumstances, i.e when they prevent the plan from being adopted although this plan is likely to ensure the continuation of the company's activity and the recovery of the debts.

The majority of the Member States were in favour of sub-option 2, as long as appropriate safeguards are put in place. However, views were diverging with regard to majorities required, exceptions and safeguards. As for the position of shareholders in early restructuring, despite the fact that all the Member States supported the rationale, some of them (FI, ES, BE, IE) were concerned about the idea of introducing mandatory detailed rules, because of potential implications on company law and constitutional protection of property rights.

5.5. New financing and interim financing, safe harbour provisions and third party releases

5.5.1. Description of sub-options

Sub-option 1: Protection of new financing - necessary to implement a restructuring plan - and of interim financing, necessary to keep the debtor operating during restructuring negotiations - is essential to make funds available to distressed businesses and for companies to keep operating while negotiating a restructuring plan. In both cases, protection can range from exemption from avoidance actions to a priority allowing the provider of new financing to rank above unsecured creditors.

Sub-option 2: In addition to protection from avoidance actions, protection of new financing in the form of rebuttable presumption ensures safe harbour from challenges for non-related party transactions which were concluded during negotiation of a restructuring plan.

Sub-option 3: Finally, release of third parties related to the insolvent subject from contractual obligations under the restructuring plan may be useful to strengthen the chances of restructuring of a business in difficulty. However, given the risks of interfering with the national provisions on guarantees and the security of transactions, such release provisions should be limited to two situations:

-    a debtor must be released from recourse claims of other affected obligors or guarantors in the same way as he is discharged of the claims of the guaranteed creditors;

-    except for legal entities, co-obligors and persons who have granted a personal guarantee or allocated or assigned an asset as collateral may avail themselves of the provisions of the restructuring plan confirmed by a court.

5.5.2. Assessment of impact of the sub-options and preferred sub-option 

Summary assessment of the preferred sub-option: Sub-option 2 is the preferred sub-option since it provides the necessary incentives for investors to support the company while negotiations are on-going and ensuring that restructuring plans can be successfully implemented by providing for new financing. These objectives could be achieved without excessively affecting the property rights of existing creditors, especially banks, and without raising the costs of credit. There is a risk that, in the absence of unified rules on affording new and interim finance super-priority status in the context of subsequent insolvency proceedings, investors would not be sufficiently encouraged to support restructuring efforts. However, if new investment would indeed be crucial to the survival of a viable debtor, such super-priority status could be contractually agreed upon among creditors via inter-creditor agreements. Moral hazard risks should be addressed for example by ensuring that the protection for new financing and interim financing is not available where there is evidence of fraud or bad faith. There are no discernible social impacts related to this sub-option.

In the public consultation, the vast majority of respondents agreed that interim and new financing is needed for the successful restructuring and continuity of the business. Most stakeholders from the business sector were of the view that financing should be protected if agreed in the restructuring plan and confirmed by the court, while some of them believed that new financing should always be protected. Particularly, business organisations such as UEAPME, Independent Retail Europe and BusinessEurope mentioned that adequate protection of providers of new financing will provide incentives for early restructuring.

Legal and insolvency practitioners were in favour of providing protection for new financing and, for the sake of greater certainty, they supported the idea of a safe harbour provision equipped with adequate safeguards. However, they were opposed to harmonising substantive definitions of avoidance actions and look back periods, because of the existing divergence in national systems. Although they were not entirely opposed to specific rules on third party releases, they remained reluctant, mainly because of fear of moral hazard.

Financial institutions were in favour of adequate protection for new financing provided that it was agreed in the plan and confirmed by the court. They were opposed to any rules on third party releases due to potential implications in cost of credit. They were also opposed to any harmonisation of ranking of claims.

During the dedicated meetings, the majority of the Member States (NL, AT, SI, RO, PT, IE, PL, EL) were in favour of general principles for the protection of new and interim financing, provided that there are appropriate safeguard against bad faith behaviour and fraud. Member States were, nevertheless, opposed to mandatory provisions granting super priority for new money or to any rules, which would affect domestic systems of ranking of claims and securities. As to safe harbour provisions, the majority of the Member States (RO, PT, ES, DE, PL, IT, BE) were in favour of providing a safe harbour for transactions which are closely connected with the negotiation of a restructuring plan and which are adopted by the creditors and confirmed by the court, as long as European legislation remains at the level of principles and there are no too detailed provisions. A few Member States (DE, FI, AT) expressed concerns with regard to legal certainty and the danger of abuse. Finally, the majority of the Member States were opposed to any rules on third party releases.

5.6. Reducing the formalities relating to court proceedings

5.6.1. Description of sub-options

Sub-option 1: Courts need to be involved only in case procedural acts will have legal effects on third parties or where abuses need to be avoided. In a preventive procedure, the court needs only be involved at two moments: (1) when a moratorium is sought against creditors and (2) when a plan needs to be approved in order to bind a minority of creditors or to provide security to new lenders. Removing the involvement of courts in other steps, such as formally opening a court procedure, convening creditors' committees and taking a vote among the creditors present in a court hearing would make these procedures less costly and speedier. At the same time, it must be acknowledged that a high level of court involvement may produce more trust in the procedures especially in Member States where insolvency practitioners are not highly specialised.

Sub-option 2: Full involvement of courts, e.g. for opening formally restructuring procedures, for appointing in every case a practitioner in the field of restructuring, for taking a vote among creditors etc.

5.6.2. Assessment of impact of the sub-options and the preferred sub-option

Summary assessment of the preferred sub-option: Sub-option 1 is the preferred option since it balances both the need to reduce length and costs of procedures and at the same time to safeguard the procedural right of the parties. There is a risk that the involvement of courts could raise costs and discourage restructurings. However, the need for a court to be involved whenever there is an impact on their parties' rights is an important safeguard against moral hazard when entering such procedures, on the side of both debtors and creditors, since the refusal to confirm a restructuring plans adopted by creditors after months of negotiations would lead to potentially significant losses for all involved. The benefits for the internal market will be considerable: not only will more restructurings happen simply because of the guarantee of legality which the involvement of a court pre-supposes; but also because court decision can circulate and be recognised across-borders under the Insolvency Regulation (such as a decision to grant a stay, or a decision to confirm a plan). It is also likely that 'in the shadow' of a strong legal framework able to cram-down on dissenting creditors, more out-of-court restructurings will take place to avoid a court procedure. There is also a risk that, to the extent court systems still need to be involved, lack of efficiency of courts in some Member States may be a deterrent. This risk could be managed by targeted provisions on the specialisation of courts and the use of modern communications technology. This sub-option is not likely to have negative social impacts. Fundamental rights of right to property and right to an effective remedy and to a fair trial are guaranteed under this sub-option.

In the public consultation, many respondents said that the involvement of a court or other competent authority is necessary when a moratorium is granted or in case of a confirmation of a restructuring plan, while a smaller part of stakeholders were of the opinion that the involvement of a court is not an absolute requirement.

Particularly, in the public consultation and the dedicated meetings, business organisations and financial institutions welcomed a fast, cheaper and less court-driven procedure.

Trade Unions underlined that the aim of shortening the length of the proceedings cannot disregard the workers’ rights to information and consultation.

During the dedicated meetings, the vast majority of the Member States (AT, BE, EE, FR, DE, EL, HU, IT, LT, MT, NL, PL, SK, SI) favoured the opening of some sort of formal procedure in which a court (or other competent authority or body) is involved from the moment it becomes necessary to stay enforcement actions or obtain confirmation for the restructuring plan.

5.7. Lowering and aligning discharge periods for natural persons

5.7.1. Entrepreneurs

5.7.1.1. Description of sub-options

Sub-option 1: Reducing the stigma culture and encouraging restarters rests on a distinction between honest and dishonest entrepreneurs and a reduction of the discharge period for the honest bankrupts. While the concept of dishonesty should in principle cover fraudulent conduct, Member States may also extent it to bad faith either before or after the opening of bankruptcy procedures. A discharge could be offered after 1 year to debtors who have no assets and no income (NINAs), e.g. after a liquidation of assets. One suggestion made in the Insolvency Conference on 12 July 2016 was that natural persons should be distinguished, for the purposes of insolvency/repayment plan procedures and discharge, not by their economic activity (entrepreneurs v consumers), but by whether they are high net worth or low net worth debtors. Sub-option 1 and Sub-option 2 attempt to make that distinction.

Sub-option 2: A maximum discharge period of 3 years would address all debtors, including those who still have income to repay creditors under a repayment plan. In fact, Sub-option 2 could be combined with Sub-option 1 for NINA 176 s.

Sub-option 3: A second chance would not be effective if entrepreneurs would not be able to discharge both their professional and their personal debt together. This option proposes therefore a consolidation of proceedings in one procedure.

5.7.1.2. Assessment of impact of the sub-options and preferred sub-option 

Very small businesses (i.e. one person business or businesses with up to four workers) accounted for more than 95 % of new businesses in the different Member States in 2013 and 30 % of them did not survive their first 2 years 177 . It is important to allow entrepreneurs a quick re-entry into the productive economy.

Summary assessment of the preferred sub-option: Sub-option 3 is the preferable sub-option as it provides for a fair balance between the rights of the creditor and the rights of the debtor, while having a most positive impact on the levels of entrepreneurship. In terms of fundamental rights, this sub-option will have positive impacts in terms of right to human dignity and right to engage in work, which do not appear to be outweighed by the potential harmful impact on creditors' property rights, in particular when taking into consideration that in practice recovery rates are very low during these periods and creditors' rights are therefore not effectively protected. A short discharge period is a concern from a moral hazard point of view. Reducing the discharge period is often feared to incentivize debtors to take on debts with no intention of repaying them. Such a fear is not supported by evidence. Research 181 shows that the key reason of over-indebtedness of sole entrepreneurs, which represent important part of SMEs, resides in the lower resistance of SMEs to external economic shocks due to their lower ability to mobilise reserves for the period of economic downturns. Negligence or intention to repay the contracted business loans is a reason for default of their obligations only in a very low number of situations. There is a potential downside risk that discharge alone could not give entrepreneurs effective access to second chance. Other flanking measures could therefore be necessary, for example limiting the duration of disqualification order which are issued for honest entrepreneurs simply because they were involved in a bankruptcy procedure.

In recent decades a number of Member States reduced the time limit of discharge period and there is no information that in any of those Member State the amount of unpaid loans would have increased due to an increased moral hazard risk. At the same time, Member States with very short discharge periods (for example 1 year in the UK) do not report higher levels of unpaid loans or higher costs for obtaining credit due to the moral hazard than Member States with long discharge period (for instance Greece with 10 years).

