Harmonising Insolvency Laws in the European Union

The European Commissions proposed directive harmonising certain aspects of insolvency law CHRIS MUYLDERMANS VOORZITTER IN ONDERNEMINGSZAKEN ONDERNEMINGSRECHTBANK Antwerpen&Limburg pro mandato 25.02.2025

Introduction Introduction International insolvency law International insolvency law has been an important topic in the corridors of power in the European Union (EU) during the past several years. We have seen the Recast Insolvency Regulation1 of 2015, which applies to insolvency procedures opened after 26 June 2017. In 2019, the Preventive Restructuring Directive2 followed, resulting in legislative amendments in all key jurisdictions in the EU. On 7 December 2022, the European Commission stepped forward again and published a Proposal for a Directive of the European Parliament and the Council harmonising certain aspects of for a Directive of the European Parliament and the Council harmonising certain aspects of insolvency law (the Insolvency Law Proposal). insolvency law (the Insolvency Law Proposal). Proposal pro mandato 25.02.2025

The Insolvency Law Proposal seeks to harmonise certain aspects Member States. The initiative is rather ambitious since the insolvency laws of the various Member States are deeply rooted in the cultural background of the Member States and very much interlinked with the other substantive laws of the relevant Member State. The directive was proposed by the Commission on 7 December 2022, together with other measures intended to further develop the EU s capital markets union. EU s capital markets union. The lack of harmonised insolvency regimes has consistently been identified as a barrier to cross-border investments. Insolvency law is considered a key area for achieving a true capital markets union. More harmonised insolvency rules contribute to improved certainty and cost reductions for (foreign) investors. harmonise certain aspects of the substantive insolvency laws in the Previous initiatives like rules of private international laws in relation to cross-border insolvency proceedings and the implementation of preventive restructuring frameworks in the EU Member States seek to harmoniseinsolvency procedures across Member States. pro mandato 25.02.2025

The main elements of the proposal are to ensure that creditors can recover the ensure that creditors can recover the maximum value from the liquidated maximum value from the liquidated company company, to improve the efficiency of insolvency procedures and increase the predictability and fair distribution of recovered value among creditors. The idea behind is that harmonisation substantive insolvency laws across the Member States would contribute to achieving the EU s plan to create a Capital achieving the EU s plan to create a Capital Markets Union Markets Union to enhance the financial to enhance the financial and economic integration within the EU and economic integration within the EU. harmonisation of contribute to pro mandato 25.02.2025

Purpose Purpose to achieve minimum that the Insolvency Law Proposal sets minimum rules that each Member State must have, but with the freedom to implement further-reaching rules than those prescribed as minimums in the Insolvency Law Proposal. This is important because, although the Insolvency Law Proposal may provide guidance as to what rules each Member State should have, the rules may still in the end differ per Member State taking into account that : the Proposal does not explicitly and clearly define what are insolvency proceedings ,lacks clear and explicit definitions of director , insolvency proceeding , and insolvent . In absence of such definitions, the harmonising effect of the Insolvency Law Proposal may be limited. minimum harmonisation harmonisation on certain insolvency law topics certain insolvency law topics across Member States. This means pro mandato 25.02.2025

The Proposal aims at harmonising 1. certain rules relating to avoidance actions avoidance actions 2. enhancing transparency transparency in relation to asset tracing 3. harmonisationof pre pre- -pack procedures pack procedures 4. mandatory mandatory bankruptcy bankruptcy filing filing/ directors / directors duties duties 5. creditors creditors committee committee 6. key information fact sheet key information fact sheet pro mandato 25.02.2025

relating to Avoidance actions voidance actions. 1. The Proposal aims at harmonising certain rules aims at harmonising certain rules relating to A Avoidance actions seek to annul legal acts that have been concluded prior to the opening of insolvency proceedings and which are detrimental to the general body of creditors. These avoidance actions rules are currently characterised by significant differences between jurisdictions across the EU. The Insolvency Law Proposal outlines three different grounds for avoidance actions: legal acts benefitting one or more creditors; legal acts made for no consideration or at undervalue; and legal acts which are intentionally detrimental to the general body of creditors. According to the Insolvency Law Proposal, the effect of an avoidance action should be four-fold. the counterparty may not assert against the insolvent estate any rights, claims, or obligations it has obtained from the transaction that is the subject of an avoidance action. the party that benefited from the legal act that is the subject of the avoidance action is bound to compensate the insolvent estate for the damages suffered by the other creditors due to the ivoidable legal act. the avoidance action damages cannot be set off by the counterparty against a claim it has on the insolvent estate. the avoidance action claim against the counterparty for compensation is assignable. pro mandato 25.02.2025

