REGULATORY SCRUTINY BOARD OPINION Enhancing the convergence of Insolvency laws

EUROPEAN COMMISSION
10.10.2022
SEC(2022) 434
REGULATORY SCRUTINY BOARD OPINION
{COM(2022) 702}
{SWD(2022) 395,396}
Enhancing the convergence of Insolvency laws
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KOM (2022) 0702 - SEK-dokument
Europaudvalget 2022
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EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB
Opinion
Title: Impact assessment / Enhancing the convergence of Insolvency laws
Overall 2nd
opinion: POSITIVE
(A) Policy context
Clear and effective insolvency laws are important criteria for investors when deciding
whether and where to invest. Discrepancies between the applicable rules in different
Member States create potential barriers to the free movement of capital in the internal
market and this uncertainty risks discouraging cross border investments and negatively
affecting competition and competitiveness.
This initiative aims to create more predictable conditions for cross-border investment in the
EU by harmonising targeted aspects of substantive insolvency law.
(B) Summary of findings
The Board notes that the report has been substantially redrafted.
The Board gives a positive opinion. The Board also considers that the report could
further improve with respect to the following aspect:
(1) The analysis of the Member States’ judicial systems does not fully take into
account all factors likely to affect court capacity.
(C) What to improve
(1) The report assesses for which Member States judicial bottlenecks are more likely to be
an issue as a result of the expected increase of Micro and Small Enterprise (MSE) cases
due to the introduction of the MSE regime. It could also assess the impact of the expected
increased number of Small and Medium Enterprises with cross-border investors as a result
of other EU legislation such as the creation of the European Single Access Point for
company data. The report could also explain how Member States could improve court
capacity to absorb the potential increased number of insolvency cases.
(2) The report should further elaborate on Commission’s plans to collect monitoring data
for future evaluation. It should better explain the sources of data and the arrangements
needed for the data collection.
The Board notes the estimated costs and benefits of the preferred options in this initiative,
as summarised in the attached quantification tables.
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(D) Conclusion
The DG should take these recommendations into account before launching the
interservice consultation.
If there are any changes in the choice or design of the preferred option in the final
version of the report, the DG may need to further adjust the attached quantification
tables to reflect this.
Full title Impact Assessment on an initiative to increase the convergence
of substantive corporate (non-bank) insolvency laws
Reference number PLAN/2020/8631
Submitted to RSB on 14 September 2022
Date of RSB meeting Written procedure
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ANNEX: Quantification tables extracted from the draft impact assessment report
The following tables contain information on the costs and benefits of the initiative on which
the Board has given its opinion, as presented above.
If the draft report has been revised in line with the Board’s recommendations, the content of
these tables may be different from those in the final version of the impact assessment report,
as published by the Commission.
I. Overview of Benefits (total for all provisions) – Preferred Option
Description Amount Comments
Direct benefits
Reduction of costs to
the judicial system at
Member State level
Who benefits: public
sector (courts,
insolvency
practitioners)
Approximately EUR 1.9
billion of cost savings
from simplification of
insolvency proceedings.
The amount is obtained as 40% lower judicial costs times
1.4% judicial costs times 130 000 insolvency cases times
average claim of insolvency case (see further detail below
the table). This is a point estimate that is determined by
these assumptions. The use of alternative assumptions
leads to a higher or lower values (see text below), but it is
not possible to attach probabilities to alternative
scenarios.These cost savings would accrue for the judicial
system (insolvency practitioners, courts) and stem from
simplification of procedures at Member States level,
hence they , do not count under the one in, one out
commitment.
Higher recovery
value
Who benefits:
creditors, i.e. the
financial sector, the
public sector, other
non-financial
corporations and
households
proportional to their
claims to the debtor
Approximately EUR 4.9
billion out of which
approximately EUR 1.9
billion are due to legal
cost savings from
simplification of
insolvency proceedings.
A 1.42 percentage point increase (Error! Reference
source not found.) times notional amount times 130,000
insolvency cases per annum, table in annex 4.1. The
notional amount is the average claim of 2.6 million EUR
derived as 3.5 million EUR average for Germany
corrected for the lower GDP per capital in the EU-27
compared to Germany (75%). Part of this are legal cost
savings described above that are expected to be passed on
to the creditors.
Simplified insolvency
procedures for micro
and small
enterprises
Who benefits: owners
/ entrepreneurs behind
micro and small
enterprises
Potentially sizeable, but
cannot be reliably
estimated.