In general, in the performed public consultation, the majority of the respondents were in favour of full discharge of debt for entrepreneurs who are 'honest'. Respondents also said that such a measure should be complemented by disincentives for dishonest conduct. The majority was also of the opinion that the test of honesty should be harmonised at EU level, with many indicating that a presumption of honesty should be put in place. The views were more diverse when it came to the length of the discharge (many of them agreed to less than 3 years and a smaller part of stakeholders was in favour of 5 years) and whether discharge should be conditional upon repayment of a certain amount of debt

More specifically, stakeholders in the business sector as well as professional associations strongly supported the objective of offering honest bankrupt entrepreneurs a second chance reducing the stigma of insolvency and allowing them to return to economic life in a reasonable timeframe. They were in favor of a 3-year discharge period, but underlined that consideration should be given to clarifying certain criteria for 'honesty', so that there is appropriate legal certainty about the cases when a facilitated discharge should be allowed. Additionally, during the stakeholder meetings, business organisations as well as legal professionals and accountants voiced that, where the entrepreneur has personal debts, both generated by his/her business activity and by his/her non-business activity, the proceedings should be consolidated for the purposes of the discharge.

The banking sector was of the view that honest bankrupt entrepreneurs should be discharged from debts after a relatively short period of time (3 years) only if a certain amount of the debt is repaid (threshold should not necessarily be statutory, but may also be determined by the courts on a case-by-case basis). Access to such discharge should be possible only when restructuring measures have failed or are impossible. Financial institutions also advocated that a ‘second’ full discharge should only be available after a longer period of time in order to exclude incentives for bad practices (and avoid moral hazard). Additionally, they were not in favour of consolidation of economic and private debts.

Trade Unions supported the objective of second chance, but they warned from too generous rules which can facilitate the so-called “phoenix syndrome 182 ”.

Although all Member States supported, in principle, the idea of a second chance for entrepreneurs, providing for a reduced discharge period, various views were expressed with regard to the conditions and exemptions. During the informal governmental expert group meetings, some Member States (BE, FR, FI) were in favour of introducing a presumption of honesty, while others (PL, NL) spoke against. In addition, views were diverging with regard to the issue of introducing a limited time-period within which a discharged entrepreneur would be banned from another discharge procedure. Some Member States (DE) pointed out that a full discharge of debt should be possible only after the repayment of a predefined portion of the debt. Finally, many Member States were in favour of consolidation of economic and private debts (BE, FI, FR, NL, ES).

Consumer organisations strongly supported a three-year discharge period, not only for entrepreneurs but for all honest bankrupt individual debtors.

5.7.2. Consumers

5.7.2.1. Description of sub-options

Sub-option 1: The regulation of personal insolvency has an influence on how individuals deal with risks in their economic activity, and determines whether individuals suffering from an excessive debt burden can return to a productive economic life. 'Discharge is the essential feature and one of the most salient characteristics of modern systems for the regulation of the insolvency of natural persons. One of the principal purposes of an insolvency system for natural persons is to re-establish the debtor’s economic capability, in other words, economic rehabilitation,48 and discharge is the most effective way in which the debtor can resume productive activity for society. It is also the most effective incentive for the use of a personal insolvency regime.' 183

Sub-option 2: As a matter of principle, there is no need to distinguish in term of discharge periods between entrepreneurs and consumers. First, the same arguments linked to re-integration in to the economic life play out for both. Second, in many cases it will be difficult to draw the line between the personal debts incurred as a result of the business activity of the debtor and those incurred for other reasons. In such cases, different discharge periods may make procedures more cumbersome and costly, with even more losses to creditors and more hardship to debtors. For these reasons, the same sub-options should be kept for both entrepreneurs and consumers. Sub-option 1 and Sub-option 2 are therefore similar to Sub-option 1 and Sub-option 2 under the section on discharge for entrepreneurs.

5.7.2.2. Assessment of impact of the sub-options and preferred sub-option

Summary assessment of the preferred sub-option: Sub-option 2 is the preferred sub-option because overall it would have an impact on a larger group of citizens, provide a better balancing of the need to afford debtors a second chance while at the same time encouraging repayment of debts and therefore creating a better perception of second chance provisions. It would also be less sensitive with Member States which currently have longer discharge periods. The risk of moral hazard is reduced, as a Study on consumer over-indebtedness 187 confirms that the reasons of consumer over-indebtedness are mostly external and objective (loss of employment, divorce, disease). 

In terms of impacts on fundamental rights, this options strikes the right balance between the creditors' right of property, due to the limited discharge period, and the interference with the debtor's private life following a limited discharge period. Positive impact on the right to decent life is expected, in particular if over-indebtedness is due to external reasons. Social impacts will be positive, as more debtors will be able to have a second start, escape debt traps and possibly avoid going on the black market to find for sources of income.

In the 2016 public consultation, most of the respondents agreed that consumers should be given the chance to restructure their debt, supporting also that a full discharge of debts, possibly subject to certain conditions, should be offered to consumers provided that they are 'honest' debtors. They particularly mentioned that this needs to be complemented by disincentives for dishonest conduct. The majority also replied that over-indebted consumers should have access to free or low cost advice.

Whilst there is support for some harmonisation of rules on discharge of debt for consumers among business stakeholders, some (e.g. Bundesverband der Deutschen Industrie e.V) highlight that a too short period for discharge can be an incentive for misuse. Some business stakeholders 188 are also of the opinion that consumer insolvency and discharge should be dealt with separately and should not form part of the effort to create an efficient insolvency framework for businesses. Additionally, financial institutions are strongly opposed of including rules on consumer insolvency.

Family and consumer protection stakeholders on the contrary strongly endorse minimum standards on consumer insolvency and discharge and stress that there are no convincing arguments for differentiating between entrepreneurs and consumers with regard to the applicable conditions.

Given the insufficiently developed body of evidence of the positive impacts of discharge periods for consumers on the internal market as well as the differences in rationale between this initiative focused on the improved functioning of the capital market union and the freedom of establishment for self-employed persons, the principle in Sub-option 2 above should be set as a possibility in a soft law instrument rather than in binding legislation, as already set out above 189 . However, this possibility would need to be considered in light of the ongoing developments in Member States as regards national reforms of consumer insolvency laws and existing frameworks for addressing the problem at this stage, as described under Problem 3. It is true that soft law already exists in that respect in the form of the 2014 Recommendation. However, it needs to be taken into account that Member States would be obliged to regulate a discharge period for entrepreneurs in line with the minimum requirements of a Directive. In those circumstances even non-binding provisions on the extension of that regulation to consumers could have tangible impact on the ground over and above the 2014 Recommendation, particularly in view of the fact that many Member States have common rules for entrepreneurs and consumers and that in practice very often the consumer and business debts of an entrepreneur can hardly be distinguished.

5.8. Measures to increase the effectiveness of restructuring, insolvency and second chance procedures

5.8. Description of sub-options

Sub-option 1: courts or judges dealing with restructuring, insolvency and second chance procedures will need to be appropriately trained and specialised; practitioners in these fields will need to be professional, abide t ethical standards, be monitored and have a disciplinary system, and be remunerated in a manner which encourages them to achieve sustainable outcomes in the short time period possible. Increasing the performance of courts and practitioners will also contribute to making the system less vulnerable to moral hazard: when people know the system works well and is transparent, there is less room for moral hazard.

Sub-option 2: the introduction of electronic means of communication for procedural steps such as filing of claims, notifications to creditors, voting of restructuring plans, lodging challenges and appeals will reduce the length of restructuring, insolvency and second chance procedures, increase the participation of creditors, especially cross-border creditors with small amounts of debt which would otherwise not consider it worthy to travel to another Member State in order to vote on a restructuring plans or to file an appeal; and the data collection exercise under Sub-option 3 below.

Sub-option 3: This sub-option will add an element of monitoring of restructuring, insolvency and second chance procedures. Member States will be asked to collect data on the number of filings, the outcomes of procedures, and the sustainability of restructuring and second chance outcomes (by collecting data on re-applications of debtors who already went one through such procedures). Such data shall be collected on the basis of a standard data collection form and will be communicated to the Commission.

5.8. Assessment of impact of the sub-options and preferred sub-option

Summary assessment of the preferred sub-option: Sub-option 3 is the preferred sub-option because it has the highest impact on the reduction of the length of procedures, the increase of confidence in the operation of courts and the professionalism of insolvency practitioners. This is the most likely sub-option to lead to a reduction of average insolvency proceedings in the Member States where procedures are too lengthy. The internal market objective would be best achieved by this sub-option which would ensure a considerable reduction of the investors' costs of assessing risk ex-ante and of coordinating procedures ex post. No significant impacts on fundamental rights or social impacts can be discerned.

In the public consultation, many respondents stated that a court system in terms of speed, cost and specialisation may have an impact on saving viable businesses and increasing the recovery rates.. More specifically, the vast majority of the respondents were of the view that minimum standards on qualifications and training for insolvency practitioners would help to increase the efficiency and effectiveness of insolvency proceedings, while more than half called for minimum standards on licensing and registration requirements, liability and a Code of Ethics. In addition, specialisation of courts and digitalisation was also mentioned as a potential incentive to reduce the length of insolvency proceedings.

Particularly, in the public consultation and the dedicated meetings with the stakeholders, business sector welcomed minimum standards for practitioners in the field of restructuring and insolvency. Many of them advocated the introduction of a code of conduct for insolvency practitioners.

Financial institutions in general would welcome the introduction of minimum standardised rules on the role of mediators and supervisors, which should include among others: (i) professional qualification standards; and (ii) general principles covering their remuneration. They were also of the view that the effective length of insolvency proceedings, as well as the skill of insolvency practitioners and the specialisation of courts and judges, have an enormous impact on the debt recovery rate.

However, insolvency practitioners' organisations were reluctant to detailed provisions regarding insolvency office holders. INSOL Europe stressed that although harmonisation would be in general desirable, only common principles in cooperation matters, independence and continuous education are advisable at this stage, due to the great diversity of national rules with regard to all aspects related to insolvency office holders (types, nature of employment, size, qualification, training, appointment, remuneration and liability issues).

Academics and experts were of the view that qualification, training and independence of insolvency practitioners as well as courts’ specialisation are of key importance for an efficient early restructuring legal framework.

In the public consultation and the meetings with governmental experts from the Member States, the majority of the Member States (PT, DE, ES, FR, NL, FI, IE) supported the objectives of adequate qualification and training of insolvency practitioners. Many Member States voiced that EU intervention should remain at the level of general objectives and provide a rather flexible approach, especially regarding the appointment and remuneration of practitioners. With regard to specialization of the judiciary, the majority of the Member States welcomed the general objectives of proper qualification, training and specialisation of judges, but expressed concerns regarding a provision on the concentration of courts in insolvency cases, since it affects the organisation of the internal judiciary system, which is a matter of national competence.

6.    THE PREFERRED HIGH-LEVEL OPTION 4

The preferred option is Option 4 with the following combination of selected substantive sub-options:

The selection of sub-options was also inspired by well-performing national frameworks 191 . Hence, the provisions of the future directive will not require significant changes in those Member States, while allowing those Member States which need to improve a reasonable degree of flexibility.

