This is an Insight article, written by a selected partner as part of GRR's co-published content. Read more on Insight

Although Directive (EU) 2019/1023 has not yet been transposed in all EU member states, the European Commission has decided to continue the process of harmonising the insolvency regimes in the European Union through its proposal for a directive on harmonising certain aspects of insolvency law (the Insolvency Directive), published on 7 December 2022.[1]

Having already focused its harmonisation work on pre-insolvency and debt discharge measures in Directive (EU) 2019/1023], the proposed Insolvency Directive introduces a minimum set of measures in three key areas of insolvency law to harmonise substantive national insolvency laws. These key areas are:

  • asset recovery;
  • the efficiency of proceedings; and
  • the fair distribution of recovered assets among creditors.

The proposed Insolvency Directive is the European Commission’s third attempt to harmonise the field of restructuring and insolvency by improving the efficiency and predictability of insolvency proceedings throughout the European Union to facilitate the EU Capital Markets Union (CMU).

Using the same approach as that for Directive (EU) 2019/1023, the Insolvency Directive introduces minimum standards that each member state can adopt as they are or in an enhanced form.

Preserving the insolvency estate

Under this new proposal, the European Commission has tried to further protect creditors through various measures to preserve the insolvency estate.

The proposed Insolvency Directive sets out three grounds for the avoidance of transactions:

  • creditor preferences – payments or collateralisation made within three months prior to filing for insolvency proceedings or thereafter shall be declared null and void if the creditor knew or should have known that the debtor knew or should have known at the time of the transaction that it was unable to pay its debts or that insolvency proceedings had been filed, except when those payments are made for fair consideration;
  • legal acts at undervalue – these are transactions carried out within one year prior to the filing of an insolvency petition in which the transaction involves no or manifestly inadequate consideration; and
  • fraudulent acts – this refers to the debtor’s intentional detrimental acts to its creditors that occurred within four years prior to the insolvency filing while the other party knew or should have known the debtor’s intent.

If an act falls under one of those three grounds, it will be void and unenforceable against the insolvency estate, and the beneficiary party will have to provide compensation.

The proposed Insolvency Directive also attempts to improve the cross-border traceability of assets. Direct access to bank account registers would first be granted to courts duly designated by each member state, in accordance with article 32 of Directive (EU) 2015/849. Using those registers, the courts will be able to access, at the request of an insolvency practitioner, not only the debtor’s national bank accounts but also those held in each member state.

In addition, the proposal aims to generalise creditors’ committees, whose role will be to ensure that creditors’ interests are protected during insolvency proceedings by ensuring their rights to be heard, receive information, be consulted on certain matters and supervise the insolvency practitioner.

Finally, in an attempt to avoid value destruction by the European Commission, there has been a proposal to introduce an obligation for directors to file for insolvency no later than three months of becoming aware or being reasonably expected to have become aware of the insolvency. Failure to do so will result in liability for damages being incurred by the creditors.

A framework for pre-pack sales

After discussions on the framework of a negotiated pre-pack procedure, the European Commission’s working group eventually decided to retain the idea of a liquidation procedure, preceded by a preparation phase. The objective is to achieve higher recovery rates by selling the debtor’s business as a going concern.

The liquidation procedure would be as follows:

  • First, the preparation phase, which is confidential, will be used to structure and organise the sale process, with the appointment of a monitor. The monitor will also conduct a best interests test and recommend the best offer after a competitive and transparent sales process. If the debtor is insolvent or suffers from a likelihood of insolvency, the debtor may benefit from a stay of individual enforcement actions.
  • Second, the sale is implemented in the context of the liquidation phase. The monitor is appointed as liquidator. The court can either:
    • authorise the sale of the debtor’s business shortly after the opening of the liquidation proceedings, after having heard from the creditors and the shareholders; or
    • run a public auction within two weeks of the opening of this second phase, the offer selected by the monitor at the end of the preparation phase being the initial bid.

The proposed Insolvency Directive provides for the introduction of a unified and simplified winding-up regime for microenterprises to reduce costs.

Next steps

The proposed Insolvency Directive will now go through the legislative process. The European Parliament and the Council are likely to suggest changes to the text of the proposal to reduce forum shopping in the European Union and facilitate cross-border investment.

At the same time, the transposition of Directive (EU) 2019/1023 will continue. On 17 July 2022, which was the deadline for the transposition of the Directive, Belgium, Bulgaria, Cyprus, the Czech Republic, Luxembourg, Latvia, Malta, the Netherlands, Poland and Slovenia were considered as having failed to enact national measures fully transposing the Directive.


Unlock unlimited access to all Global Restructuring Review content