Given that the Insolvency Law Proposal intends to establish only minimum standards for avoidance actions, Member States may adopt additional rules for avoidance, voidability, or unenforceability of legal acts detrimental to the joint creditors to the extent that those rules offer better protection to the joint creditors. CAVEAT CAVEAT To a certain extent, this may interfere with the Insolvency Law Proposal s objective to promote cross- border investment. Cross-border investors may not attribute the necessary comfort to the minimum rules, as there likely will remain discrepancies between various Member States. pro mandato 25.02.2025

2. EnhancingTransparenc Transparency to asset tracing asset-tracing related to insolvency estates is one of the main topics. It includes both the preservation (i.e. freezing) of the assets identified and the repatriation of assets that are located in another Member State. insolvency practitioners within the EU should gain access to centralised registers of the EU in respect of: bank accounts, UBO information and asset title information, simplifying and improving the process of identifying assets located in Member States. As the registers contain sensitive information, judicial control entrusted to designated courts are put in place to safeguard the rights and interests of European citizens and companies. insolvency practitioners appointed in any of the other Member States should be equipped with the same access to various registers as local insolvency practitioners of a Member State and stipulates that such insolvency practitioners may not be subjected to further professional standards. this would enable insolvency practitioners to trace debtors assets easier, faster and at lower cost, which is expected to result in other higher recovery in cross-border European European insolvency proceedings. pro mandato 25.02.2025

An important limitations : An important limitations : insolvency practitioners will not have access to information on accounts held with certain payment providers (i.e. crypto-currency service providers and service providers that do not offer accounts with IBAN codes). This gap is driven by the absence of European legislation requiring these types of payment providers to include identification data in centralised electronic systems. Considering the intensive (crypto) monetary traffic that takesplace through payment providers such as ICS, Paypal, Klarna and Strike, potentially important assets therefore cannot adequately be traced back to an insolvency estate despite the Proposal. the Proposal does not equip practitioners with new instruments to recover assets belonging to insolvency estates as this was considered too controversial by the Member States, the level of accessible information is only limited Given recent case law in the European Court of Justice (the ECJ), entailing that general access to UBO registers interferes with. the EU s Charter of Fundamental Rights pro mandato 25.02.2025

3 . The harmonisation of Pre Pre- -pack procedures pack procedures The Insolvency Law Proposal also addresses the harmonisation of pre-pack procedures within the EU. In the EU, a pre-pack procedure is usually characterised by the sale of a debtor s assets or enterprise in an insolvency procedure with court approval (the liquidation phase), but with the deal having been agreed upon prior to the commencement of the insolvency procedure (the preparation phase). The (brief) insolvency procedure is utilised to leverage the benefits of such a procedure to, for instance, terminate employment contracts to right-size the workforce. By preparing the sale prior to the actual insolvency procedure, the pre-pack minimises potential loss of creditor value at an early stage since the negative effects of a formal insolvency procedure are less likely to materialise between the opening of these proceedings and the actual sale. As such, pre pack procedures are seen to maximise creditor recovery seen to maximise creditor recovery in insolvency proceedings pro mandato 25.02.2025

4. Mandatory bankruptcy filing 4. Mandatory bankruptcy filing directors of a legal entity who are deemed best positioned to realise when the company is nearing or in insolvency are obliged to submit a request for the opening of insolvency proceedings with the court within three months after the directors become aware or can reasonably be expected to become aware that the entity is insolvent. the Member States shall ensure that directors failing to comply creditors creditors, but also permits the Member States to adopt stricter liability rules for failure to comply with this obligation. directors failing to comply with this obligation are liable for damages to are liable for damages to The rationale behind this proposal is to maximise recovery by avoiding the potential loss of asset value if insolvent companies continue trading. The explanatory memorandum to the Insolvency Law Proposal does set out that the term director is to be understood broadly, referring to those persons charged with making, or who in fact are making or who ought to be making key decisions with respect to the management of a company. pro mandato 25.02.2025