For example, on restructuring:

a stay of enforcement actions is necessary to address the problem of a minority of creditors who have no interest in restructuring the debtor and who may therefore obstruct the negotiations. at the same time, a too long stay period may be detrimental to creditors, therefore increasing the number of those who would be opposed to restructuring the debtor's business

the inspiration for a short stay period of no longer than 4 months came from France (the ad-hoc and conciliation procedures), Germany, Spain and a number of Member States which reformed very recently in this area (Slovenia for example); the inspiration for allowing MS the discretion to prolong the stay period up to 12 months provided that certain conditions are met came from Finland and France (the sauvegarde procedure) where more complex restructurings can take place.

the preferred option will therefore not change what works well in several Member States, while addressing the biggest problems with the stay which are: too long stay periods (24 months in Luxembourg) with no control and therefore potentially open to abuse and (2) no stay possibility at all (Austria).

For discharge: the trend is clearly towards reducing the discharge period for natural persons.

following the 2014 Recommendation, most reforms took place in this area: Spain, Romania, Hungary, Croatia have for the first time introduced the possibility of a discharge of debt after a number of years – this is a positive development, but the discharge period implemented in these countries is 5 years and not the recommended 3 years

in some Member States the existing discharge periods were reduced to 3 years, e.g. Greece (for entrepreneurs only, from 10 years)

several Member States where entrepreneurship is very dynamic have short discharge periods, e.g. UK, NL, FI - they were the inspiration probably also for the 2011 Competitiveness Council conclusions which recommended 3 year discharge periods to be implemented in the Member States by 2013.

Chart 6: An illustration of how a restructuring framework including the preferred sub-options could work in practice

7. ANALYSIS OF OVERALL IMPACTS OF THE PREFERRED HIGH-LEVEL OPTION 4

There is a substantial amount of evidence that the approach to restructuring that is set out in the preferred option, of giving preference to restructuring over liquidation, and of facilitating a fresh start for failed entrepreneurs and consumers can give rise to significant economic benefits 192 . However, the insufficient granularity and lack of data comparability between Member States as regards the number and types of restructuring and insolvency proceedings, and essential elements of such proceedings, such as their length, costs and recovery rates - make it challenging to make precise quantitative estimates of the scale of the positive impacts that the preferred Option 4 is expected to generate.

Thanks to its binding character, Option 4 will introduce a new culture of rescuing viable businesses in those Member States (mostly central, eastern and southern EU Member States) where such approach is currently virtually non-existent and which the 2014 Recommendation could not bring about given its non-binding character.

Option 4 provides for key effectiveness and efficiency elements of restructuring proceedings which have been elaborated together with a group of insolvency experts as well as the key stakeholders. Given the large divergences between the substantive insolvency frameworks in Member States as attested by the comparative study, Option 4 tries to put in place a minimum, targeted effectiveness and efficiency framework while at the same time not upsetting the existing insolvency and restructuring procedures in the Member States where these work well. A degree of flexibility for Member States to decide on the means to achieve the objectives is necessary because in practice we observe that different approaches could work well in practice. For example, Member States have different approaches to class formation (for example whether to bifurcate secured claims in different classes based on the value of the collateral) and to the majorities required for the plan to be adopted (for example whether simple or qualified majority), therefore the details in these matters were left to their discretion.

Furthermore, Option 4 will create a framework where restructuring of cross-border groups of companies will be possible – thanks to the common binding minimum standards. This will be an important progress compared to the existing situations where, according to the stakeholders, cross-border restructurings with application of multiple Member State insolvency laws are currently unfeasible due to the inefficiency or divergences of national restructuring frameworks. By more coherent insolvency law, current barriers which hold back cross-border investments would be removed. However, Option 4 does not attempt to introduce a new European preventive restructuring procedure, but it rather defines certain efficiency measures which Member States should implement in their existing (or to be introduced) preventive restructuring procedures.

8. MONITORING AND EVALUATION

The implementation of the Directive in the Member States will be followed in the context of the European Judicial Network, which will act as a forum for the exchange of best practices on restructuring and second chance frameworks at EU level. Currently, national official sources (e.g. justice ministries or national statistical institutes) provide information on the number of insolvency cases filed. In some Member States, additional breakdown of different types of insolvency proceedings – which may include restructuring proceedings – can be available.

Although some cross-country data on the number of insolvencies are assembled and reviewed by international institutions 202 , currently, it is not possible to distinguish the number of national proceedings with a cross-border element from the total number of insolvency proceedings 203 ; the same applies to restructuring proceedings. Due to the aforementioned limitations in availability of real data on insolvency, it is currently not possible to say what the actual costs of cross-border insolvency or restructuring proceedings and cross-border recovery rates 204 . With respect to time needed for resolving insolvency cases, estimations on the basis of insolvency practitioners experience are available 205 . Introducing performance reporting by national insolvency agencies (e.g. on costs, timescales and asset recovery percentage) has been suggested by private stakeholders 206 as well as international organisations, such as the IMF 207 .

In the proposed instrument, it would be necessary to include an obligation for Member States to provide annual statistical data on:

(i)    the number of preventive restructuring procedures opened by enterprises in difficulty,

(ii)    the number of liquidations and sales as a going concern,

(iii)    the average length of proceedings, including particular procedural phases (e.g. before courts, out-of-court),

(iv)    the size of the debtors involved in such proceedings (medium, large or micro-enterprises), and

(v)    the outcome of the procedures opened, including the recovery rates in different types of procedures.

The evaluation of statistical data will allow the Commission to decide on the appropriate follow-up.

9. ANNEXES

ANNEX 1. Procedural information concerning the process to prepare the impact assessment report and the related initiative

ANNEX 2. Summary of consultations of stakeholders, including the outcome of the public consultation on an effective insolvency framework within the EU

ANNEX 3. The Impact of the initIative and data

ANNEX 4. LEGAL BACKGROUND

ANNEX 5. GLOSSARY

ANNEX 6. OVERVIEW OF MEMBER STATES' RESTRUCTURING FRAMEWORKS

ANNEX 7. WHO IS AFFECTED BY THE INITIATIVE AND HOW

ANNEX 8. EVALUATION OF THE IMPLEMENTATION OF THE COMMISSION RECOMMENDATION of 12.3.2014 ON A NEW APPROACH TO BUSINESS FAILURE AND INSOLVENCY

ANNEX 1

Procedural information concerning the process to prepare the impact assessment report and the related initiative

1. REGULATORY SCRUTINY BOARD

The Impact Assessment Report was examined by the Regulatory Scrutiny Board on 28 September 2016. Recommendations from the Board were transmitted on 30 September 2016 and were implemented into the resubmitted version of the IA Report as follows:

2. Impact Assessment Steering Group

This Impact Assessment was drawn up by Directorate-General for Justice and Consumers (DG JUST).

An Impact Assessment Steering Group (IASG) was set up to bring in views of other services of the Commission. DG Competition, DG Economic and Financial Affairs, DG Financial Stability, Financial Services and Capital Markets Union, DG Internal Market, Industry, Entrepreneurship and SMEs, DG Justice, Secretariat General, Legal service, DG Taxation and Customs Union, DG Employment, Social Affairs and Inclusion and DG Communications Networks, Content and Technology accepted the invitation.

The Impact Assessment Steering Group met 3 times and was consulted by writing on 9 February 2016. The first meeting took place on 11 December 2015, the second - on 30 June 2016 and the third - on 20 July 2016. The minutes of the two last meetings may be found in section 2 (below).

3. The minutes of the two last meetings of the Impact Assessment Steering Group

4th Inter-Service Meeting on initiative on preventive restructuring and second chance frameworks

Commission services represented: GROW, CNECT, ECFIN, TAXUD, FISMA, EMPL, DGT, JUST, SG

A fourth inter-service meeting on the initiative on preventive restructuring and second chance frameworks took place on 22 September 2016. The purpose of the meeting was to discuss the content of the new initiative based on a first draft Directive on preventive restructuring and second chance frameworks.

Horizontal provisions - Judges and practitioners in the field of restructuring, insolvency and second chance

DG FISMA welcomed the provisions on specialisation of judges and insolvency practitioners, as the rationale aligns with many country specific recommendations on improving the efficiency of insolvency frameworks.

Employees

DG EMPL referred to the importance of employees’ standing and suggested that a clear reference to the fact that the current Directive will not affect EU labour acquis should be made. In addition, they expressed concerns regarding the impact of the stay period (which can be up to 12 months) on workers.

DG JUST welcomed the suggestion made and will reflect further on a possible solution in order to clarify the effect of the stay on employees.

Stay of individual enforcement actions

DG FISMA expressed concerns with regard to the length of the stay period (up to 12 months). They would favour a proposal of a stay of 3 or 4 months with the possibility for renewal or extension in prescribed circumstances (up to 6 or 8 months), especially when the recourse to restructuring is not limited to a clear viability test.

DG JUST underlined the significant divergence regarding the characteristics and period of stay in Member States and referred to the safeguards provided for creditors so as to address moral hazard: the stay can be lifted any time on the request of one creditor; the extension of the stay will be decided by a court, only if there is evidence of relevant progress in the negotiations on the restructuring plan and evidence that the continuation of the stay is not detrimental to the creditors' rights.

DG ECFIN remarked that the safeguards introduced depend largely on the quality of the judiciary. 

DG FISMA expressed concerns with regard to the suspension of acceleration/termination clauses foreseen for executory contracts during the stay period. They required certain clarifications in order to remove uncertainty and ensure compatibility with the Financial Collateral Directive.

DG JUST stressed that the early termination/suspension will apply mostly to non-financial contracts. Additionally, the future Directive provides that the creditors should be paid during the stay as only pre-commencement claims are affected. Finally, in collaboration with DG FISMA, these provisions could be fine-tuned in order to be in accordance with the Financial Collateral Directive.

DG FISMA expressed concerns with regard to the suspension of the obligation to open insolvency proceedings for the duration of the stay.

DG JUST explained that in some jurisdictions over-indebtedness or the prospect of illiquidity could trigger the obligation to file for insolvency. The future Directive provides safeguards so as to ensure that that only viable companies can benefit from preventive restructuring, since creditors can lift a stay at any time and the court will reject the plan if it is clearly non-viable. Additionally, the Insolvency Regulation already provides that secondary proceedings can be suspended for three months.

Discharge for entrepreneurs

DG FISMA and DG ECFIN suggested that the wording used in Article 22(1), which allows Member States to restrict the access to discharge or lay down longer discharge periods for dishonest entrepreneurs should be looked at in order to disincentive dishonesty.

DG TAXUD suggested leaving flexibility to the Member States in this matter.

DG JUST explained that flexibility is provided to Member States to restrict access or to lay down longer periods for debtors when there is bad faith or fraud and that the Member States can also exclude some kinds of debt from discharge. A Recital would be added in order to underline further the need to disincentivise dishonest debtors.

