The implementation of the Restructuring Directive (EU) 2019/1023
Nikol Caruana is an Associate within the Commercial and Corporate Department of Fenech & Fenech Advocates
According to a European Commission’s assessment in 2016, half of the new businesses within the European Union (EU) do not survive the first five years and every year about 200,000 firms end up having to close shop, resulting in over 1.7 million people losing their jobs.
While evaluating ways to boost economic recovery and attractiveness across the European community, it was felt inter alia that having large gaps within the single market’s various insolvency regimes was frustrating the free movement of establishment and investment by creating uncertainty, costs and litigation. To tackle such shortcomings, the European Institutions strived to update the community insolvency framework (way back in 2000) with particular focus on facilitating cross border proceedings and promoting alternatives to insolvency. In 2019, the EU adopted yet another important tool, which had to transpose by 17 July: the Restructuring Directive – on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
Averting insolvency – the aim of the Restructuring Directive
In essence, the Restructuring Directive seeks to promote the rescue of honest and economically viable debtors in financial distress so as give them “a second chance”. Moreover, it ensures that creditors and other stakeholders across the EU have alternative solutions to the dreaded insolvency. This is done through the harmonisation of principles and implementation of minimum standards, which essentially:
(a) facilitate restructuring at an early pre-insolvency stage;
(b) lead to a discharge of debt incurred by insolvent entrepreneurs (traders); and
(c) create measures to promote the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
This article will focus mainly on the provisions concerning the preventive restructuring frameworks (a), the application of which can be restricted to legal persons by member states.
What are the key elements of the Restructuring Directive?
(1) Availability of preventive restructuring frameworks
Member states are to implement legal frameworks which allow the restructuring of the business facing financial difficulties. These shall enable the debtor and the affected parties (creditors, workers, members, etc.) to come up with a restructuring plan when there is the likelihood of insolvency and not only once declared insolvent.
(2) Judicial Involvement vs debtor in charge
The Directive promotes the downgrading of judicial and administrative involvement so as to limit it to what is necessary and proportionate (for example, when restructuring plans which affect the interests of dissenting affected creditors or which provide for new financing).
(3) Common Rules for the adoption of plans
The affected parties are to be divided in different classes (such secured and unsecured creditors) that reflect sufficient commonality of interest. A restructuring plan may be adopted by the affected parties by voting or concluding an agreement, provided the majority threshold to be set by the member states shall not exceed 75% of the amount of claims or interests of those affected.
(4) Dissenting Creditors and cross-class cram down
The Directive provides detailed rules on when an approval of the restructuring plan may still be successful despite not being approved by the majority of affected parties in every voting class, but by the majority of voting classes on the whole.
(5) Moratorium on individual enforcement actions and ipso facto clauses
To support the negotiations of a restructuring plan, debtors shall have the option to benefit from a temporary stay of individual enforcement actions (for example, creditors requesting the liquidation or seizure of the debtors assets) and the enforcement of ipso facto clauses in certain specified contracts (for example, which impose termination of an agreement in case the debtor resorts to restructuring).
What about Malta?
Unfortunately, Malta’s corporate insolvency regime has been lacking for a number of years. In fact, Malta has ranked almost last among all EU member states in the World Bank’s Doing Business 2020 report, scoring a measly 5.5 out of 16 in terms of its insolvency framework’s strength. The result is mainly attributed to low recovery rates and lengthy insolvency proceedings averaging three years; nonetheless, it appears that resorting to insolvency is the go-to tool for both creditors and debtors alike when faced with financial difficulty.
It is noteworthy that the Maltese legal framework is actually equipped with alternative mechanism to tackle corporate insolvency similar to the ones promoted by the Directive. In fact, Part VI of the Companies Act (Chapter 386) entitled “Company Reconstructions” regulates, among others: (a) the sanctioning of a compromise or arrangement (which includes restructuring) made between creditors or members and the company subject to achieving a qualified consensus, and (b) the company recovery procedure. However, it seems that such mechanisms are seldom used in Malta or else, they tend to be exploited for the wrong reasons when it is simply too late. It is evident that the current mechanisms will require amendments as they are heavily reliant on judicial intervention and do not favour the debtor in control aspect. Moreover, the preventive element and the opportunity for additional financing are not sufficiently encouraged.
At the date of this writing, it was confirmed that Malta has requested an extension for the implementation of the Directive. Moreover, the authorities confirmed that the implementing texts and measures will be revealed in the coming months together with other important renovations affecting the Maltese insolvency regime on the whole.