EIP has intensively dealt with the proposal for a new Directive (in the following the “Proposal”) in six working groups consisting of representatives of EIP’s national member organizations. In principle EIP welcomes the Proposal with regard to the topics Avoidance Law (Title II), Asset Tracing (Title III), Pre-pack proceedings (Title IV), Directors’ Duties and Liabilities (Title V) and Creditors’ Committee (Title VI).

In contrast, EIP rejects the Proposal with regard to the special regime for winding-up of microenterprises (Title VI) and advocates sticking to, as a rule, the appointment of objective insolvency practitioners as central persons handling insolvency proceedings. The Proposal would in fact lead to the complete abolition of regimes that, in the majority of Member States, function well, in which a neutral and objective insolvency administrator plays the central role in conducting insolvency proceedings, and which essentially serve the protection of creditors’ interests and also generally ensure this in a cost-effective manner.

The provisions under Title VI of the Proposal would considerably worsen the situation for creditors and their practical implementation would not work, especially due to the accumulation of tasks envisaged for the insolvency courts or alternative competent authorities (in the following the “Insolvency Courts” or “Courts”).

There would be extensive violations of creditors’ rights, as debtors would not be capable to identify and respect creditors’ security interests (e.g. contractual and statutory rights to separation or separate satisfaction), as, due to lack of knowledge, they are regularly noteven aware of such rights, or they no longer have the necessary time or interest in a labour-intensive and time-consuming liquidation of their failed enterprise.

Furthermore, micro-entrepreneurs usually have difficulties to clearly distinct between assets of their companies and their personal assets.

Particularly these tasks are carried out and enforced by an insolvency administrator, who also checks whether there have been any detrimental acts by the management prior to the proceeding. Insolvency Courts will not be able to perform these and many other tasks that insolvency administrators currently perform, mainly because, among other things, the job description of judges and judicial officers is completely different.

According to a provisional evaluation, the proposed special regime would be applicable for 90 to 95 % of insolvency proceedings in all Member States. In smaller and medium- sized Member States, such as the Baltic States, Belgium or Austria, this might, on a large scale, lead to the disappearance of insolvency administrator offices and the infrastructure and know-how they stand for, as it will no longer be possible to maintain offices and specialize in this area of law and business in a cost-covering way, due to the lack of proceedings.

Moreover, the proposed Directive is contradictory: On the one hand it rightly seeks to improve the outcome of insolvency proceedings for creditors through enhanced asset tracing possibilities and harmonized rules on avoidance actions and strengthen creditors’ involvement through creditors’ committees. On the other hand, the special regime applicable for the overwhelming majority of insolvent enterprises de facto abolishes the concept of insolvency proceedings in which these very rules would – and could only – be applied by insolvency administrators.

In addition, the disregard of creditors’ rights under the special regime would make it even more difficult for microenterprises to obtain financing from banks. Banks will decrease and raise the costs for lending, when facing the danger that their security interests will not be respected or at least be more difficult to enforce and, in the absence of an objective insolvency administrator, will not be able to uncover detrimental acts of the debtor and voidable actions. These two tasks are core activities of the administrator in insolvency proceedings.

As already pointed out by many national associations, there are better ways to make insolvency proceedings more efficient.

The proposed new pre-pack proceeding (Title IV) expands the toolbox in insolvency proceedings in a way that is, in principle, sensible, in order to realize the highest possible sale price for the business in a difficult economic situation. However, it has to be ensured that abuse in the form of selling below value – e.g. to management or former shareholders or persons closely related to them – will be prevented. In this respect the Proposal needs to be revised.

Among other points, the relationship between the possible Court initiated auction and the actual pre-pack procedure led by the monitor requires revision. Some EIP members fear that the proposed concept (Art. 19, 22 and 24) can lose its meaning, if an objective M&A process is carried out in the preparation phase under the supervision of a monitor and the best bid from this then only serves as a stalking horse bid in a subsequent auction. The threat of an auction can provoke the lowest possible bids in the preceding M&A process. It can discourage bidders from undertaking the considerable effort of due diligence at the outset, if even the best bid in the M&A process does not guarantee acceptance of the bid and the timetable may be delayed. A public auction should only be an option for the Court, if the monitor or creditors have expressed serious suspicions of abuse, or if the only bidders are the management or former shareholders or persons closely related to them.

In principle, EIP welcomes the proposed regulations on avoidance actions (Title II), as they are suitable for enforcing the principle of equal treatment of creditors. Why should creditors who, e.g., because of special knowledge, a close relationship to the debtor or special rights in enforcement, be better off than other creditors in the situation where the debtor’s assets are insufficient? However, the equal treatment of creditors does not improve, if the enlargement of the insolvency estate through avoidance actions is not distributed equally among all creditors due to complex ranking systems for the creditors’ claims. An avoidance action, e.g., against the tax office or a social insurance agency makes little sense, if these creditors are prioritized under national law in the distribution of the proceeds of the avoidance action. In a further step, therefore, the European legislator must also tackle and harmonize the diverse national ranking systems, preferably in the sense of equal treatment of all (unsecured) insolvency claims.

In detail, EIP’s comments on the different parts of the proposal are as follows (in order of importance):