COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law

EN EN
EUROPEAN
COMMISSION
Brussels, 7.12.2022
SWD(2022) 395 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT REPORT
Accompanying the document
Proposal for a Directive of the European Parliament and of the Council
harmonising certain aspects of insolvency law
{COM(2022) 702 final} - {SEC(2022) 434 final} - {SWD(2022) 396 final}
Offentligt
KOM (2022) 0702 - SWD-dokument
Europaudvalget 2022
Table of Contents
1. INTRODUCTION ................................................................................................................................ 5
1.1. Political context.................................................................................................5
1.2. Scope of the initiative........................................................................................7
1.3. Key insolvency concepts ...................................................................................7
1.4. Economic context ............................................................................................10
1.5. Legal context ...................................................................................................12
2. PROBLEM DEFINITION .................................................................................................................. 18
2.1. What are the problems?...................................................................................18
2.2. What are the consequences?............................................................................25
2.3. What are the problem drivers? ........................................................................26
2.4. How will the problem evolve? ........................................................................34
3. WHY SHOULD THE EU ACT? ........................................................................................................ 35
3.1. Legal basis.......................................................................................................35
3.2. Subsidiarity: Necessity of EU action...............................................................35
3.3. Subsidiarity: Added value of EU action..........................................................36
4. OBJECTIVES: WHAT IS TO BE ACHIEVED? ............................................................................... 36
4.1. General objectives ...........................................................................................36
4.2. Specific objectives...........................................................................................37
5. WHAT ARE THE AVAILABLE POLICY OPTIONS? .................................................................... 37
5.1. What is the baseline from which options are assessed? ..................................38
5.2. Description of the policy options ....................................................................39
5.3. Options discarded at an early stage .................................................................44
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ........................................................... 46
6.1. Benefits and costs of a targeted regime...........................................................47
6.2. Benefits and costs of a comprehensive EU regime .........................................56
7. HOW DO THE OPTIONS COMPARE?............................................................................................ 62
7.1. Benefits and costs across the elements of insolvency regime .........................62
7.2. Quantification of effectiveness........................................................................64
7.3. Assessment of judicial efficiency and adjustment costs..................................65
7.4. Coherence with national and EU law ..............................................................66
7.5. Synthesis..........................................................................................................66
8. PREFERRED OPTION ...................................................................................................................... 69
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?.................................. 74
ANNEX 1: PROCEDURAL INFORMATION............................................................................................ 76
ANNEX 2: STAKEHOLDER CONSULTATION....................................................................................... 81
Appendix to Annex 2: Summary report – online public consultation.......................84
ANNEX 3: WHO IS AFFECTED AND HOW? .......................................................................................... 95
ANNEX 4: ECONOMIC ANALYSIS ....................................................................................................... 105
2
ANNEX 5: DETAILED DESCRIPTION OF INSOLVENCY BUILDING BLOCKS ............................. 156
ANNEX 6: RECENT INSOLVENCY-RELATED REFORMS IN MEMBER STATES ......................... 230
ANNEX 7: SME TEST .............................................................................................................................. 235
10. LIST OF REFERENCES .................................................................................................................. 237
3
Glossary
Term or acronym Meaning or definition
BCA Business Continuity Act
BORIS Beneficial ownership registers interconnection system
BRIS Business Registers Interconnection System
CMU Capital Markets Union
