EU Insolvency Harmonisation Proposals: Directors’ Duties, Pre-Packs and Transaction Avoidance

The European Commission published a draft Directive harmonising certain aspects of insolvency law, on 7 December. 

Status Quo: EU insolvency rules are currently fragmented along national lines, delivering differing outcomes with different degrees of efficiency – resulting in large divergences in recovery value for investments in insolvent companies across the EU.

Objectives: The draft Directive aims to reduce differences in national insolvency laws, increase predictability of insolvency proceedings, maximise the recovery of value from the insolvent company for creditors, reduce information costs for investors, and thereby facilitate cross-border investment.

Main Proposals:

• Directors’ Duties – Directors would be under a duty to file for insolvency proceedings no later than three months after becoming aware that the company is insolvent. Directors would be personally liable for damages incurred by creditors as a result of failure to comply with this obligation.
• Pre-packs – Introduction of UK-style pre-pack proceedings in which the sale of the debtor’s business is negotiated before the opening of insolvency proceedings and the sale executed shortly after the opening of such proceedings. However, there are some key differences from the UK-style pre-pack, including (a) limitations on secured creditors’ ability to credit bid, (b) the need for a court to authorise the pre-pack sale, and (c) the fact that necessary ongoing contracts would generally be assigned to the purchaser, even without the consent of the contractual counterparty/ies.
• Avoidance Actions – Minimum harmonisation rules, with three specific grounds for avoidance actions (namely preferences, acts at an undervalue, and intentionally detrimental actions) – with specified consequences for such actions.

Nature: Directives provide for minimum standards; European Member States are permitted flexibility as to how they implement those standards into their own national law. Accordingly, even post-implementation, rules across Member States would not be identical.

Timing: The draft Directive will now proceed through the usual, lengthy European legislative procedure, which can take from 18 months to a few years. Once implemented, Member States will have two years in which to transpose the Directive into national law. Of course, as the UK is no longer a Member State, it will not be required to implement the Directive.

Impact: Via targeted convergence of EU insolvency laws, the Directive should facilitate ease of understanding of insolvency processes and assist in maximising recovery values of insolvency estates. However, imposing an obligation on directors to file for insolvency without undue delay – ostensibly, to avoid potential asset value losses for creditors – looks set to hamper rescue efforts in practice.