Discharge for consumers

DG FISMA and DG ECFIN expressed concerns about the provision encouraging Member States to envisage debt discharge for households, given the current vulnerabilities in EU banking system and the focus of the initiative on business restructuring and second chance for entrepreneurs. They suggested that explanation (Recital) should be improved in order to clarify that what is intended is not to change the status quo.

DG JUST explained that this is not a mandatory provision and is in line with the 2014 COM Recommendation.

The SJ would be invited to look at whether a reporting obligation could be inserted when there is no substantial obligation (i.e. also for those Member States who did not take up an option to extend to consumers).

Explanatory Memorandum

SG suggested improving the text of the explanatory memorandum providing for more visibility on the broader goals (CMU, Single Market).

* * * *

Summary record of the 3rd Inter-Service Meeting on the insolvency initiative - BERL 20.07.2016

Participants: P. Stachowiak (COMP); N. Philiponnet (ECFIN); O. Martinez De Briones (EMPL); N. Bohan, M. Parmentier, F. Poliani (FISMA); D. Tsagkris (GROW); J. Lopez Rodriguez (TAXUD); K. Vandekerckhove, M. Carpus-Carcea, O. Vondracek, A. Chra, M. Mailly, P. Sziranyi, M. Lissowska, M. Janschek (JUST); W. Sleath, A-L. Barreau (SG)

Agenda: Discussion of the draft impact assessment before the submission to RSB

Meeting document: Draft impact assessment

Discussion:

K. Vandekerckhove (JUST) provided an update on the state of play of the initiative and explained the evolution of the text since the last inter-service group meeting and further meetings with Member States. Some adaptations would be made in terms of the baselines, the impacts and stakeholders' views. It had been a conscious choice to change the order of the presentation of the options, but if this was to be retained, the rationale would be explained. It was noted that the Communication planned to accompany the proposal would be an opportunity to provide the broader context, including on the relationship with the Capital Markets Union and the Single Market Strategy, so this could be kept relatively brief in the impact assessment report. Personal insolvency would be dealt with in a separate recommendation.

N. Philiponnet (ECFIN) commented on the following aspects:

The scope of the initiative should be clarified. It would be useful to explain why the initiative focuses on restructuring and does not address other aspects of the insolvency framework. This could help anchor expectations on the potential impact of the initiative.

With regard to the choice of instrument, it would be useful to develop further why other legislative instruments could not be used.

Regarding the sub-options, there could be more clarity on what the criteria for their selection is, and whether they are exhaustive and exclusive.

The consistency between the options and the objective could be improved. The overall objective of the initiative is to reduce the cost of cross-border insolvency. However in section 7 on the overall impact of the instrument, the improvement of the performance of the insolvency systems at the national level is given more prominence. The impact on cross-border flows of capital could also be better articulated.

There could also be a more cautious approach to the quantification of the benefits, given that restructuring agreements were only one element.

More globally, the general approach and the communication could underline that a positive environment for start-ups needed the right balance between liquidation and restructuring.

JUST agreed to seek to adjust the text accordingly.

N. Bohan (FISMA) underlined the following elements:

The text could have a more logical frame to better link the identification of the problem in the draft impact assessment with the intention to come with a proposal confined to business restructuring. The problem definition and objectives should more clearly lead to the options identified.

In terms of criteria for assessing options, a specific objective / criterion should be added related to the way in which the restructuring solution balances the interests of creditors and debtors; financial stability should be a criterion in assessing all the options. The regime should ensure adequate protection for creditors and limit the scope for tactical abuse of restructuring systems (for example, through excessive delay). It should be clear that for some companies, liquidation will always remain the best option.

A specific option for SMEs could be included.

JUST agreed that the overall narrative needed to explain the more specific place of restructuring (and its limits), including why acting on restructuring would help banks to deal with non-performing loans, also noting that this would be an important element for the chapeau communication.

J. Lopez Rodriguez (TAXUD) considered that the problem driver stressed too heavily the impact of differences of national legislation/fragmentation, as opposed to the shortcomings of some (but not all) national approaches. It would be useful to identify further national practices creating problems and gaps, so as to address them as objectives and in the policy options.

O. Martinez De Briones (EMPL) considered that the area of ranking of claims is missing in this draft impact assessment. She also underlined the need for better protection of employees. JUST explained that the ranking issue was left to national legislation.

D. Tsagkris (GROW) raised the issue of early warning provisions for SMEs. Generally it was noted that the costs of restructuring could be prohibitive for the smallest companies, pointing that the "second chance" through liquidation is taking place in the majority of cases rather than restructuring.

Next steps:

The draft impact assessment will be submitted to the RSB in August

The RSB will meet on 28 September

The next ISG meeting will take place in the second half of September. The objective of next meeting is to have a look at the proposals and the Communication ahead of the inter-service consultation.

4. LIST OF STUDIES relevant for the preparation of the Impact Assessment

Forthcoming

- Annual Report on European SMEs (2016): Work Package 1 - Section 'What is the situation as regards the availability of a ´second chance´ for honest failed/bankrupt entrepreneurs in the EU', DG GROWTH, [forthcoming]

- Rescue of Business in Insolvency Law, European Law Institute (commissioned by DG JUST), [forthcoming]

- 'Promoting protection of the right to housing. Homelessness protection in the context of evictions (Pilot Project)', FEANTSA [forthcoming] 208

- Statement of principles for a global approach to multi-creditor workouts, INSOL International, 2nd ed. [forthcoming]

- Impact assessment study on policy options for a new initiative on minimum standards in insolvency and restructuring law, JIIP consortium (commissioned by DG JUST), [forthcoming]

- Flash Eurobarometer 2016, Report Insolvency, [forthcoming]

2016

- Doing Business: Resolving insolvency, World Bank Group (2016)

- Study on 'Harmonising insolvency law in the Euro Area: rationale, stock taking and challenges. What role for the Eurogroup?', European Parliament, July 2016, PE 574.428

- Impact Assessment 'A review of the corporate insolvency framework', UK Insolvency Service, 1 March 2016

- SME Performance Review 2015/2016, DG GROWTH, March 2016

- Turnaround Wing Guidelines for Restructuring and Turnaround Professionals, INSOL Europe, March 2016

- Report on 'Potential economic gains from reforming insolvency law in Europe’, AFME, Frontier Economics and Weil Gotshal & Manges LLP, February 2016

- Study on 'A new approach to business failure and insolvency. Comparative legal analysis of Member States’ relevant provisions and practices', University of Leeds (commissioned by DG JUST), January 2016.

- Study on 'Consumer vulnerability across key markets in the European Union', London Economics, VVA Consulting and IPSOS Mori consortium (commissioned by DG JUST), January 2016

2015

- Doing Business: Resolving insolvency, World Bank Group (2015)

- 'Corporate insolvencies in Europe 2014/15', Creditreform (2015)

- Nordic-Baltic Recommendations on Insolvency Law, revised version of 15 December 2015

- 'Upgrading the Single Market: more opportunities for people and business', European Commission, COM(2015) 550 final, 28 October 2015

- Feedback Statement on the Green Paper 'Building a Capital Markets Union', SWD(2015) 184 final, 30 September 2015

- Economic Analysis accompanying the Action Plan on Building a Capital Markets Union, SWD(2015) 183 final, 30 September 2015

- 'The Economic Impact of Rescue and Recovery Frameworks in the EU', Commission Staff Discussion Paper (n°4), September 2015

- Euro Area Policies – Selected Issues, IMF Country Report No. 15/204, July 2015

- Euro Area Policies – Selected Issues, IMF Country Report No. 15/205, July 2015

- 'Tackling Small and Medium Sized Enterprise Problem Loans in Europe', IMF Staff Discussion Note, March 2015

2014

- Doing Business: Resolving insolvency, World Bank Group, 2014

- Economic Review for the European Union, OECD, 2014

- Study on 'Bankruptcy and second chance for honest bankrupt Entrepreneurs', ECORYS (commissioned by DG Enterprise & Industry), November 2014

- Study on a new approach to business failure and insolvency – Comparative legal analysis of the Member States' relevant provisions and practices, INSOL Europe (commissioned by DG JUST), May 2014

- Impact Assessment accompanying the Commission proposal of the Directive of the European Parliament and of the Council on single-member private liability companies, COM SWD(2014) 124 final, 9 April 2014

- Impact Assessment accompanying the Commission Recommendation on a New Approach to Business Failure and Insolvency, SWD(2014) 61 final, 12 March 2014.

- Study on 'Consumer Protection Aspects of Financial Services', European Parliament, February 2014, PE 507.463

- Report on 'The treatment of the insolvency of natural persons', World Bank, January 2014

2013

- Study on 'The over-indebtedness of European households: updated mapping of the situation, nature and causes, effects and initiatives for alleviating its impact', Civic Consulting (commissioned by DG SANCO), December 2013

- Report on 'Overindebtedness of European households: updated mapping of the situation, nature and causes, effects and initiatives, for alleviating its impact', Civic Consulting (commissioned by DG SANCO), December 2013

- Selected Issues, IMF Country Report No. 13/299, September 2013

- Study on 'The functioning of consumer credit market in Europe, IPSOS and London Economics (commissioned by Executive Agency for Health and Consumers (EAHC) on behalf of DG SANCO), July 2013

- 'Unlocking funding for European investment and growth. An industry survey of obstacles in the European funding markets and potential solutions', Oliver Wyman (commissioned by AFME),June 2013

- Study on 'Directors' Duties and Liabilities', London School of Economics (commissioned by DG MARKT), April 2013

- 'Dealing with Private Debt Distress in the Wake of the European Financial Crisis: A Review of the Economics and Legal Toolbox', IMF Working Paper No. 13/44, February 2013

- 'Measureable Results! Doing Business Project Encourages Economies to Reform Insolvency Frameworks', IFC World Bank Group, January 2013

- UNCITRAL Legislative Guide on Insolvency Law, Part Four: Directors' obligations in the period approaching insolvency (2013)

2012

- Report on the application of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, COM(2012)743, December 2012

- Impact Assessment accompanying the Revision of Regulation (EC) No 1346/2000 on insolvency proceedings, SWD(2012) 416 final, 12 December 2012

- 'Directors' duties and liabilities in the EU', European Commission, DG MARKT, December 2012

- Study on 'Means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices', London Economics (commissioned by DG MARKT), December 2012

- Global Principles for Cooperation in International Cases (‘Global Principles’), American Law Institute (ALI) and International Insolvency Institute (III), June 2012

- 'Out-of-court Debt Restructuring, World Bank Studies No. 66232, January 2012

2011

- Preliminary Report to the Insolvency Service into Outcomes in Company Voluntary Arrangements, Prof. Adrian Walters and Dr Sandra Frisby, March 2011