Owners of MSEs would benefit from a dedicated
simplified insolvency procedure. In most cases, this
would enable an orderly winding down of distressed
micro- and small businesses as costs of normal insolvency
procedures were not proportionate for them. This would
also accelerate debt discharge and help create a second
chance for these entrepreneurs. Insolvency experts
surveyed in Deloitte/Grimaldi (2022) suggest average cost
savings of about 12%. EBA (2020) shows judicial costs of
3.5% for SME loans, compared to 1.4% for corporate
loans.
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Better coordination
among creditors
Who benefits:
creditors, in particular
cross-border creditors
Cannot be estimated Creditor committees would allow creditors to cooperate
and more effectively coordinate their decisions and would
help cross-border investors to be better represented. This
on one hand contributes to higher recovery value
(quantified above) but also presents a benefit of its own.
Indirect benefits
Lower debt funding
costs
Who benefits:
companies, including
SMEs
Approximately EUR 1.6
billion
Under the assumption that a 1.4% increase in the recovery
rate (table 7 in section 7.2) triggers 1.4 basis points lower
funding costs on 1855 billion EUR NFC liabilities in form
of debt securities and EUR 9592 billion in loans 2020
(Eurostat)
Higher productivity
growth
Who benefits: broader
society including both
private and public
sector
Approximately EUR 7.2
billion
0.5% higher productivity growth from fewer zombie firms
(as suggested in OECD 2017), assuming insolvency rules
reduce the share of zombie firms by 10%. A higher or
lower share would increase respectively reduce the
productivity gains proportionately, but there is no
possibility to attach probabilities to different assumptions
Lower information
and learning costs
for cross-border
investment
Who benefits: cross-
border creditors
Potentially sizeable, but
cannot be estimated
There is neither statistical data nor a suitable
methodological approach to quantify these benefits.
However, based on the findings of the HLEG on CMU
and stakeholder views, benefits in this area are potentially
sizeable.
Higher chances of
timely selling going
concern parts of a
distressed business
Who benefits:
companies, including
SMEs, their investors
and employees
Cannot be estimated The harmonised pre-pack procedure would increase the
chances of timely selling of going concern parts of the
distressed company’s business, enabling to preserve value
for its shareholders and employees.
Administrative cost savings related to the ‘one in, one out’ approach*
N/A1
N/A N/A
1
As explained in section 8, none of the cost savings indeitified in this table are applicable for the “one in, one
out” committment.
_________________________________
This opinion concerns a draft impact assessment which may differ from the final version.
Commission européenne, B-1049 Bruxelles - Belgium. Office: BERL 08/010. E-mail: regulatory-scrutiny-board@ec.europa.eu
II. Overview of costs – Preferred option
Citizens/Consumers Businesses (notably
insolvent businesses and
creditors)
Administrations
One-off Recurrent One-off Recurrent One-off Recurrent
Preferred
option (as
an
aggregate)
Direct
adjustment
costs
none none
Familiarisati
on with new
rules
(creditors,
businesses at
risk of
insolvency,
lawyers and
consultants;
no estimate
available)
none none none
Direct
administrative
costs
none none none none
Creation
of
factsheets
on key
characteri
stics of
insolvenc
y
framewor
ks: EUR
67,000-
90,0002
Updating the
factsheets -
negligible
costs
Direct
regulatory fees
and charges
none none none none none none
Direct
enforcement
costs
none none none none none none
Indirect costs none none Further
internal
procedures
and an
information
flows for
Higher
liability of
directors of
companies
may be
reflected in
none Potentially
more
insolvency
cases,
estimated at
approximately
2
See below under “expected costs” for an explanation.
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distressed
companies to
enable due
diligence in
case of pre-
pack sale
(conditional
on company
opting in for
a pre-pack
sale, no
estimate
available)
higher wage
demands,
more
difficult
recruitment
of directors,
company
procedures/i
nformation
flows or
higher
liability
insurance
costs (no
estimate
available).
EUR 0.9-2.0
billion3
and
more disputes
on asset
seizures (no
estimate
possible).
Costs related to the ‘one in, one out’ approach
Total
Direct
adjustment
costs
none none Familiarisati
on with new
rules
none
Indirect
adjustment
costs
none none none none
Administrative
costs (for
offsetting)
none none none none
3
See below under “expected costs” and Annex 4, Section 3.2.
7
EUROPEAN COMMISSION
Regulatory Scrutiny Board
Brussels,
RSB
Opinion
Title: Impact assessment / Enhancing the convergence of Insolvency laws
Overall opinion: NEGATIVE
(A) Policy context
Clear and effective insolvency laws are important criteria for investors when deciding
whether and where to invest. Discrepancies between the applicable rules in different
Member States create potential barriers to the free movement of capital in the internal
market and this uncertainty risks discouraging cross border investments and negatively
affecting competition and competitiveness.
