October 2024 brought another bill amending restructuring law, after the previous one was withdrawn in early 2024. Changes are necessary to implement the “Second Chance Directive”[1]. Every EU Member State was required to transpose it by 17 July 2022, and all did so except Poland.
The Directive harmonises restructuring rules to support the internal market, introducing preventive restructuring frameworks, early-warning systems, the best-interest-of-creditors test and a four-month enforcement stay extendable to a total maximum of twelve months. According to its explanatory memorandum, the bill introduces only changes necessary for full transposition. Below we discuss the principal proposals.
More information in restructuring plans
Plans would additionally include:
- the general employment effects, including planned redundancies and reduced working time, and arrangements to inform and consult employee representatives;
- a statement of the debtor’s assets and liabilities, asset values and a description of its economic position and employees’ situation;
- whether the debtor was a micro, small or medium-sized undertaking when applying.
A mandatory recovery test
The supervisor or administrator would prepare a test simulating asset values and potential creditor recoveries under different scenarios. It would include:
- a valuation identifying methods and assumptions and the business’s value assuming (i) implementation of the restructuring plan and continued operation, and (ii) bankruptcy;
- the expected creditor recovery in hypothetical bankruptcy proceedings;
- an assessment of whether claims covered by the arrangement would receive more through its conclusion and performance or through bankruptcy.
The test would not be required for micro-undertakings.
Secured claims included by operation of law
Currently, claims secured in rem may be included only with creditor consent unless the debtor proposes full satisfaction or at least as much as enforcement against the collateral would provide. If that proposal is made, inclusion follows by law.
The bill proposes a fairly revolutionary change: secured claims would unconditionally fall within the arrangement by operation of law, irrespective of the proposals.
Changes to cross-class approval
Current Article 119(3) allows adoption despite a lack of the required majority in some creditor classes if (i) creditors representing two-thirds of total claims vote in favour and (ii) dissenting classes receive no less than in bankruptcy.
Under the proposal, at the debtor’s request or with its consent, the court could declare adoption despite a missing majority in every class if (i) a majority of classes voted in favour, including at least one class of secured creditors or creditors ranking above category II under bankruptcy law; (ii) supporting classes represented at least half the classes within categories that would receive partial satisfaction in bankruptcy, applying a going-concern valuation.
New judicial powers to amend arrangements and verify classes
The court could amend an arrangement where the changes do not affect essential provisions and would allow approval.
It could also verify classification before voting. On application by those entitled to submit proposals, it would approve the classes by order or refuse approval and identify defects.
A further mandatory ground for refusing approval
Current Article 165(2) permits refusal where terms grossly prejudice creditors who voted against and lodged objections.
The bill makes refusal mandatory if any dissenting creditor objects that implementation would leave it worse off than bankruptcy or ending restructuring without an arrangement. The court must, of course, find the objection justified.
A new role for supervisors and administrators
They would support arrangement negotiations while protecting debtor and creditor interests. A new feature permits use of a mediator with debtor consent. They could also contract with third parties for mediation, preparation of the restructuring plan and valuation, acting in their own name but at the debtor’s expense.
Conclusion
Some proposals are significant, particularly mandatory inclusion of secured claims, whose holders rarely volunteer for restructuring, and the recovery test, which may give creditors fuller information about recovery under different scenarios. Yet the bill introduces only the Directive’s minimum solutions, and doubts remain whether they suffice for proper implementation. For example, it contains no early-warning system provisions, despite these being mandatory.
* The author discusses only the changes considered most important, not every proposal in the bill.
[1] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, amending Directive (EU) 2017/1132.