5. The Creditors committee Creditors committee The idea behind the creditors committee, which is only installed pursuant on agreement of the general meeting of creditors, is to strengthen the position of creditors in insolvency proceedings in ways that individual creditors who would otherwise not participate in the proceedings due to limited resources or geographical distance are represented. This will enable creditors to become more involved in the proceedings and, where necessary, give direction to the proceedings. Creditors committees can help cross-border creditors in particular to better exercise their rights and ensure their equitable treatment. Member States are allowed to exclude the establishment of a creditors committee in insolvency proceedings when the cost of setting up and operating such a committee is not commensurate to the value it may generate. where there are too few creditors, where the vast majority of creditors have a small share in the overall claims where the expected recovery from the estate is significantly lower than the costs of the set-up and operation of the committee (e.g. micro-enterprise). pro mandato 25.02.2025

The Insolvency Law Proposal provides rules on key aspects of the creditors committee the appointment of committee members and their composition, working methods, the function of the committee, and the personal liability of its members. the creditors committee is independent the creditors committee is independent from and should supervise the insolvency practitioner is not spelled out that the insolvency practitioner should actually be accountable to the creditors committee). supervise the insolvency practitioner (although it the creditors committee be granted certain rights and duties such as : the right to be heard in court, the right to seek external advice and to be informed and consulted on matters in which creditors have an interest (e.g. the sale of assets outside the ordinary course of business), the duty to provide information to the creditors represented by the creditors committee and the right to receive information from those creditors. The Insolvency Law Proposal aims at strengthening the position of creditors in cross-border insolvencies. Member States can still make their own interpretation to an extent. A further improvement could be realised if the Proposal not only provided for the rights, powers, and obligations of the creditors committee as a collective, but also contained provisions on the rights of the individual creditors if a creditors committee has not been established. pro mandato 25.02.2025

6. The introduction of the Key information fact sheet he Key information fact sheet to set forth the various essential elements of the national insolvency laws across Member States for cross border investors border investors engaging with these diverse legal jurisdictions. Its introduction is aimed at not only strengthening, but also streamlining the distribution of cross border investments within the EU. The key information includes: information relating to the conditions triggering the commencement of insolvency proceedings within each Member State, the rules governing the claims and the obligations involved in such proceedings, the mechanisms for the priority and the ranking of creditors claims, and the subsequent distribution of proceeds following the completion of insolvency proceedings. cross- - The information needs to be : carefully established presented in clear language avoiding any discrepancies relating to different interpretations, ensuring its comprehensibility across a broad spectrum of stakeholders, catering to cross-border investors. pro mandato 25.02.2025

the key information fact sheet strives to : empower cross empower cross- -border investors border investors with indispensable insights into the insolvency frameworks of various Member States. increase transparency transparency regarding the discrepancies that exist between Member States in order to enable informed decision-making and to facilitate cross facilitate cross- -border investments border investments within the EU. Provide statistical insights into the average duration of national insolvency proceedings in individual Member States .. strives to : pro mandato 25.02.2025

TO CONCLUDE TO CONCLUDE The Insolvency Law Proposal is part of a broader push within the EU to further develop, harmonise, and enhance insolvency laws across continental Europe. It has been the latest in a stream of legislative efforts to contribute to the development and cohesion of international insolvency law across the EU. Whilst the objective of the Insolvency Law Proposal was applauded, its execution has also been received with some criticism. In particular, though harmonisation on certain topics, such as the rules for mandatory bankruptcy filing and directors liability, do not necessarily create a set of legal rules that have broad support across the European jurisdictions. BUT BUT to be continued pro mandato 25.02.2025

ECON heeft gisteren ook nog een draft Opinion NEXT STEPS NEXT STEPS December 2024 The Council adopted its position on key elements of a proposed directive to harmonise certain aspects of insolvency law. This partial general approach focuses on measures to preservethe insolvency estate, the duties of directors in the event of insolvency and transparency obligations. During the Polish presidency, member state experts will continue discussions on the remaining provisions. On February 5 2025 ECON published it draft opinion Heading for trialogue? pro mandato 25.02.2025

the Insolvency Law Proposal does not apply to insolvency proceedings relating to : financial institutions, public enterprises, and private individuals not running a business. pro mandato 25.02.2025