Is the European Union speaking with one voice on restructuring?

On 26 June 2019, the Directive on restructuring and insolvency^[1] of the European Parliament and of the Council was published in the Official Journal of the European Union.

The main objective of the Directive is to harmonise national laws and proceedings concerning preventive restructuring and insolvency measures, to contribute to the proper functioning of the internal market and, remove obstacles to the free movement of capital and freedom of establishment^[2].

As is the case for Spain, Italy and Netherlands^[3] (which shall adopt the laws and regulations by 17 July 2022 to comply with the Directive), several Member States are still in the process of transposition.

Germany has also amended its insolvency regulations via a law dated 29 December 2020 which has been enforceable since 1st January 2021.France also completed the transposition process by an ordinance dated 15 September 2021 enforceable as of 1st October 2021.

The two countries have adopted legislations that cover both in-court and out-of-court restructuring proceedings. French out-of-court restructuring frameworks have been slightly fine-tuned as they were already largely aligned with the requirements of the Directive.

Is the transposition of the Directive fulfilling its objective? Are Germany and France speaking with one voice on restructuring?

Preventive proceedings

Both German and French legal frameworks provide for proceedings intended to solvent debtors, opened only on their initiative, to implement confidential restructuring schemes^[4]. 

German law allows the debtor to disclose^[5] the proceedings, which will in practice prevent creditors from taking steps to recover their debts. A limited exception under French law concerns the publicity of the judgment approving the conciliation agreement, which will disclose the existence of the proceedings and the agreement but not its content.

In Germany and in France, these proceedings do not trigger an automatic stay. German debtors can petition the court for a stay against one or several creditors for a maximum period of eight months. French debtors may petition the court for a stay against reluctant creditors for the duration of the proceedings (up to five months) or for grace periods of up to two years against pursuing creditors.

Preparation of restructuring plans 

The debtor can always prepare and submit a restructuring plan, in compliance with the Directive^[6].

German creditors affected by a restructuring plan may propose amendments to the plan prepared by the debtor, while French creditors may propose a restructuring plan competing with the debtor’s under reorganization proceedings.

Formation of classes of creditors 

As minimum standards, the Directive requires that secured and unsecured creditors are treated in separate classes^[7].

These minimal standards were transposed into French law, it being specified that equity holders affected by a restructuring plan shall be treated in a separate class and class formation shall comply with subordination agreements. Under German law, at least four classes shall be formed including secured creditors, unsecured creditors, subordinated creditors and equity holders. 

At first glance, these two sets of provisions may seem very similar in their approach. Actually, while German law institutes an automaticity of equity holders’ efforts, French law underlies that a restructuring plan does not necessarily need to include efforts from equity holders.

German and French law also differ in two respects:

• the formation of the classes belongs to the debtor under German law. Under French law, this is the judicial administrator’s role. 
  
  
• more importantly, German law provides that parties connected to the debtor may, depending on the nature of their claims, automatically fall within the class of subordinated creditors, whereas French law has not transposed any specific provision on this matter, despite the recommendation of the Directive^[8].

Adoption of restructuring plans 

German and French creditors are involved in the adoption of a restructuring plan.

In principle, to be approved by the court, a German restructuring plan shall be adopted by each class by a three quarters majority. In France, each class shall adopt the restructuring plan by a two thirds majority^[9], subject to the possibility under reorganization proceedings to consult creditors individually allowing the court to impose payment delays^[10]. 

By way of exception, a German or French court may approve a restructuring plan adopted by a majority of classes - aa key measure of the Directive^[11]. 

Overall, the objective of harmonising legal frameworks on restructuring and insolvency sought by the European Parliament and the Council seems to have been achieved for Germany and France. The transposition amongst all Members States^[12] should facilitate the work of the insolvency practitioners when handling cross-border cases.

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[1] Directive (UE) 2019/1023 of the European Parliament and of the Council of 20 June 2019 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, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) – link to the Directive here.

[2] Directive, recital no. 1.

[3] Netherlands has already partly transposed the Directive by a law enforceable since 1st January 2021.

[4] We refer to out-of-court restructuring proceedings as amended by "StaRUG" law for German law, and to the conciliation proceedings for French law.

[5] Effective 1st July 2022.

[6] Directive, article 9.1. We refer to out-of-court restructuring proceedings as amended by "StaRUG" law for German law, and to safeguard and reorganization proceedings for French law.

[7] Directive, article. 9.4.

[8] Directive, recital no. 46: "Member States should in any case ensure that adequate treatment is given in their national law to matters of particular importance for class formation purposes, such as claims from connected parties, (…)".

[9] Under French law, the formation of classes of creditors is compulsory for companies with more than 250 employees and a turnover of more than EUR 20 million or for those with a net turnover of more than EUR 40 million. 

[10] This is also possible in safeguard proceedings without the formation of classes of creditors.

[11] Scheme referred to as "cross-class cram-down", which is subject to several conditions, specific to each national law.

[12] Directive, article 34: "Member States shall adopt and publish, by 17 July 2021, the laws, regulations and administrative provisions necessary to comply with this Directive (…) Member States that encounter particular difficulties in implementing this Directive shall be able to benefit from an extension of a maximum of one year of the implementation period".