- 'Business Dynamics: Start‐ups, Business Transfers and Bankruptcy. The economic impact of legal and administrative procedures for licensing, business transfers and bankruptcy on entrepreneurship in Europe', European Commission, DG Enterprise and Industry, January 2011

- 'Harmonisation of insolvency law at EU level with respect of opening of proceedings, claims filing and verification and reorganisation plans', European Parliament Briefing Note 2011, PE 432.766

- 'Harmonisation of insolvency law at EU level: Avoidance actions and rules on contracts', European Parliament Briefing Note 2011, PE 432.767

2010

- ‘Harmonisation of insolvency law at EU level’, European Parliament Study, 2010, PE 419.633

- 'Household Indebtedness in the EU', European Parliament Briefing paper 2010, PE 433.453

- 'Internationalisation of European SMEs', DG Enterprise and Industry, 2010

- 'Financial exclusion in the EU, New evidence from the EU-SILC special module', DG Employment, Social Affairs and Equal Opportunities, November 2010

2007

- 'Bankruptcy Codes and Innovation', CEPR Discussion Paper No. DP6307, May 2007

2006

- 'The stigma of failure: An International Comparison of Failure Tolerance and Second chancing', Centre for Business Research, University of Cambridge, Working Paper No. 334, December 2006

ANNEX 2

Summary of consultations of stakeholders, including the outcome of the public consultation on an effective insolvency framework within the EU

Table of Contents

1.    LIST OF MOST IMPORTANT CONSULTATIONS    

2.    MAIN FINDINGS    

2.1.    General attitude towards the initiative    

2.2.    The affectation of internal Market by current rules    

2.3.    Impact of the proposed measures on the creation of new companies    

2.4.    Impact of the proposed measures on the increase of recovery rates of debts    

2.5.    The impact on the problem of non-performing loans    

2.6.    Cross-border element and its impact on restructuring    

2.7.    The characteristics of an appropriate restructuring framework at EU level    

2.7.1.    Situation of debtors    

2.7.2.    Involvement of national courts    

2.7.3.    Publicity related to proceedings    

2.7.4.    'Debtor-in-possession arrangements’    

2.7.5.    Enforcement actions – stay and its duration    

2.7.6.    Creditors' rights - ‘cross-class cram down’ (i.e. the confirmation of the restructuring plan supported by some classes of creditors in spite of the objections of some other classes of creditors)    

2.7.7.    Protection of new financing    

2.7.8.    Role of directors in preventing insolvencies    

2.7.9.    Role of Member States in preventing insolvencies    

2.7.10.    Avoidance actions    

2.7.11.    Insolvency practitioners    

2.8.    Second chance – debt discharge for natural persons     143

2.8.1.    General considerations    

2.8.2.    Affectation of the Internal Market    

2.8.3.    Advice to debtors    

2.8.4.    Discharge of debts    

2.8.4.1.Entry conditions for the discharge procedure

2.8.4.2.Discharge period

2.8.4.3.Exclusion from discharge

2.9.    Outside restructuring framework and second chance    

2.9.1. Duration of insolvency proceedings    

2.9.2. Directors' disqualification    

2.10.    Stakeholder suggestions which were not taken on board by the initiative    

1.LIST OF MOST IMPORTANT CONSULTATIONS

The Commission has consulted stakeholders in many different ways. Below a list of the most important consultations:

Public consultation, which was launched on 23 March 2016 and ended on 14 June 2016. It received more than 260 contributions from 27 MS and the country with the most overall contributions was Germany followed by UK, Belgium and Lithuania. Approximately 30% of replies were made on behalf of insolvency and legal practitioners, while the rest were mainly from companies and business support organisations, credit and financial institutions, debt collection and marketing information services, trade associations, consumer organisations, Trade Unions, academics and judges. In addition, replies were received from the public authorities of 18 Member States.

Dedicated meetings with Member States (on 29 June 2016 and on 7 September 2016).

Dedicated meetings with stakeholders (on 7 April 2016, 27 May 2016 and on 18 July 2016). An informal "Sounding Board" composed of selected stakeholders with particular interest in issues of debt restructuring and business failure was created. When creating this group of stakeholders we tried to identify the widest possible representation across EU or worldwide with a view to share their views on the initiative. The main participants were:

ofrom the financial sector: AFME 209 , EBF 210 , Invest Europe; EMF-ECBC 211 , EFIN 212 ;

ofrom the business and trade sector: BusinessEurope, BDI 213 , EuroChambers 214 ;

specifically for SMEs: UEAPME 215 , ESBA 216 , Independent Retail Europe;

osocial or economic interest organisations:

for workers', employees: ETUC 217 , UNI Europa

for consumers: BEUC

oPractitioners with interest in the field of insolvency: ACCA 218 , FEE 219 , IBA 220 , CCBE 221 , UIA 222 , INSOL Europe;

othink-tanks: FDC 223

In addition, bilateral meetings with specific stakeholders were held during the consultation period. These included among others meetings with the Nordic-Baltic Insolvency Network, Trans Europe Experts, with Verband Insolvenzverwalter Deutschlands (VID), with the National Bank of Austria, with Managed Funds Association (MFA), with INSOL International, with Droit et Croissance, with FENCA 224 , with the German Insurance Association.

Expert group meetings (on 13 January 2016, 19 February 2016, 28-29 April 2016, 24-25 May 2016, 14-15 June 2016 and on 11 July 2016.) The expert group on restructuring and insolvency law was created in the end of November 2015 and the detailed list of experts could be found on the Register of Commission expert groups ( http://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDetail&groupID=3362 ).

Conference on the convergence of insolvency frameworks within the European Union organised under the auspices of the Slovak Presidency on 12 July 2016. It was consisted of three main panels; on a new approach to business failure and insolvency and what can be improved following the 2014 Recommendation, how to create an appropriate insolvency framework beyond the scope of the 2014 Recommendation and on second chance for entrepreneurs and consumers.

2.MAIN FINDINGS

2.1.General attitude towards the initiative

Most of the stakeholders supported the adoption of preventive measures to enable the restructuring of viable businesses as well as measures to increase the recovery rates of debt in insolvency in order to achieve an appropriate insolvency framework within the EU. The provisions related to second chance were more controversial, but the majority considered that measures ensuring the discharge of debts for entrepreneurs (individuals) would be necessary for an appropriate insolvency framework within the EU. Moreover, although most of the stakeholders and Member States acknowledged the importance of discharge for consumers, many of them preferred that mandatory rules on consumer insolvency should not be included in this instrument.

The majority of those consulted were in favour of a minimum harmonisation entailing high-level principles that would help introducing a level playing field across the Europe for investors and entrepreneurs; they supported the objective to shift the focus of insolvency proceedings away from liquidation in such a way that viable businesses are encouraged to implement quick and cost-effective restructuring measures at an early stage.

Other measures such as measures ensuring the enforcement of claims and measures governing employees' rights in insolvency did not gain much support as being appropriate for insolvency framework at EU level.

All the Member States agreed on the necessity of preventive measures enabling restructuring of viable businesses. While some of them were more open to a well targeted harmonisation, the majority of them were cautious about the harmonisation related to insolvency, restructuring and second chance, opting for high-level principles, where obstacles to the functioning of Internal Market are identified. In particular, some were more reluctant (FI, CZ, SE), while others either did not see the need (since introduced reforms – PL), or were afraid of many unintended interactions with other areas of law (DE) as well as with well-working systems and local cultures and policies. Wider diversity of views and reluctance was observed with regard to discharge periods and the conditions for discharge.

As to the stakeholders, business organisations, professionals' associations, financial institutions, consumer organisations, Trade Unions and academics were in general supportive of minimum harmonised rules on early restructuring and a second chance approach and welcomed the idea of an efficient and (cost)-effective EU insolvency framework for saving viable businesses. They believed that any intervention at EU level should be sensitive to national specificities, as well as existing Member State legislation and strike a right balance among the interests of different stakeholders. More particular, they gave attention to early warning mechanisms, early restructuring, court involvement and publicity requirements when rights of third parties are affected, protection of financing, short moratorium periods, reducing the cost and length of proceedings, protection of security and property rights, sufficient qualified and regulated professionals and enhanced judicial system. The banking industry also stressed the importance of protecting collateral and the cost of credit and financing. Consumer organisations underlined the need of early detection of financial difficulties, access to free or low-cost debt advice and discharge for natural persons. Trade Unions stressed that employees' interests, consultation and priority ranking rights should not be overruled. As to discharge, some stakeholders (mainly the banking sector) were of the view that consumer discharge should be dealt separately.

Also the experts advised the Commission to focus on business restructuring and make the Recommendation more workable. The opinions were divided as whether the future legal instrument should be more detailed or more principle based.

Views of main stakeholders

According to the position papers received during the public consultation, the position of the main European stakeholders is summarised below:

BUSINESSEUROPE is generally supportive of a second chance approach to insolvency in the EU by ensuring minimum standards for pre-insolvency (early restructuring) and recovery proceedings. It is essential to provide early warning systems, preserve the ability of the company going through a restructuring procedure to keep its business, protect new financing, promote specialisation of courts and training of judges and provide minimum standards for insolvency practitioners (e.g. Code of Ethics). In addition, consideration should be given to clarifying certain criteria for identifying 'honesty’, promoting access to assistance and information tools as well as to alternative out-of-court means and digitalisation. However, Businesseurope is of the view that there should be no harmonisation of the classes of creditors and that consumer insolvency should be dealt separately.

Association of Chartered Certified Accountants (ACCA) welcomes the initiative of the European Commission to introduce minimum standards in the EU in relation to restructuring and insolvency, but underlines the dangers of changing well-working regimes. ACCA is in general in favour of introducing an effective and efficient framework for preventive restructuring measures in EU. Particularly, they opt for a framework entailing the possibility to file early, less court involvement and publicity, protection of secured creditors, protection of financing (no abusing) and sufficient qualified and regulated professionals. Finally, artificial distinctions between entrepreneurs and consumers in relation to discharge are not encouraged.

European Banking Federation (EBF) fully embraces the Commission's intention to introduce preventive measures developing a new approach to business restructuring in EU. It is however of key importance that the future legislative initiative would be well balanced in catering to the needs of both creditors as well as present and future debtors. In particular, EBF supports involvement of creditors in the restructuring plan and in the assessment of viability of the debtor, enhanced access to information for creditors, reasonable time limits for judicial restructuring procedures, super senior rank priority for new financing as long as is agreed in the restructuring plan and confirmed by the Court, EU common standards for claim statements' time limits, harmonisation of certain aspects on avoidance actions and strengthening the enforcement framework. Moreover, EBF welcomes the introduction of minimum standardized rules on the qualification of insolvency practitioners and measures laying down obligations for directors’ of distressed companies. Concerns are expressed to a full discharge for entrepreneurs without the additional requirement of paying certain amount of the debt. Finally, they consider that consumers' insolvency should be dealt separately.

