Modern prospects for European insolvency law harmonisation

15 September 2015

In this month's blog, Professor Paul Omar discusses modern prospects for European insolvency law harmonisation.

In words published in a practitioner journal just over three years ago, this author was of the view that: “It is difficult to see member states agreeing to proposals from the European institutions for substantive rapprochement of their internal [insolvency] laws unless there were overwhelming economic benefits for them to do so.” (“European Insolvency Laws: Convergence or Harmonisation?”, Eurofenix, Spring 2012, p21). Though not in itself intended as a prediction, these cautious words have nonetheless turned out to be quite far from the direction in which views on harmonisation have now apparently travelled.

The first salvo was in fact fired long before the above thoughts were published. An INSOL Europe Report of April 2010, authored by a practitioner body of some repute and entitled Harmonisation of Insolvency Law at EU Level, was written with a view to the eventual review of the European Insolvency Regulation (EIR), which would take place from 2012 onwards. It was presented to the European Parliament Committee on Legal Affairs and advocated consideration of substantive harmonisation in a number of areas, including the opening criteria for proceedings, stays of creditor action, procedural management rules, ranking and priority rules, the filing and verification of claims, responsibility for any rescue plan, the scope and extent of a debtor’s estate, avoidance actions, contract termination or continuation, directors’ liability, post-commencement financing availability and insolvency practice qualifications. While many of these areas were procedurally focused, as befitted a review of the way in which the EIR could better function, the report seemed to suggest that the time had come to consider ways in which insolvency law across Europe could go beyond mere convergence and reach the stage at which harmonisation becomes feasible.

Echoes of the 2010 report in fact found their way into a response by the European Parliament in 2011, entitled Report with Recommendations to the Commission on Insolvency Proceedings in the context of EU Company Law (document A7-0355/2011), which acknowledged the difficulty of creating a “body of substantive insolvency law at EU level” but postulated the desirability of “worthwhile” harmonisation in a number of discrete areas, chiefly to avoid the adverse consequences of disparities in national laws that might favour so-called ‘forum shopping’. These areas included the opening criteria for proceedings, the filing of claims, avoidance actions, insolvency practice qualifications and common aspects for restructuring plans. Again, although quite modest, this report can be taken to represent a change of thinking on the part of the European institutions – which, apart from a brief dalliance with harmonisation in the first drafts of what was to become the European Bankruptcy Convention 1995 (and a direct model for the EIR), had always shied away in practice from anything beyond promoting the idea of eventual convergence in good practice.

The energies of the European Commission were directed from 2012 onwards to the reform of the EIR itself, although this process did not conclude till the Recast EIR emerged in May 2015. However, even during this process, attention was given to whether it was desirable to proceed to what was described as an “approximation of laws” in discrete areas, some of which replicated items on earlier lists. In the 2012 Communication from the Commission etc. on a New European Approach to Business Failure and Insolvency (document COM(2012) 742 Final), the context articulated is not the ideal of harmonisation or the avoidance of disparity, but the need to eliminate legal uncertainty and an “unfriendly business environment”, deemed to constitute obstacles to cross-border investment. In fact, rejecting some of the rationale of earlier proposals, the communication suggests that the type or focus of legal systems per se do not determine entrepreneurial success or the possibility of rescue, but instead the availability of specific tools that favour early warning of distress and promote the efficiency of procedures. In language reminiscent of the (final) report in connection with Best Project on Restructuring, Bankruptcy and a Fresh Start in 2003, the European Commission advocates concentration on improving “second chances” by introducing fast-track procedures for honest debtors, aligning and shortening discharge periods and, for small and medium enterprises (SMEs) in particular, improving prevention, access to out-of-court settlements and debt recovery generally.

The focus on SMEs and entrepreneurship readily explains how the European Commission moved, from a purely incidental consideration of desirable steps to take in modernising domestic laws, towards promoting its own vision of what European insolvency should look like. In 2014 it published a text, Recommendation on a New European Approach to Business Failure and Insolvency (document COM(2014) 1500 Final), that outlines reforms aimed at dealing with four particular concerns:

• the availability of a framework to facilitate preventive restructuring;
• assisting restructuring negotiations through enabling the appointment of a mediator and for stays to be available;
• ensuring the success of restructuring plans through certain minimum content and by clarifying creditor and court involvement in the adoption process; and
• providing protection for new financing arrangements.

To these priorities the European Commission has tacked on the issue of appropriate discharge periods for entrepreneurs, settling on three years as a new norm. Although the recommendation was primarily addressed to EU member states with action expected by March 2015, the European Commission reserved the option (in light of a further study) to propose “additional measures to consolidate and strengthen the approach … in the recommendation”, suggesting it might consider an enactment in some form to impose a common framework across the member states.

All this seems a far cry from the early days of the insolvency initiative, despite the long-standing interest, dating to the late 1960s, in a Community convention to regulate cross-border jurisdiction, recognition and enforcement in insolvency. For many years, insolvency has been seen merely as ancillary to some other area of interest – for example, social policy (employment rights) or company law. ‘Core insolvency’ never really extended beyond the private international and procedural aspects of jurisdiction and coordination. For the debate to have changed, in a significant way, to become one considering a methodology – whether approximation, convergence or harmonisation – and to what procedural and/or substantive fields this should extend is a token of how far down the road the European Union has travelled.

Where will this journey take us? Despite the obvious dangers of making a prediction, particularly in being obliged to recant it later, a few thoughts may be proffered. The initiative begun by the 2014 Recommendation will undoubtedly result in significant changes at domestic level, making national procedures even closer than would otherwise have been achieved through natural convergence or ‘regulatory arbitrage’. Further, work currently being embarked upon by UNCITRAL, which has a reputation of only working on projects on which it already has a substantial global consensus, may offer a clue as to what might appear on a future agenda. Just to pick up one topic among a vast array, UNCITRAL Working Group V added a Part Four to its Legislative Guide in 2013 dealing with directors’ obligations in the ‘twilight zone’ – which coincidentally reflects an earlier European preoccupation with the same issue, as appeared in the 2002 Report of the High Level Group of Company Law Experts on a Modern Regulatory Framework for Company Law in Europe, which aimed at re-energising the company law harmonisation programme, and which UNCITRAL also hopes to extend to the position of directors of enterprise groups. This might well form a useful and, in the words of the European Parliament, “worthwhile” candidate for a measure.

Beyond this, it may be difficult to anticipate the precise direction of future European initiatives even though these will undoubtedly come. Nonetheless, it is clear that the debate has moved on and that harmonisation is no longer the idea that dare not speak its name in polite society!

Paul Omar, Professor of International and Comparative Insolvency Law, Nottingham Law School; Secretary, INSOL Europe Academic Forum