After almost two years of intense negotiations between the Member States of the European Union (the “EU”), the Council of the EU approved today the Directive on Preventive Restructuring Frameworks, Second Chance and Measures to Increase the Efficiency of Restructuring, Insolvency, and Discharge Procedures (2016/0359) (the “Directive”). Thus, the Directive will enter into force on the twentieth day following that of its publication in the Official Journal of the EU. The Member States must adopt and publish the relevant legislation necessary to comply with the Directive within two years from the Directive’s entry into force, subject to certain exceptions. Furthermore, Member States may extend the implementation by up to one year by means of a simple notification to the Commission.
The purpose of the Directive is to remove barriers to effective preventive restructuring of viable debtors and to harmonise certain aspects of the material insolvency rules within the EU. The Directive seeks to reduce the number of bankruptcies, ensure that reputable entrepreneurs are offered a second chance, and to reduce uncertainty regarding insolvency-related risks when doing business in other Member States. Currently, the significant differences in the insolvency regimes of various Member States cause considerable unpredictability to different stakeholders. There are clear differences even in the national insolvency regimes of the two neighbouring and broadly similar countries, Finland and Sweden.
The Directive relies on minimum harmonisation. It should allow the Member States flexibility to apply common principles while respecting national legal systems. Member States should be entitled to maintain or introduce into their national legal regimes preventive restructuring frameworks other than those provided for by the Directive (e.g. a company law framework).
The Directive will not affect certain categories of debtors, including for example natural persons who are not entrepreneurs, public bodies under national law, or financial institutions. Moreover, the Directive does not affect application of the Insolvency Regulation (2015/848), which will continue to apply as such and regulate questions related to jurisdiction, choice of law, and recognition of national proceedings and judgments in cross-border cases.
How the Directive Will Affect Finland and Sweden
The Directive deals with, among other things, preventive restructuring mechanisms, separate prohibition of enforcement for restructuring (thestay), classes of creditors and related cross-class cram-down, and duties of directors where there is a likelihood of insolvency. We will address these issues in the following.
Neither Finland nor Sweden currently have any pre-insolvency proceedings unlike, for example, the UK. Sweden offers its business reorganisation (SWE: företagsrekonstruktion) where a court appoints an administrator who seeks to come up with a reorganisation plan together with the debtor, which may or may not include a mandatory write-down of debt (SWE: offentligt accord). In the Finnish formal restructuring proceedings (FI: yrityssaneeraus, SWE: företagssanering), a court orders that the restructuring proceedings be commenced and appoints an administrator, who in turn prepares a proposal for a restructuring plan, which includes, among other things, rearrangement of debts and continuation, alteration, or exceptionally even termination of the debtor company’s business.
The Directive stipulates that Member States shall ensure that where there is a likelihood of insolvency, debtors have access to a preventive restructuring framework that enables them to restructure. However, the Directive leaves it up for the EU Member States to decide how the framework is constructed.
The applicable Swedish and Finnish business reorganisation legislations do not clearly meet in all respects the requirement of the Directive whereby an early-stage restructuring regime should be provided. Neither Sweden nor Finland have legal procedures for facilitating the workout negotiations by involving a court. The systems of both countries are merely holistic, involving all creditors of a company (although, in Sweden, a mandatory write-down of debt will never apply to secured creditors). A need for a single credit facility workout is widely recognised among European insolvency practitioners.
The Directive’s provisions on stay of enforcement will require that the national restructuring legislation in Finland, and most likely also in Sweden to some extent, be amended. Pursuant to the Directive, debtors may be granted a stay of individual enforcement actions of up to 12 months where it would support negotiations of a restructuring plan in a preventive restructuring framework. In comparison, under current Finnish law, a general prohibition on enforcement actions for restructuring debts is automatically granted upon the commencement of the proceedings and is effective until the court has approved the restructuring plan. Such stay can in principle last longer than one year, although only exceptionally do the proceedings last this long. In Sweden, pursuant to the current legislation, a reorganisation can only continue for about a year at a maximum, but minor adjustments might be required to comply fully with the Directive.
The Directive may also bring about changes to the Finnish and Swedish legislation relating to the confirmation of restructuring plans. For instance, Member States may choose between two alternative arrangements by which it will protect a dissenting class of creditors. The first option is that a Member State may ensure that the dissenting class is treated at least as favourably as any other class of the same rank and more favourably than any junior class (the so-called relative priority rule). Alternatively, Member States may provide that the claims of dissenting creditors are paid in full by the same or equivalent means if a more junior class receives any distribution or keeps interest under the restructuring plan (the so-called absolute priority rule).
Currently, the voting process in Sweden is quite simple, as composition only affects unsecured creditors – i.e. one class of creditors only. Pursuant to the new Directive, several classes of creditors would be involved, secured creditors being one of the mandatory classes, and voting would take place within each class of creditors, making the process more sophisticated. As a result, a minority having and abusing a hold-out position may in the future be “crammed down”. The inclusion of classes other than unsecured creditors will be one of the changes made that will have the greatest impact on the Swedish reorganisation regime.
By contrast, in Finland, creditors are already treated in separate classes in a voting process. Furthermore, the equivalent mechanism of cross-class cram-down is already possible (and even used in practice) under Finnish law.
Importantly, the Directive also imposes duties for directors (i.e. board members) where there is a likelihood of insolvency. Pursuant to the new regime, directors must have due regard, as a minimum, to a) the interests of creditors, equity holders, and other stakeholders; b) the need to take steps to avoid insolvency; and c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business. As the directors’ principal duty under the current national provisions of the respective Companies Acts in Sweden and Finland is to see to the interests the company and its shareholders, the Directive needs to be analysed against the provisions on directors’ liability both in Sweden and Finland.
Implementation into National Legislation
The rules would have to be implemented into national legislation by the EU Member States within a maximum of three years as noted above. As the Directive is a minimum harmonisation directive, Member States may implement stricter rules than those required by the Directive.
The Directive would most likely be implemented in Sweden by amending the Business Reorganisation Act (SWE: lagen om företagsrekonstruktion), but it is yet to be seen if the regulator would go further than what is as such required by the Directive.
In Finland, it is unclear how the Finnish legislator will implement the Directive. The legislator may only lower the threshold for the initiation of the restructuring proceedings, set out rules regarding pre-insolvency proceedings in a wholly new Chapter under the current Restructuring of Enterprises Act (FI: laki yritysten saneerauksesta), or even create a new law for preventive restructurings. If a new pre-restructuring procedure is to be introduced, it also remains to be seen whether it contains elements from, for instance, the UK’s Scheme of Arrangement, and further whether such elements would even be introduced into the Finnish Companies Act. The latter would also bring along a wider possibility for restructuring of equity.
In any case, we expect the Ministries of Justice in both countries to take action promptly in order to implement the Directive, as there are many challenges ahead to be resolved in the national legislations.
Jan Lilius Counsel at Hannes Snellman
Mika Karppinen Counsel at Hannes Snellman
Matti Engelberg Senior Advisor at Hannes Snellman
Olli Mäkelä Associate at Hannes Snellman
Minja Jantunen Associate at Hannes Snellman
Carolina Wahlby Managing Associate at Hannes Snellman