European Federation for the Factoring and Commercial Finance Industry (EUF) supports the idea of an efficient and (cost)-effective EU insolvency framework allowing for early restructuring, increasing the recovery rates and ensuring the enforcement of debts. Moreover, EUF underlines that the diversity of rules in several aspects related to insolvency and restructuring proceedings constitutes a barrier to the functioning of the Internal Market and increases the costs for creditors (e.g. costs for participating in cross-border insolvency proceedings, costs of assessing the risk of default) and for SMEs (e.g. they are dicincentivised to start restructuring at an early stage). Harmonisation of measures related to claw-back, interim financing, and avoidance actions would increase legal certainty. Finally, EUF is of the view that there should not be a full discharge available for entrepreneurs.

European Financial Inclusion Network (EFIN) believes that preventive measures for enabling restructuring of viable businesses and measures to ensure the discharge of debts are key issues for an efficient insolvency framework in the EU and for achieving better recovery rates. Such framework should entail an early detection of financial difficulties, access to free debt advice, the possibility of a moratorium and of a cross-class cram down as well as discharge for entrepreneurs and consumers. The concept of ‘honesty’ is also essential and should not be abused and the principle of dignity should be central. Finally, they suggest the introduction of a calculation method for a minimum cost of living (e.g. reference budget) with the agreement of all stakeholders at a national level.

European Association of Certified Turnaround Professionals (EACTP) strongly supports Commission's Recommendation on a new approach to business failure and insolvency. They underline that the overall aim of a preventive restructuring framework should be to fully turnaround the business allowing for an operational restructuring. They are in favour of introducing incentives for business to take early action for restructuring, protecting 'bridge' financing and granting a temporary stay (having also a designated court different from the insolvency court). They also support establishing professional standards for insolvency practitioners, mediators etc.

European Mortgage Federation-European Covered Bond Council (EMF-ECBC) supports the efforts to ensure the existence of effective insolvency frameworks for business in EU. However, any intervention at EU level should be sensitive to national specificities, as well as existing Member State legislation. EMF-ECBC stresses that differences between Member States’ insolvency frameworks can act as an obstacle to the free movement of capital, goods and services and the functioning of Internal Market. They express concerns regarding limiting the enforcement of claims over the collateral underlining potential implications to capital bank requirements. Although they recognise that second chance entails benefits for the wider economy, they advocate that a debt discharge should be available only when a certain amount of a debt is repaid in order to avoid moral hazard and promote responsible entrepreneurship. Finally, they strongly believe that measures to ensure discharge of debt for consumers should not form part of the efforts of this consultation to create an efficient insolvency framework for businesses and it should be dealt separately.

Independent Retail Europe supports maximum harmonisation of EU insolvency rules, as this would provide businesses operating cross-border (and providing credit cross-border) with maximum levels of legal certainty, investor protection and cost savings. Independent Retail Europe particularly underlines the importance of protection (absolute priority ranking) of financing for SMEs under restructuring, in case of recovery proceedings, as well as protection of security and property rights. Harmonisation should also help with reducing the costs and the length of the cross-border proceedings and simplify the formal requirements. It would be also beneficial to introduce general principles for defining the viability of a debtor. Moreover, discharge periods should allow an entrepreneur to return to economic life in a reasonable timeframe; a set of objective criteria should be developed to determine when a facilitated discharge should be allowed in order to avoid moral hazard as well as fraudulent bankruptcies (taking also into account the risk of the chosen business). Finally, they stressed the knock-off effect that insolvencies of independent retailers have for the wider independent group (double punishment) and advocated that the group, with the agreement of the independent retailer should be able to intervene in a restructuring process, including, if necessary, the buy- out of the point of sale.

EUROCHAMBERS stresses that effective national insolvency systems are crucial for business and underlines the increasing risks for payment recovery in cross-border businesses. Insolvency frameworks that allow for early access to restructuring, strengthening the position of secured creditors and introducing flexible and less costly out-of-court procedures would reduce the overall default rates. However, EUROCHAMBERS is not convinced that there is a clear justification for EU competence for harmonisation in this area, but efficiency in insolvency laws should be rather achieved through guidance and pressure from the European semester process. EUROCHAMBERS supports the idea of introducing interconnected insolvency registers that would include information for creditors as well as sufficient information available online on all applicable legal frameworks. Finally, they encourage initiatives for professional support including mentoring, training and advising entrepreneurs in financial distress and believe that both consumers and entrepreneurs should have the possibility to restructure debts under certain conditions.

European Trade Union Confederation (ETUC) underlines the importance of protecting employees' rights in insolvency. They stress the severe direct and indirect effects of insolvency for employment and for economy in general, due to the knock-off effect. They are generally in favour of preventative restructuring of viable businesses and a second chance approach as described in the Insolvency Recommendation, but they also express strong concerns regarding certain elements. Particularly, ETUC is concerned to ensure that there is no erosion of existing employee protections, as currently laid down in EU legislation, no alteration of the preferential creditor status of employees and no misuse about early filing or abuse of second chance with letter box practices. In addition, ETUC states that Member States should be encouraged to set up early warning and advice systems to businesses and also stresses the fundamental issue of consultation and information of workers. Moreover, they are in favour of establishing a common definition for insolvency, including a reasonable chance of viability test for entry in restructuring, enhancing the rights of employees to be heard and ensuring transparency and external supervision. Furthermore, ETUC fully supports the improvement of supervision of directors’ duties and liability as well as the establishment of minimum standards for Insolvency Practitioners as an aid to increasing the efficiency and effectiveness of insolvency proceedings. Finally, ETUC is reluctant to a full discharge of debts after a relatively short period of time and is in favour of more stringent rules for dishonest entrepreneurs.

European Association of Craft, Small and Medium-Sized Enterprises (EUAPME) emphasises that preventive measures that enable viable business to restructure should be a primary consideration for an appropriate insolvency framework in the EU, taking though into account the coherence of the national legal systems and different policies. Particularly, measures ensuring the viability of a debtor, offering assistance for debtors in financial difficulties, raising the degree of recovery rates and improving the efficiency of procedures are crucial. A fair balance of debtors' and creditors' interests is needed and companies should be better directed to appropriate proceedings. Insolvency proceedings should be more efficient, quicker, fairer and more cost-effective, particularly for SMEs. In addition, restructuring proceedings should entail the involvement of the court and supervision when creditors' rights are affected, the possibility of a moratorium when it is absolute necessary and cram-down under conditions. However, no interference with ranking of creditors should be foreseen. Finally, with regard to discharge, indebted honest individuals should be offered a second chance and access to free or low cost advice, accompanied with adequate safeguards in order to prevent misuse.

INSOL Europe agrees that some level of harmonisation of preventive measures is desirable and particularly, issues such as rules on the opening of insolvency proceedings, reorganisation plans, avoidance actions, ipso facto clauses and directors liability are important topics apt for harmonisation. INSOL Europe also advocates for a European Rescue Plan that can be adopted of groups of companies which have opened insolvency proceedings in more than one EU jurisdictions. Moreover, they mention that both measures to protect new financing and measures to promote assistance to financially distressed debtors are important and they stress the necessity of introducing minimum standards on avoidance actions. In addition, the availability of debtor-in -possession proceedings is encouraged, but effective supervision when creditors are stayed from enforcing their rights is advisable. Furthermore, majorities of creditors should not be able to bind creditors with differing interests, but the court should decide about overruling such vote. They also advocate that a common definition of insolvency in the context of the opening of the proceedings is not necessary and they stress that the distinctive criterion between claims which predate the insolvency proceedings and claims which occur during insolvency proceedings should be harmonized. Nevertheless, they are not in favour of statutory rules on assessment of a debtors' viability or any minimum standards on IPs, judges, courts and ranking of claims. Finally, the opportunity for honest individuals to obtain a discharge should be given to both consumers and entrepreneurs under the same conditions and access to cheap or low cost advice should be available for SMEs and individuals.

Federation of European Business Information Services (FEBIS) supports that minimum standards on preventive measures to enable the restructuring of viable business, measures to increase the recovery rates of debts in insolvency and measures ensuring the enforcement of debts should be taken to achieve an appropriate insolvency framework in the EU. They are in favour of early warning systems, publicity, court involvement, short stay provisions and discharge for all honest individuals with stricter conditions applicable for entrepreneurs. In addition, they stressed the important role of suppliers providing credit and the necessity to reduce cascade bankruptcies. Finally, they advocate for a better access to finance, enhancing information requirements for SMEs and introducing common accounting standards.

2.2.The affectation of internal Market by current rules

The vast majority of those consulted in the public consultation believed that existing differences between the laws of the Member States in all the areas mentioned in the chart above affect the functioning of the Internal Market. Particularly, almost half of them indicate that differences in the areas of preventive measures and measures increasing the recovery of debts affect to a large or a considerable extent the functioning of the Internal Market. Very few claimed that divergence in the laws of the Member States in those areas does not pose any barriers to the functioning of the Internal Market.

In the public consultation and the dedicated stakeholders meetings, all the stakeholders agreed that timely access to preventive (restructuring) proceedings is a key issue in order to avert the insolvency of economically viable business. The majority was in favour of a minimum broad standards harmonisation, whilst allowing Member States flexibility as to how those standards are applied in practice, without affecting adversely any well-working regimes. In addition, they raised several points where more targeted harmonisation would be useful.

In the public consultation, the majority of respondents outlined that a minimum harmonisation of a preventive framework would be helpful providing for consistency, predictability and motivating investment and cross-border transactions. In particular, they argued that:

The differences between Member States insolvency frameworks can affect exports, imports, investment, cross-border lending and cross-border company groupings.

The unpredictability of insolvency proceedings makes it difficult for creditors to recover value from distressed debts, which contributes to high levels of non-performing loans. The latter weight on a bank’s balance sheet and as a consequence may lead to constrains in its lending activities.  225  

Divergences in the laws of the Member States raise the cost of financing leading to a fractured Internal Market.

Harmonisation of business failures processing rules may help to encourage an environment in the EU where investors, funds, banks and other stakeholders will be motivated to support relevant European distressed companies and help them survive and thrive.

Investors primarily want certainty of treatment and consistency of application in insolvency. Differences in insolvency regimes may increase uncertainty for investors as well as the cost of assessment of risks; it can become a deterrent to cross-border corporate investment, since the difficulties of establishing the value of distressed debt may increase the cost at which investors are willing to invest, or even it could discourage investors from establishing their business activities in other Member States.  226

Forum shopping and COMI shifts usually reflect the availability of preventive measures. SMEs are less able to do so. 227 Costs from shifting of activities. 228

Approximation of preventive measures would reduce the regulatory arbitrage, preventing the debtors from relocating their center of interest to countries with a more favourable insolvency regime and file there for bankruptcy (“bankruptcy tourism”). 229

National differences encourage rogue businesses to strategically establish their registered offices in Member States with "lax" legislation with a view to gain a competitive advantage over other national undertakings. The problem is particularly acute for letterbox companies. 230

It would allow for more efficient evaluation of the likely outcome of all affected parties, speeding the means for a solution as well as providing greater clarity around valuations at various layers of the capital structure, resulting in an efficient means of risk assessment and valuation. 231

It would cut down on legal fees and other expenses, the need to forum shop and move corporate headquarters to enable a viable and speedy restructuring.

