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Parliament and Council reach agreement

On 19 December 2018, negotiators from the European Parliament and the Council agreed on common EU standards for more efficient insolvency procedures. This was preceded by consensus between the EU Justice Ministers in October 2018 regarding the Commission proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU. We reported on the proposal and the position taken by the umbrella associations of Germany’s social insurance system in our articles of May 2018 and June 2018.

Legal certainty for investors and companies operating across the EU

The Commission’s proposed legislation was prompted by significant differences in insolvency and restructuring frameworks between Member States. The different jurisdictions have resulted in excessive costs and significant obstacles to cross-border investment in the EU single market. Companies operating in several EU countries or in supply chains have been particularly affected. In the EU, 200,000 companies go bankrupt every year, resulting in 1.7 million job losses. Therefore, the EU Commission has proposed three key elements in its Directive: 

 

·       minimum standards for preventive restructuring procedures which help companies to continue operating and to save jobs,

·       rules for granting a second chance to bona fide over-indebted entrepreneurs with full discharge of their debts following a period of no more than three years,

·       and targeted measures for Member States to increase the efficiency of insolvency, restructuring and discharge procedures in order to reduce long and costly proceedings.

Second chance

Although timely restructuring of companies should avoid insolvencies and the resulting dismissal of employees, honest entrepreneurs who do go bankrupt should be given a second chance to create a new company following the insolvency. The resulting legal certainty is intended to stimulate growth and employment in EU Member States, remove obstacles to the development of capital markets, and cushion economic shocks. The Directive is integrated into the action plan to create a Capital Markets Union and the Single Market Strategy.

 

The proposed Directive does not, in principle, impose any further obligations on Member States in terms of consumer insolvency. However, the Commission strongly recommends that the Member States apply the same discharge principles for businesses to all consumers.

 

One special group mentioned concerns ‘natural persons who are entrepreneurs’ (referring mainly to micro and small entrepreneurs). This group will benefit from the discharge of debt period of maximum three years for their private debts, with Member States being able to adopt a derogation whereby business and private debts are dealt with in separate procedures, but only to the extent that these discharge procedures can be coordinated in accordance with the Directive. It will become more difficult to make claims against this category of persons as a result of the good conduct period being reduced.

What still needs to be done?

In its plenary vote on 28 March 2019, Parliament passed an adopted text on the proposal for a Directive; however, the Commission’s proposal as amended represents Parliament’s position at first reading and is therefore included in its legislative resolution.

 

Parliament’s position is in line with the agreement previously reached between the institutions. The Council will thus be able to approve Parliament’s position. The legislative act would then be adopted in the form of Parliament’s position. Once adopted, it will supplement the 2015 insolvency Regulation.

 

The Directive will enter into force 20 days after its publication in the Official Journal of the EU. The functioning of the Directive will then be reviewed five years after its entry into force and every seven years thereafter.

 

The adopted text can be read here.