COMI Company’s centre of main interest
CSR Country Specific Recommendations
DRI Directive on Restructuring and Insolvency (Directive (EU)
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)
EAPO European Preservation Order Procedure
EBA European Banking Authority
EBRD European Bank for Reconstruction and Development
ECB European Central Bank
ECOFIN Economic and Financial Affairs Council
EIR European Insolvency Regulation (Regulation (EU) 2015/848 of the
European Parliament and of the Council of 20 May 2015 on
insolvency proceedings)
ELD Environmental Liability Directive
ESRB European Systemic Risk Board
EU European Union
GDP Gross Domestic Product
HLEG High Level Expert Group on Sustainable Finance
IMF International Monetary Fund
IP Insolvency practitioners
IRI Insolvency registers’ interconnection
ISSG Commission’s inter-service steering group
JRC Joint Research Centre
MS Member State
MSE Micro and small enterprises
NFC Non-financial Corporation
4
NPL Non-performing loans
OECD Organisation for Economic Cooperation and Development
RSB Regulatory Scrutiny Board
SDG Sustainable Development Goals
SME Small and medium-sized enterprises
TFEU Treaty on the Functioning of the European Union
UNCITRAL United Nations Commission on International Trade Law
WB DB World Bank Doing Business
5
1. INTRODUCTION
1.1. Political context
It is a well-established view among stakeholders, researchers, international institutions
and policy makers1
that the significant differences in insolvency rules across Member
States constitute an important barrier to cross-border investments and a key obstacle to
further economic integration.2
The European Central Bank (ECB) as well as the
International Monetary Fund (IMF) recurrently flagged that tackling the divergence in
national insolvency rules is key to achieving progress on the Capital Markets Union
(CMU). The IMF “….identifies three key barriers to greater capital market integration in
Europe: transparency, regulatory quality, and insolvency practices.3
[..] As the EU seeks
to build an integrated capital market, how best to regulate the sector and improve
insolvency processes become key questions.”4
According to the ECB “where insolvency
and judicial frameworks are more efficient, risk-sharing through both capital and credit
markets is higher [..] This empirical research finding shows that it is important to address
the major shortcomings and divergence between insolvency frameworks which persist at
the European level. This would require taking measures beyond the draft Directive on
Insolvency, Restructuring and Second Chance”.5
Furthermore, multiple think tanks and
other international bodies concluded on the significance of divergences in insolvency
rules as an obstacle to cross-border investment.6
Regulators and market participants singled out differences in insolvency practices among
the three most important barriers7
to market integration in a survey carried out by the
IMF (2019) on the benefits of the CMU and the obstacles towards its realisation. The
empirical analysis undertaken by IMF identified that convergence in insolvency regimes
would yield the largest contribution to three key metrics of financial integration: higher
cross-border asset holdings, a reduction in cross-country differences in corporate funding
costs and improved risk-sharing across the EU Member States.8
Annex 4, Section 4
1
See, for instance, the Five presidents report (5-presidents-report_en.pdf (europa.eu), European Parliament
resolution of 9 July 2015 on Building a Capital Markets Union (2015/2634(RSP)) and of 8 October 2020
on further development of the Capital Markets Union (CMU) (2020/2036(INI)).
2
Similar to the degree of economic integration being measured by the level of cross-border trade, cross-
border investment flows are a standard measure of capital market integration, with higher flows being
indicative of a better economic integration among Member States.
3 The two other important policy triggers to cross-border investment (in addition to national insolvency
regimes), such as regulatory quality and transparency of data, are addressed by other Commission
initiatives (e.g. report on the operation of the European Supervisory Authorities and the proposal on the
creation of the European Single Access Point). Nevertheless, the importance to tackle the insolvency-
related barriers would remain irrespective of progress made on these other policy initiatives.
4
Quoted from IMF (2019).
5
Quoted from ECB (2018). “More efficient and harmonised insolvency laws and regulatory frameworks
for equity investments, including addressing the debt-equity bias in taxation, can improve certainty for
investors, reduce costs and facilitate cross-border investments, while also making risk capital more
attractive and accessible to companies”, ECB (2022).
6
See for example, CEPS (Valiante, 2016), Bruegel (Demertzis et al. 2021), DIW (Bremus and Kliatskova,
2019). See also Demmou et al. (2021) for the perspective of the OECD.
7
See IMF (2019a, 2019b).
8
Taken at face value, the IMF analysis suggests an improvement of the recovery rate by one standard
deviation (difference between Italy and Germany) would lead to a 24% increase in cross-border asset
holdings, reduce the dispersion in corporate funding costs by 6% for unlisted firms and by 2% for listed
firms, and increase risk-sharing through the capital and credit channel from 24% (in the baseline scenario)
to 53%. For more details, see Annex 4 and in particular Figures A4.25 and A4.26.