Debt discharge after a period will allow entrepreneurs second chances and provide a driver for growth. This should be tempered by ensuring disincentives for dishonest conduct. 232

Second time entrepreneurs are more successful and operate for longer than start-ups.

Currently, there is a wide disparity within the EU Member States both as regards availability of appropriate rescue tools and, should rescue not be possible, effectiveness of the individual insolvency regimes and thus outcomes for stakeholders. There is anecdotal evidence of centre of main interests shift at the time of failure (for example from Germany or Spain to UK). 233

There are examples where one members of a group of companies has filed for insolvency because of strict legal requirements in the relevant Member State which has pushed the parent company into insolvency proceedings in another Member State when a restructuring might otherwise have been possible. 234

However, some concerns were expressed whether a harmonisation in the above-mentioned areas is necessary and whether the above-mentioned differences have a direct effect on the Internal Market:

A partial harmonisation may undermine the operation of the regime altogether as many aspects of a restructuring are interlinked with the formal insolvency processes or with other areas of law (company law, contract law, employment, labour law, tax law). This may have a limiting effect on the impact of any new measures.

Some of the differences in approach to certain aspects of national insolvency are driven by national social and political considerations and therefore are not readily conducive to being harmonised across the EU socio-economic constructs and cultural differences make certainty and consistency difficult.

An approach that might weaken the well-functioning approaches in some countries would not be welcome.

Some insolvency practitioners mentioned that investment decisions of enterprises as well as decisions about cross-border transactions are not entirely depended on different features of insolvency law in a specific Member State. The level of risk depends mainly on the financial situation of the respective business partner and – if this risk is realised – the efficiency of the applicable insolvency law. The differences in insolvency laws will need to be taken into account when carrying out any risk analysis, but will not necessarily be a key focus or determining factor for investors, creditors or debtors.

Certain measures notably those governing employees’ rights are likely to be rather political and polarising measures and therefore difficult to amend on EU level (e.g. In France, saving employment is the second priority of French insolvency law, after continuation of activity (first priority) but before settlement of liabilities (third priority).

Differences in the laws of the Member State may only affect the administration and the cost of the proceedings. 235

Differences in existing regimes are not necessarily problematic in practice, but can be seen as offering a greater variety of options for debtors who operate across borders. For example, English schemes of arrangement have been used as a solution for restructuring non-UK companies. 236



2.3.Impact of the proposed measures on the creation of new companies

The majority of those consulted in the public consultation, stressed that all the measures mentioned above have an impact on the creation and operations of newly established companies. Particularly, more than one third believed that preventive measures to enable restructuring of viable business, measures to increase the recovery of debts in insolvency and ensure enforcement of debts as well as measures to ensure discharge for entrepreneurs affect to a large or a considerable extent the creation and operations of newly established companies.

On the one hand, the impact of the measures mentioned above was deemed considerable for start-ups since access to credit can be facilitated. Providers of equity and debt capital to new and growing businesses will be more willing to invest when their rights are clear and there is predictability and transparency of the process especially for measures that affect debt enforcement. At the same time, it may be easier for business to obtain funding where there is an effective regime across EU for creditor' rights and enforcement of debts. 237  

On the other hand, although the possibility to restructure viable business may have an impact on new companies providing for incentives and confidence to entrepreneurs 238 , it was largely supported that, at the time of establishing a start-up, no significant focus is placed on insolvency regime (except maybe for certain considerations of personal liability or very strict discharge regimes), as the possibility of failure is not largely considered by entrepreneurs; newly formed businesses take into account a variety of different considerations (commercial, financial, operational, legal and regulatory) in order to decide in which jurisdiction operations should be located and operate from, but rarely in the areas mentioned above, apart from exceptional cases (e.g. where a new company is used in a restructuring solution for an existing company/special purpose vehicles). 239

Other stakeholders were of the view that all the measures mentioned above can have an impact on start-ups in the sense that due to their limited ‘financial buffer’ they are more vulnerable to knock-off effects. 240

Other issues that according to the stakeholders may have an impact on saving viable businesses:

The cost of restructuring

The availability/range of recognised informal measures

The court system in terms of speed, cost and specialisation

The ability of qualified and regulated insolvency processionals to lead the restructure/ business rescue

The broader business environment and regulatory regime

2.4.Impact of the proposed measures on the increase of recovery rates of debts

When asked which measures would contribute to increasing the recovery rates of debts, the respondents to the public consultation replied as follows:

More than 40% of the respondents supported that all the measures mentioned above would contribute to increasing the recovery rates of debts. Minimum standards on insolvency practitioners/mediators/supervisors, minimum harmonized rules on avoidance actions, specializations of judges and the length of insolvency proceedings were deemed as more important. 241

It was also stated that:

Other factors (such as the speed of access to the courts, the predictability of outcome in litigation and the expertise and innovation of insolvency practitioners) are more likely to have an impact on recovery. 242

Although several of the measures mentioned may be necessary to obtain a higher debt recovery rate, there is no need to set minimum standards under European law. 243

2.5.The impact on the problem of non-performing loans

When asked about which measures would contribute to reducing the problem of non-performing loans, the respondents to the public consultation replied as follows:

The majority of those consulted agreed that measures enabling the rescue of viable companies are essential for mitigating the problem of non-performing loans, while less were of the view that measures to improve the effectiveness of insolvency proceedings can also contribute to reducing the problem of non-performing loans.

It was in general stressed that the problem of NPLs can be dealt more effectively in a system providing for realistic possibilities of an effective restructuring and debt enforcement on the one hand and a prompt discharge of what is not realistically recoverable on the other hand.

Effective insolvency legislation promotes efficient management of non-payments. 244

More particularly, it was supported that early restructuring measures result in better recovery for lenders since they can allow rescued companies to repay their loans (at least in part) and to continue to make a positive contribution to the economy. 245  

Timely resort to restructuring well serves the objectives of recovery rates and NPLs. 246

Creditors and investors' certainty concerning legal outcomes particularly as to the enforceability of the loans and the effectiveness of the restructuring initiatives will lead to the efficient resolution of NPLs in Europe. 247

One of the primary factors for commencing enforcement action is the possibility of a quick enforcement and a degree of certainty on the process and outcome. 248

Consideration should be given not to impede efficient enforceability of the collateral, because in case a default the collateral backing the credit is deemed as a central element. 249

Other measures mentioned:

Consumer and family organisations supported limiting the cost of debt collection to reflect the ‘real costs’ and promote a non-profit model for debt collection and debt advice companies.

The European banking sector would welcome strengthening the enforcement framework and protecting secured creditors. In particular, the adoption of harmonised enabling certain creditors’ claims, at least those secured by a pledge, to be satisfied before the enforcement of contracts under insolvency proceedings would effectively enhance the lenders’ recovery ratio or at least prevent excessive credit deterioration. Moreover, it was suggested that the context of ordinary enforcement procedures should allow the direct/automatic enforcement of the claims or part of the claims that have not been objected by the debtor, without any court preliminary consent. Finally, it was advocated to enlarge the scope of the Collateral Directive to include also unlisted financial instruments (e.g. shares of private companies). 250

2.6.Cross-border element and its impact on restructuring

The majority of the participants to the public consultation recognised that, as opposed to a purely national situation, the restructuring of a business is very significantly or significantly affected when creditors are situated in a different Member State(s) than their debtors. On the contrary, very few stated that there is no impact at all.

Particularly, the majority of the stakeholders mentioned that:

There are higher costs and risks for creditors (especially unsophisticated and small ones) participating in cross-border restructuring process (language barrier, professional guidance, possible fees/costs) compared to a purely national situation. 251

Where creditors are situated in a different Member State from the debtor, a restructuring will be more complex due to various legal uncertainties (such as specificities of the legal regime, including the different treatment of securities in rem, multiple and competing requirements, different time limits). 252

Variations in the requirements between jurisdictions mean that considerable extra costs would have to be incurred by creditors in order to fully understand the process and debtor and creditor rights; this would make it both slower and harder for an external creditor to effectively participate in supporting a debtor. 253

The difficulty to properly assess the consequences of a crisis, given the lack of harmonized minimum standards on debt enforcement and debt recovery procedures, makes it less secure for credit institutions and other investors to invest in other Member States.

Other stakeholders argued that:

Creditor engagement is usually mainly driven by the likely outcome and individual effect on creditors.

There can be problems in relation to proceedings which are outside of the scope of European Regulation on insolvency.

The overall impact on the restructuring is likely to be low; other than the practical issues of locating and notifying creditors and assessing claims, there is little impact.

It is more likely to have an impact on SMEs, where creditors are more likely to have relatively low stakes. For such creditors, the need to access advice on a restructuring in another Member State, to enable them to participate in that restructuring, may not be cost effective given the likely level of any recovery. 254

2.7.The characteristics of an appropriate restructuring framework at EU level

2.7.1.Situation of debtors 

In the performed public consultation, the majority of the respondents were in favour of having the possibility of early restructuring (before the debtor is insolvent, but where there is a likelihood of imminent insolvency), 255 less stressed that restructuring should be available at any time 256 , while very few were of the view that only already insolvent debtors should be eligible for restructuring. 257

In particular, the majority of stakeholders stressed that it is fundamental that both the failing viability of the debtor is identified in sufficient time before collapse, so that restructuring can be put in place, but also that its future viability can be assessed. Moreover, it was clearly mentioned that adequate safeguards should be ensured in order to avoid abuses, such as delaying the onset of insolvency where there is no chance of a successful rescue.

In the public consultation and the dedicated staleholders' meetings, the business sector (Eurochambers, Independent Retail Europe, EUAPME) was strongly in favour of early restructuring for viable businesses when there is a likelihood of insolvency and they underlined the importance for early warning tools. Some business organisations (Independent Retail Europe, EUAPME) also stressed that models for restructuring plans could be used as a starting point in order to reduce costs for SMEs, as long as they are optional and flexible.

Legal practitioners, insolvency practitioners and academics were in favour of early restructuring for viable debtors, when there is a likelihood of insolvency, including when the viability of the business is threatened due to over-indebtedness. They were also in favour of early warning mechanisms and facilitating access to advice. As for the model restructuring plans, although some professionals (ACCA) expressed feasibility concerns, others (CCBE, ELI) were in favour.

The financial sector supported the idea of and advocated for more efficient alert mechanisms, such as tax and social security authorities flagging a negative development of a business.