This initiative aims to create more predictable conditions for cross-border investment in the
EU by harmonising targeted aspects of substantive insolvency law.
(B) Summary of findings
The Board notes the additional information provided in advance of the meeting.
However, the Board gives a negative opinion, because the report contains the
following significant shortcomings:
(1) The report does not provide sufficient evidence of how current insolvency
proceedings negatively affect cross-border investment in the single market. It
does not convincingly demonstrate why the EU should intervene now. The
analysis of how divergent the situation is in Member States is insufficient.
(2) The report does not clearly set out the articulation between the initiative and the
2019 Restructuring and Insolvency Directive. It does not clearly identify the
remaining gap after the latter is transposed in July 2022.
(3) The report does not sufficiently assess the impacts on the capacity of Member
State’s judicial systems, resulting from the expected increased number of cases
involving SMEs and how this may affect the expected benefits.
(4) The report does not provide a balanced assessment of options and is geared
towards the preferred option. It does not present clearly the trade-offs that policy
makers face.
(5) The report does not present a robust assessment methodology nor sets out clearly
the underlying assumptions. The SME test is missing.
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(C) What to improve
(1) The report should set out the policy context more clearly, in particular by identifying
those factors that have changed since the 2019 Restructuring and Insolvency Directive was
agreed. It should explain how a gap has emerged [since then,] what that gap is, its
magnitude and set out a clear and unambiguous rationale for action at this juncture. It
should identify with evidence those specific aspects of national insolvency laws that
present major hurdles to cross-border investment, for which harmonisation would have a
clear EU added-value and hence could significantly contribute to the creation of a Capital
Markets Union.
(2) The evidence is weak in the problem analysis. The report should better demonstrate
how important insolvency procedures are in terms of influencing cross-border investment
decisions as opposed to other factors. It should be more transparent and indicate how robust
the available evidence is on how insolvency regimes affect cross-border investment
decisions. It should seek to significantly strengthen and supplement the limited evidence
presented. At the same time, it should avoid over-reliance on a few available evidence
sources (e.g. the insolvency practitioner survey given potential conflict of interest).
(3) The report should further elaborate both the institutional differences between
jurisdictions (e.g. the applicable rules, quality of the judiciary in dealing with insolvency
cases and insolvency practitioners) and the differing levels of judicial capacity. It should
examine how these impact insolvency outcomes and affect cross-border investment. The
report should better explore what the implications of these divergences across Members
States would have as potential constraints in terms of any proposed harmonisation given
that the presence of such potential bottlenecks in the judiciary might hide a procedural
delay thereby undermining the legal security that the initiative seeks to provide. This
impact needs to be considered in the report and quantified as much as possible.
(4) The presentation of options pre-empts the preferred one. The report should therefore
provide a more balanced and evidence-based assessment of options and bring out more
clearly the trade-offs that policy makers face. Later when comparing the options the
relative scoring of the preferred ‘targeted’ and the alternative ‘fully harmonised’ options
should be better grounded in the available evidence and adjusted accordingly as well as
better explained.
(5) The report should critically review the cost and benefit estimates and better account for
uncertainties. Before applying scoring schemes and weighting of aggregate costs and
benefits, the impact analysis should check the plausibility of what the different measures
contribute and be comprehensive. The report should analyse in a more nuanced way to
what extent simplified insolvency procedures for Micro and Small Enterprises may
contribute to bottlenecks in the judicial system of Member States and thus risk the
realisation of envisaged benefits. This uncertainty should be reflected in the analysis as the
current modelling assumes no effect on capacity of courts.
(6) When it comes to administrative costs and savings, the report should clearly indicate
which of those costs and savings are to be considered in the scope of the One In, One Out
approach. The report should include a proportionate SME test to indicate impacts and
assess the proportionality of measures for SMEs.
(7) The report should explain how the data collection for effective progress monitoring
will be ensured.
(8) Views from stakeholders, also dissenting ones, should be included throughout the
report, especially in the problem definition, impacts and preferred option.
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Some more technical comments have been sent directly to the author DG.
(D) Conclusion
The DG JUST must revise the report in accordance with the Board’s findings and
resubmit it for a final RSB opinion.
Full title Impact Assessment on an initiative to increase the convergence
of substantive corporate (non-bank) insolvency laws
Reference number PLAN/2020/8631
Submitted to RSB on 25 May 2022
Date of RSB meeting 22 June 2022
Electronically signed on 10/10/2022 20:10 (UTC+02) in accordance with Article 11 of Commission Decision (EU) 2021/2121