Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on the Malta Chamber 7th March 2021

A 2019 EU Directive will ensure a more ‘linear and harmonized process’ on issues related to restructuring & insolvency.

On 26th June 2019, the European Parliament and the Council of the European Union published a new EU Restructuring Directive on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.

Before delving into the nitty-gritty of the Directive, it is crucial to point out how extraordinary this achievement truly is, given the fact that the EU Member States all have different regimes, hence, displaying a remarkable initiative that will harmonize financial distress, non-performing loans, and tackle distress prior to default, thereby having as its ultimate goal the mitigation of formal insolvency proceedings.

The Directive has introduced some major key aspects in an attempt to adhere to its primary intention, i.e. that of drastically reducing insolvency proceedings. In order to do so, the Directive implores the establishing of early warning tools as these ought to be put in place to incentivize debtors that start to experience financial difficulties to take early action.

These early warning tools would trigger as soon as certain payments remain unfulfilled such as the non-payment of taxes or social security contributions. To facilitate this proposal, Member States ought to put online information vis-à-vis such as earning tools and classify this information depending on the magnitude of the business. These warning tools could serve as a mechanism to make debtors aware of their situation thereby avoiding insolvency. This Directive also provides for the introduction of a preventive restructuring framework aiding debtors to restructure with a view to preventing formal insolvencies.

Some Member States already have such structures in place, nonetheless, for those who do not, this will serve as an essential tool in assisting debtors to preserve as much employment and business activity as possible. Although the Directive does not impose it mandatorily but rather on a case by case basis, it is recommended however to have the appointment of a practitioner if the debtor would benefit from a general stay of individual enforcement actions as elaborated in the Directive.

It goes without saying that this Directive has both European and foreign influence, in fact, it retains some aspects from the USA’s Chapter 11 which is the US’s Bankruptcy Code. This influence can be seen in the restructuring plans which allow for the selling of assets as well as modification to the debtor’s capital structure.

Moreover, these plans require the addition of a description of the economic situation, the affected parties and their classes, as well as the terms of the plan.  Such restructuring plans can only be adopted if a majority is reached in each creditor class, which majority may not exceed 75 per cent in any case.

Moreover, these plans ought to be confirmed by the authorities if they hinder or affect dissenting parties if there is new financing or if there is a loss of more than 25% of the workforce. The best interest of the creditors is also safeguarded by this Directive as a best-interest-of-creditors test was introduced in order to ensure that creditors are not prejudiced by such restructuring plans.

The Directive is socially conscious as it allows for the possibility of giving entrepreneurs a second chance by discharging their debt. This would enable over-indebted individuals to enter a procedure that would provide the opportunity to fully discharge one’s debt in a span of 3 years maximum. In addition, apart from offering a number of measures which one may opt for, the Directive also seeks to cut down the length and costs of restructuring procedures in an attempt to increase the efficiency of the aforementioned processes.

Following this Directive, EU Member States are expected to have this framework implemented by 17th July of 2021 as required by Article 34 of the Directive.

Nonetheless, there exists the possibility of an extension in relation to the use of electronic means of communication to file claims, submit restructuring or repayment plans, and notify creditors, as well as in relation to the lodging of challenges and appeals which ought to be published by 17th July 2024 and 17th July of 2026 respectively. This Directive as mentioned above may constitute a complete overhaul for certain Member States whereas it may cause little to no change for others as such concepts are already up and running.

What is certain is the fact that this Directive will ensure a more linear and harmonized process in relation to preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.

It goes without saying that this Directive will aid Malta greatly since, unlike the other Member States, Malta failed to update its insolvency laws following the 2008 financial crisis. This complacency is reflected by the fact that Malta ranks last in the ease of resolving insolvency and 121st worldwide.

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Author: Jurgen Dalli – Junior Legal Associate, PKF Malta
Published on the Malta Chamber 7th March 2021
Get in touch: info@pkfmalta.com