6
provides more details on the statistical analysis done by the IMF, ECB and academic
researchers about the impact of more efficient and alligned insolvency rules on cross-
border investment and risk sharing.9
The Commission’s first Action Plan on building a CMU10
in 2015 argued that
“convergence of insolvency and restructuring proceedings would facilitate greater legal
certainty for cross-border investors”. In 2015, the European Parliament adopted a
resolution11
where it called to ease cross-border investment and indicated that for the
CMU to work smoothly, insolvency rules must be made to work better in a cross-border
context. This led to the adoption of the Directive on Restructuring and Insolvency in
2019, which pursued targeted harmonization in the specific areas of pre-insolvency
measures and debt-discharge procedures. Since it did not cover rules governing
insolvency proceedings, the expert group12
set up by the Commission and tasked with
informing policy choices for the 2020 Capital Markets Union Action Plan13
emphasised
that progress towards the CMU, as the integrated market for capital, requires addressing
further the inefficiency and divergence of insolvency regimes across Member States.14
Similar recommendations were also put forward by a number of expert groups, organised
by Member States and industry representatives.15
The CMU Action Plan from 202016
announced that the Commission would take a
legislative or non-legislative initiative for minimum harmonisation or increased
convergence in targeted areas of non-bank corporate insolvency law to make the
outcomes of insolvency proceedings more predictable.17
The Council Conclusions
(ECOFIN) of 3 December 2020 on the Action Plan encouraged the Commission to
deliver on this initiative.18
In April 2021, Eurogroup concluded that national reforms of
insolvency regimes shall progress in coherence with parallel work streams led by the EU
9
The empirical approach used in economic studies to demonstrate the impact of differences in insolvency
regimes on cross-border investment follows the spirit of gravity models, which are a standard tool to
analyse the determinants of international trade flows, see Portes/Rey (2005) for the seminal application on
cross-border capital flows, Hartmann et al (2018), IMF (2019), Kliatskova and Savatier (2020).
10
COM/2015/0468 final
11
European Parliament resolution of 9 July 2015 on Building a Capital Markets Union (2015/2634(RSP))
12
High Level Forum on the Capital Markets Union (2020).
13
COM/2020/590 final.
14
A similar perspective is adopted in IMF and ECB publications: “differences in European restructuring
and insolvency regimes will persist after implementation of the Directive, despite its goal of
harmonization. The Directive shows that harmonization of insolvency laws, particularly important in the
context of the Banking Union and the Capital Markets Union is a complex challenge”, Garrido et al.
(2021); “further harmonisation of general legal frameworks would be desirable. [...] In particular, market
participants would find it easier to invest in firms located in different Member States if core elements of
insolvency regimes, such as the definition of insolvency triggers, avoidance actions and the ranking of
claims, were harmonised at best-practice levels”, de Guindos et al. (2020).
15
See also the reports by Next CMU set up by seven Member States, by Markets4Europe set up by
financial institutions.
16
COM(2020) 590 final.
17
The subsequent Capital Markets Union Communication of 25 November 2021, under its Action 11
entitled “Making the outcome of cross-border investment more predictable as regards insolvency
proceedings”, the Commission announced that “it would propose an initiative by Q3 2022 that would seek
to harmonise targeted aspects of the corporate insolvency framework and procedures.”
18
Council Conclusions on the Commission’s Action Plan, doc. nr.12898/1/20 REV 1. These Conclusions
were confirmed by the Euro Summit statement of 11 December 2020, Doc. nr. EURO 502/20.
7
institutions, which were undertaken in the CMU Action Plan.19
The European Parliament
reiterated again in 2020 that for the CMU to work smoothly, insolvency rules must be
made to work better in a cross-border context.20
1.2. Scope of the initiative
This initiative covers business non-bank insolvency procedures and does not include
insolvency procedures for banks and consumers. The banks’ bankruptcy proceedings and
recovery and resolution are governed respectively by the Winding up Directive and by
the Bank Recovery and Resolution Directive21
and Single Resolution Mechanism
Regulation,22
together with national liquidation law. Member States have national laws to
deal with the bankruptcy of consumers, which are excluded from the scope of this
initiative because of the limited cross-border dimension. Consumers do not typically
raise funds from cross-border creditors and consumer bankruptcy procedures do not
significantly contribute to the key objectives of the CMU.
The intiative aims at a targeted harmonisation of substantive insolvency rules. The
initiative excludes policy intervention on preventive restructuring of corporations, as well
as on other matters that are covered by the Directive on Restructuring and Insolvency
(DRI)23
. The intiative nonetheless includes the aspects of restructuring and reorganisation
proceedings where relevant to debtors in insolvency. The scope of DRI carves out
traditional insolvency law (with very minor exceptions), covering only situations of pre-
insolvency and post-insolvency. The DRI deals with the debt discharge of failed
entrepreneurs only to the extent it is relevant to answer the question on when and how an
entrepreneur, who has become insolvent, can make a fresh start after insolvency
proceedings. Section 1.4 clarifies the relationship between the DRI and this initiative.
