07 December 2022

Questions and Answers on the Commission's proposals on corporate insolvency and listing

Today's proposal aims at harmonising targeted elements of Member States' insolvency rules and at creating common minimum standards across all Member States, thereby facilitating cross-border investment.

CORPORATE INSOLVENCY

Why is the Commission proposing a targeted harmonisation of insolvency proceeding rules?

Today's initiative, announced in the Capital Markets Union Action Plan of September 2020, is part of the Commission's priority to advance the Capital Markets Union (CMU). The lack of harmonised insolvency regimes has long been identified as one of the key obstacles to the freedom of capital movement in the EU and to greater integration of the EU's capital markets. Today's proposal aims at harmonising targeted elements of Member States' insolvency rules and at creating common minimum standards across all Member States, thereby facilitating cross-border investment.

Member States' different starting points, legal traditions and policy preferences imply that reforms at national level in this area are unlikely to lead to a convergence of insolvency systems. Action at EU level is, therefore, needed to reduce this fragmentation.

What specifically is the Commission proposing?  

The proposal aims to accomplish convergence in three key dimensions of corporate (non-bank) insolvency law: (i) ensuring that creditors can recover the maximum value from the liquidated company, (ii) the efficiency of insolvency procedures and (iii) the predictable and fair distribution of recovered value among creditors.

1. Maximising the recovery value of the liquidated estate

Today's proposal introduces a minimum set of harmonised conditions across the EU to ensure that debtors do not reduce the value that creditors can get. It will also introduce conditions on asset traceability by improving insolvency practitioners' access to asset registers, including in a cross-border setting. This is combined with the possibility of maximising the recovery value of the business at an early stage through ‘pre-pack' sales (i.e. a planned insolvency procedure where the assets are sold to a designated purchaser) and an obligation on company directors to file for insolvency without undue delay to avoid potential asset value losses for creditors.  

2. Enhanced procedural efficiency

The proposal also sets up rules for a simplified winding-up procedure for insolvent microenterprises. For those small companies, the cost of ordinary insolvency procedures is often prohibitively high. The new rules will ensure that microenterprises, even those with no assets, are wound up orderly, in a fast and cost-effective procedure. This will also ensure that entrepreneurs can have a debt discharge at the end of the procedure. To accomplish this, as a rule, no insolvency practitioner should be appointed (as this is an additional cost), the debtor should remain in possession of the assets and of the day-to-day operation of the business throughout the procedure and the residual value of assets should be realised through an electronic auction system.

3. Fair and predictable distribution of recovered value

Today's proposal sets out how creditors' interests can be represented in “creditors' committees.” Creditor committees are a key tool to protect the interests of all creditors. The proposal sets out conditions for such committees to be created and minimum harmonisation rules in relation to key aspects, such as the appointment of the members and the composition of the committee, the working methods, the rights and functions of the committee, as well as the personal liability of its members.

What is this proposal changing?

The corporate insolvency proposal:

• Harmonises conditions for “transaction avoidance”. This will protect the insolvency estate by clawing back assets that were wrongfully disposed of prior to the opening of insolvency proceedings (e.g. if a debtor makes a donation to a friend just before insolvency proceedings);
• Makes it easier to trace assets across borders by facilitated insolvency practitioners' access to asset registers;
• Allows for the preparation and negotiation of the sale of the debtor's business before the formal opening of the insolvency proceedings (‘pre-pack'). This will help prevent the quick deterioration of the value of the company (‘melting ice cube effect');

• Requires directors to file for insolvency without undue delay to avoid potential asset value losses for creditors (‘zombie firms');
• Provides simplified procedures for insolvent microenterprises, hence reducing the costs of the proceedings and guaranteeing an orderly liquidation;
• Improves representation of creditors' interests through creditors' committees;
• Makes key features of national insolvency regimes, including insolvency triggers and the ranking of claims, more transparent for creditors to reduce the cost for cross-border investors to search the information....

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