Trade Unions agreed that an early restructuring framework should be available to viable debtors in financial difficulties when there is a likelihood of insolvency. However, they reminded of abusive practices by which insolvency proceedings, and in particular restructuring, are deliberately used to evade responsibilities under labour law. An easier access to preventive restructuring framework should be counterbalanced by safeguards against 'tactical insolvencies', for the protection of employees’ rights. Additionally, they advocated that the EU labour acquis should not be affected.

Most Member States supported the idea of early restructuring already at the time of the Recommendation on restructuring and second chance. In the performed public consultation over 50 % of respondents were in favour of early restructuring procedures while 20% believed that restructuring should be available at any time. Member States 258 agreed on the necessity of preventive measures enabling early restructuring of viable businesses. During the dedicated meetings with the Member States, they were of the view that when the viability of the business is threatened due to over-indebtedness, the businesses should have a right to access an early restructuring framework. However, the majority, if not all ((AT, EE, FI, DE, IE, PL, PT, ES, SE) were opposed to harmonising the definition of insolvency or that of the likelihood of insolvency.

In addition, all the Member States advocated for early warning mechanisms and tools, but there was no consensus regarding the modalities how these systems should be established and operated (whether they should be funded and monitored by the State or by the private market). As for model restructuring plans, although the majority of Member States expressed concerns regarding the effectiveness, they were in favour as long as these checklists are optional and flexible.

Closely related to it was the question about a harmonised definition of insolvency or likelihood of insolvency. In the public consultation, two thirds of those consulted were in favour of introducing a common definition of insolvency at EU level, particularly with a view to enhance certainty and predictability for firms and investors across the EU and create a level-playing field for cross border insolvency proceedings. 259 The majority of those consulted were of the view that such a definition should include elements of both a cash flow (liquidity) and a balance sheet test.

However, during the dedicated meetings with the stakeholders, it was highlighted by almost all of them that whilst some minimum standards might be helpful, it is unlikely to agree in practice on a common definition. 260 In this context, some stakeholders argued that the consequences of a company meeting the insolvency definition/test are more important than the definition itself, in particular when there are strict requirements for mandatory filing for insolvency. 261 Additionally, in the public consultation and the informal meetings with the Member States, most of them were not in favour of harmonising these definitions at EU level.

Finally, the experts consulted did not reach a consensus on the need to a common definition of insolvency at EU level. The view expressed was that a definition would not be necessary to access early restructuring proceedings. Most of the experts expressed the view that the future initiative should focus more on trigger elements/criteria, especially for early restructuring procedures.

2.7.2.Involvement of national courts

Approximately 45% of the respondents to the public consultation supported that some sort of formal procedure (with the involvement of the court or other competent authority) should be opened when a moratorium is granted or in case of a confirmation of a restructuring plan, 262 while 18% were in favour of a rather flexible process without having the involvement of a court as an absolute requirement 263 . In addition, during the ‘Sounding Board’ meetings, the majority of stakeholders in business and financial sector as well as professionals in the field of restructuring confirmed that less court-driven procedures may make the restructuring process less rigid, costly and time-consuming.

Particularly, the majority argued that as soon as rights of third parties are affected, (e.g. cram- down or moratorium), court involvement should be required to avoid an abuse of process by the debtor (and consenting creditors). 264  

The majority of the stakeholders indicated that restructuring measures in which the courts are involved to a lesser degree or not at all should equally be available to all forms of enterprises 265 , with many of them stressing that they should be particularly available to SMEs.

Other stakeholders argued that:

In purely consensual restructurings court involvement is not necessary.

Flexible out-of-court procedures would be an efficient and viable solution both in terms of success rate and duration. 266

Additionally, in the public consultation, the majority of the stakeholders indicated that restructuring measures in which the courts are involved to a lesser degree or not at all should equally be available to all forms of enterprises 267 , with many of them stressing that they should be particularly available to SMEs.

2.7.3.Publicity related to proceedings

Some stakeholders were of the view that publicity is only required in case of a moratorium or a confirmation of the plan, while others stated that publicity should not be an absolute requirement. 268 Fewer were of the view that publicity is required as from the beginning of the negotiations on a restructuring plan.

In the public consultation, it was particularly stated that:

Publicity should be required when the restructuring measures affect all or the majority of the creditors. 269

Notification should be given to all affected stakeholders, but this may be only a limited group of creditors. 270

For entirely consensual restructurings, which do not rely on stays or court approval, publicity is not required. 271

Especially for cross-border cases, access to information about restructuring/insolvency proceedings on a timely manner, is crucial for creditors.

A European register of insolvencies based on existing national registers would be beneficial particularly for cross-border cases, as creditors could be informed about the opening of an insolvency proceedings against their debtor in another Member State. 272

In light of these, the Trade Unions underlined the importance of consultation and information rights of the employees at an early stage.

Finally, during the dedicated meetings with the Member States, while some Member States (UK, DE, IT, FI) mostly favoured transparent procedures and certain publicity, others (NL, BE, ES, FR) stressed the importance of confidential procedures.

2.7.4.'Debtor-in-possession arrangements’

In the public consultation, the vast majority of stakeholders were of the view that debtors in the context of restructuring measures should be allowed to keep control over the day-to-day operations of their business (‘debtor-in-possession arrangements’) with almost two thirds supporting that there should be supervision from a suitably qualified mediator/supervisor/court. 273

Main comments:

The debtor-in-possession arrangements prove to be very often the best solution in order for a debtor to preserve the productive capacity of a company; they promote operational efficiencies and realize significant cost savings.

Some form of supervision by a suitably qualified and independent professional would reduce the risk of abuse and provide a transparent and trustful process for creditors. 274

The level of oversight may depend on the nature of restructuring and on the measures requested (e.g. where the rights of creditors are limited). 275

A range of restructuring measures should be available with options for a debtor to remain in possession or where appropriate have an independent supervisor or the court to assist. 276

In principle, the intervention/supervision of a mediator/supervisor/court should not be mandatory. 277

Once a moratorium is ordered, supervision is necessary. 278

The debtor-in-possession arrangements are especially needed for SMEs, since it would be very difficult to find proper management for the company. However, it is highly unlikely that the restructuring would succeed without any supervision or control. 279

During the 'Sounding Board' meetings, business sector and business support organisations were strongly in favour of debtor-in-possession arrangements. They particularly underlined that if the appointment of a supervisor/mediator is optional, this could reduce costs for SMEs. Some of them were also of the view that when rights of third parties are not affected, the decision of the appointment of a supervisor should be confidential.

Practitioners were in favour of debtor-in-possession principle with the possibility for appointing a supervisor. They were though reluctant to harmonising the conditions for appointing an insolvency practitioner.

Credit and financial institutions were of the view that the debtor should in principle remain in possession and they fully shared the principle according to which the appointment of a mediator in a preventive restructuring framework should not be mandatory, but made by the court on a case by-case basis. They also underlined the importance of transparency of information for creditors.

Trade Unions supported the debtor-in-possession principle, but underlined that the employees’ rights to information and consultation should not be affected.

From the public consultation and the dedicated meetings with the Member States, almost all of them (AT, BE, EE, DE, EL, HU, IE, FR, FI, IT, LV, LT, PL, SK, SI) were in favour of the debtor remaining in possession, but subject to supervision by a suitably qualified mediator/ supervisor/ court. They also agreed that the appointment of a mediator or supervisor (insolvency practitioner) should remain optional, but were not in favour of harmonising the conditions for appointment.

2.7.5.Enforcement actions – stay and its duration

In the public consultation, the majority of those consulted supported that a stay of individual enforcement actions should be available both in formal insolvency proceedings and in preventive/pre-insolvency restructuring procedures. 280

The majority underlined that:

A stay of individual enforcement actions gives the viable businesses in temporary financial distress a necessary amount of time ('breathing space') to define a restructuring plan and to avoid precipitate creditor action, thus significantly increasing their chances for a successful restructuring. 281

It should be ensured that creditors whose rights are stayed are adequately protected; a balance must be found between depriving creditors (especially secured creditors) of their contractual or propriety rights, and allowing the debtor breathing space to restructure; adequate safeguards should be put in place (e.g. limited conditions and supervision, possibility for creditors to lift the stay). 282

A stay should be limited to prevent individual creditor claims (no general stay).

The majority was also in favour of allowing an individual creditor to lift the stay granted to the debtor, under certain conditions. 283

They specifically argued that:

An individual creditor should be allowed to ask the court to lift the stay in order to reduce the risk connected with commencement of preventive/pre-insolvency procedures in bad faith (e.g. in order to harm creditors' interests, delay enforcement actions).

The creditor should be able to request the stay to be lifted if it can show that it leads to unfair prejudice or abuse against the creditor, or if the creditor would be able to block the restructuring proceedings (i.e. it represents a blocking minority). 284

Others were of the view that an individual creditor should not be sufficient, but a qualified or a large majority of creditors should be allowed to ask the court to lift the moratorium (e.g. if they prove that the debtor is not negotiating or there are not any realistic chances of success). 285

As for its duration, the majority of the stakeholders were of the view that a stay should be granted for a maximum of 2-3 months with a possibility of renewal in certain circumstances, while others were of the view that the time limit should be set by the court subject to the fulfillment of certain conditions.

The majority stated that:

There should be a fair balance between the debtors’ and creditors' rights. Thus, a stay should not be granted for a very long period, but for a proportionate and appropriate timeframe in order to contribute to the efficiency of the negotiations.

Only a fast restructuring ensures the survival of the business operation and longer periods may not lead to better results, but have a negative impact on the recovery of debt. 286

There should be the possibility of renewal or extension, under certain circumstances, (e.g. depending on the level of the complexity of the restructuring or in the event that there are prospects of success).

According to the experience of the majority of insolvency practitioners and legal professionals consulted:

2-3 months is a reasonable and sufficient time, but there should be the option to extend if there is a reasonable basis (i.e. complexity). Longer stays without a review mechanism would unfairly prejudice the rights of creditors. It is often the case that preliminary negotiations are conducted without requiring a stay. The longer the period of the process, the lower the chances of a successful restructuring.

Others were of the view that:

Since there is no one-size-fits-all approach, flexibility is needed as to the time limit. 287

The period of a stay should depend upon the level of oversight of the debtor's continuing activities by suitably qualified and regulated professional and be subject to appeal to a Court. 288

During the ‘Sounding Board’ meetings, businesses sector was in favour of a short limited stay (2-3 months) for individual enforcement actions, while some of them (UEAPME) underlined that a stay should be granted for a period set by the court.

Financial institutions were of the view that a short stay (2-3 months) should not be automatically provided by the court, but only ordered in specific situations, with the possibility to be lifted by the creditors.

Legal and insolvency practitioners were in favour of a short stay of 3-4 months with the possibility of renewal under certain circumstances and be lifted by the creditors. Some of them (INSOL Europe) underlined that where creditors are stayed from enforcing their rights it is advisable to institute effective supervision.