1.3. Key insolvency concepts
Insolvency proceedings aim at ensuring the orderly winding down or restructuring of
companies or enterpreneurs in financial and economic distress (i.e. that have been
declared insolvent).24
These are compulsory and collective procedures that take over the
19
Doc. nr. EURO 502/21. Similarly, the statement of the Euro Summit meeting of 25 June 2021 confirmed
that “structural challenges to the integration and development of capital markets, particularly in targeted
areas of corporate insolvency laws, need to be identified and addressed”
20
European Parliament resolution of 8 October 2020 on further development of the Capital Markets Union
(CMU): improving access to capital market finance, in particular by SMEs, and further enabling retail
investor participation (2020/2036(INI)).
21
Directive 2001/24/EC, Directive (EU) 2019/879 of the European Parliament and of the Council of 20
May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of
credit institutions and investment firms and Directive 98/26/EC. As part of the acquis, the ranking of
claims in the bank creditor hierarchy was partially harmonised to ensure a common approach enhancing
legal certainty in the event of resolution and insolvency.
22
Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014
establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain
investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and
amending Regulation (EU) No 1093/2010.
23
Directive (EU) 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.
24
‘Insolvency’ or ‘insolvency proceedings’ have become the more usual terms in international documents
(see UNCITRAL Legislative Guide on Insolvency Law) and in the relevant EU policy instruments in the
last three decades as opposed to ‘bankruptcy’ or ‘bankruptcy proceedings’. The former (‘insolvency
8
contractual enforcement of claims against the insolvent debtor, which would be
otherwise exclusively left to the individually agreed enforcement mechanisms between a
given counterpart and the debtor. This section provides a general overview of central
concepts whereas Annex 5 describes the main features of insolvency systems in the EU
Member States in detail. 25
The proceedings typically include tools that ensure a timely declaration of insolvency, so
that it does not affect the possibility to either restore the going concern or to ensure a
cost-effective liquidation, as well as tools to maximise the recovery value of the
company’s assets being liquidated.
The main insolvency features relate to:
1. Governance of the proceedings;
2. Tools to recover asset values from the liquidated company;
3. Tools to distribute recovered values among creditors.
The governance of proceedings involves actions, such as defining when a business
should be declared insolvent, and therefore should be subject to insolvency proceedings.
It, for example, includes the obligation of directors to file for insolvency in due time
before depleting the value of the company’s assets (e.g. to avoid the situation where
directors make large pay-outs to themselves and other employees of the company). The
governance of proceedings also cover the institutional aspect: notably, if the proceedings
are run before a court or another competent authority, or if an insolvency practitioner is
appointed to steer the procedure and administer the estate.
The insolvency regime may also include several tools to ensure proper identification of
the debtor’s assets and recovery of their market value. These tools may include (i)
transaction avoidance tools, i.e. actions to challenge past transactions that have been
concluded to deprive creditors of the debtor’s assets; (ii) pre-pack liquidation, i.e. the
possibility to conduct negotiations on the sale of the company or its parts as a going
concern before insolvency filing with the deal finalised in insolvency, to avoid significant
value destruction due to protracted insolvency proceedings, or (iii) access rights to asset
registries, to ensure proper tracing of the company’s assets.
Finally, the value distribution tools of an insolvency regime include tools that govern the
orderly allocation of the recovered value of the company’s assets among creditors. Such
distribution tools may for example include a pre-determined creditors’ ranking that
establishes the order of priority among various types of creditors, providing ex-ante
clarity to creditors about their chances to recover value in case of insolvency and
avoiding a lengthy case-by-case assessment based on court discretion in insolvency.
Another tool is creditors’ committees that ensure that all represented creditors’ views are
heard in insolvency, leading to a better coordination among creditors and more efficient
proceedings’) is generally understood as a broader term, including all types of in-court or out-of-court
procedures which address collectively the financial distress of a debtor. The term ‘bankruptcy’ is narrower,
usually connected to the judicial declaration of the insolvent state of the debtor and implies a traditional
court proceeding. Irrespective of these differences, this Impact Assessment Report uses the terms as
intercheangeable with each other.
25
Further sources for descriptions of insolvency systems in the EU Member States are McCormack et al.
2016, Steffek 2019, Deloitte/Grimaldi 2022. Information per Member State is also available in the e-justice
portal (https://e-justice.europa.eu/447/EN/insolvencybankruptcy).
9
decision making (lack of coordination among creditors often leads to disruption in
insolvency cases).
A business is part of a complex web of relationships with suppliers, investors and
creditors, employees, clients, public authorities (e.g. tax and social security authorities)
etc. All of these groups are direct or indirect providers of financing and creditors of the
business. The opening of insolvency proceedings directly affects the rights and positions
of all these stakeholders. The rights of each type of creditor and some of their incentives
differ in the event of an insolvency. Insolvency law is further strongly linked to questions
of property law, labour law and freedom of economic activity.
From the perspective of the CMU, the outcome of insolvency proceedings and the
allocated recovered value therein is of particular importance to the supply of capital and
credit in the economy and particularly to providers of financing to companies. When
deciding on their offers, providers of financing consider the future risk of the company
becoming insolvent and the value of recovered assets for the price that they will charge
for the capital offered to that company. Recovery values, recovery time and the judicial
costs of insolvency proceedings are all affected by differences in national insolvency
laws that ultimately influence this risk assessment and thus have bearing on the
willingness to invest and provide financing across borders and on the terms of such
financing.
Banks as the most common type of lenders to businesses often enjoy a senior creditor
status and hence a privileged treatment in insolvency. Since the market share of other
financial investors and inter-company loans has been increasing over the last years, the
recovery value of the insolvent businesses’ assets in an insolvency case is critical not
only for banks, but also for other providers of equity and debt financing. Furthermore,
value recovery could also be relevant for other companies such as suppliers, including
many SMEs, which often suffer (disproportionately more than larger companies) from
their trade partner becoming insolvent (often leading to what is known the insolvency
domino effect).
Finally, public authorities are creditors in insolvency cases because of due tax or social
security contributions. Often tax claims enjoy a privileged treatment in creditors’
ranking. Furthermore, employees, who are in a vulnerable situation in insolvency as they
may lose their jobs, enjoy special privileges in some systems in relation to due wage
claims.26
The longer insolvency proceedings last, the bigger the adverse effects on the value that
can be recovered in a liquidation (“melting ice cube” phenomenon).27
Moreover, any
judicial proceedings, including insolvency proceedings, are associated with costs.
Complex judicial proceedings are associated with very high costs (including in particular
26
The insolvency experts interviewed in Deloitte/Grimaldi (2022) stated that “Employees are in general
well protected in the EU. […] Outside of insolvency regulations, governments pay the dues to employees
and then become creditors of insolvent company”.
27
The recovery value will generally be smaller than 100%, but it is often not zero because, even if the
borrower is insolvent, there may still be assets with a positive value. The “melting ice cube” phenomenon
stipulates that the recovery value is not a fixed, exogenously determined amount, but that it tends to decline
the longer the duration of the process. This is because beyond the depreciation of physical assets such as
machinery over time, their value deteriorates if they are not used. Moreover, business lines that may still be
viable on their own become less valuable if business relationships are interrupted.
10
the costs related to insolvency practitioners (IPs) who often have to be appointed in
insolvency proceedings). For SMEs, the costs of proceedings can be so high, that very
little or nothing is left for allocation to creditors after paying the costs. The impossibility
to pay for the costs remains to be a major reason why in many cases proceedings are not
even opened for SMEs, depriving them of orderly liquidation.
Figure 1 presents a visualisation of central decision points during the insolvency process.
Figure 1: A stylised perspective of the different steps in insolvency procedures and critical elements that determine
their outcome
1.4. Economic context
Efficient and harmonised insolvency rules underpin the efficient allocation of capital,
economic recovery from recessions and thus also economic growth.28
In contrast, lengthy
and inefficient insolvency procedures undermine economic growth by preventing capital
reallocation from businesses with low profitability and high indebtness. Such businesses
are investing less and are less likely to pursue innovative activity, which slows down the
diffusion of technical progress and ultimately the growth potential. Capital allocation is
impaired because economic resources locked in distressed entities (zombie companies)
are not available for more productive uses. Banks’ exposure to bad loans impairs their
capacity to provide credit to new business.29
Insolvency rules impact on economic activity not only if a company needs to wound
down and the remainings of the estate be distributed to its creditors. The expected
recovery value, time and costs have an impact much earlier by affecting to what extent
and under which conditions companies can get access to funding they need for their
operations and growth. As further detailed below, inefficient insolvency procedures and
divergences in procedures across Member States discourage the supply of cross-border
funding, as evidenced by a high home bias in portfolio investment and a low proportion
of cross-border credit.
28
See Annex 4 for empirical studies in support of the arguments made in this paragraph.
29
The more uncertain and lengthy the enforcement of non-performing loans, the stronger the incentive of
banks to evergreen non-performing loans at the expense of credit to new customers.
11
The number of corporate insolvencies in the EU is in the range of 120,000 to 150,000 per
year.30
Data shows a substantial decline in bankruptcy declarations in 2020, which is
primarily due to the public support measures during the COVID-19 crisis. Many more
businesses cease to exist in the EU each year, which suggests that a substantial number of
businesses are wound down without recourse to public insolvency procedures.31
The
introduction of debt moratoria and other means helped companies and entrepreneurs
overcome the Covid-19 induced economic downturn at the expense of increasing the debt
level in the corporate sector and the creation of a larger number of businesses exposed to
debt overhangs.32
While many observers anticipated a pronounced increase in corporate
bankruptcies, it has not yet materialised.33
It is however not excluded that it may still
occur in the future, especially since the energy price shock and supply chain bottlenecks
have increased the likelihood of a severe slowdown of economic growth in the EU.
Accordingly, the IMF cautioned in its assessment of the euro area’s economic recovery
prospects that “Insufficient efforts to address labor market rigidities, debt overhang, and
inefficient insolvency processes could impede efficient reallocation of resources, thus
leading to significant labor market hysteresis, low productivity growth, and sizable
economic scarring.” 34
Although the proposed changes to insolvency rules will not be in
place to support adjustment to and recovery from the current economic shocks, the latest
economic developments demonstrate the vulnerability of the EU economy to sizeable
economic shocks and distress. If and when future shocks hit the EU economy, corporate
adjustment and the winding-down of insolvent firms should imperatively take place
under more efficient and better-aligned insolvency rules in the EU, which suggests a
need to act as soon as possible.
There is currently no information about the share of insolvency cases in which cross-
border creditors are involved, neither for intra-EU nor for creditors from third countries.
However, the data on the share of cross-border exposure of the EU companies may be
seen as proportionate to the (potential) share of cross-border bankruptcy cases. It can
hence allow for an approximation.35
This data suggests that a significant number of all
insolvency proceedings in the EU - 10%-20% are likely to involve claims of cross-border
creditors36
. This number should, however, not be interpreted as implying a low
importance of insolvency rules for cross-border investors: the current level of cross-
border investment (which may be subject to potential cross-border insolvency
proceedings) is impaired by the existing cross-border obstacles, including those on
divergent and inefficient insolvency regimes. It is, thus, likely to underestimate the true
level of importance of cross-border insolvency proceedings, once these obstacles are
30
See Annex 2 for a review of data sources and more information about the economic context. Eurostat
collects statistics on the number of bankruptcies and companies’ deaths, which are however not
comparable because of differences in coverage. It does not publish bankruptcy numbers to account for
differences in definitions, methodologies and structures across Member States.
31
See Annex 4 for a more detailed discussion on the number of insolvency cases and business exits.
32
For a quantification of the number of “zombie” firms in the euro area, see the ECB May 2021 Financial
Stability Report,
33
See ESRB (2021).
34
see IMF (2022).
35
It should be noted that this is an underestimation (a lower bound), as the foreign exposure only captures
the direct cross-border aspects of a company’s exposure. However, cross-border investors may also operate
via domestic legal entities and therefore be affected by insolvency proceedings in a similar way.
36
The term cross-border creditor is used in this impact assessment as synonym to cross-border investor.
12
removed (including via this initiative).37
More details on economic context are discussed
in Annex 4, Section 1.
1.5. Legal context
1.5.1. The limited scope of prior EU action
The intiative covered by this impact assessment seeks to increase the convergence of
substantive insolvency rules of the EU Member States. It is different in terms of its
objective and scope from any existing EU law. This section sets out how the EU law
developed in the areas of pre-insolvency (preventive restruturing), insolvency and post-
insolvency (second chance) over the course of the last years and where the current
intiative fits in this context.
The Union started to legislate in the area of insolvency about twenty years ago. In the
beginning, the EU did not aim at creating the convergence between the domestic
substantive insolvency frameworks. Rather it intended to ensure a smooth coordination
and cooperation between the national regimes in cases of cross-border insolvency. The
EU Insolvency Regulation (EIR, first adopted in 2000, recast in 2015) was adopted on
the legal basis for judicial cooperation in civil and commercial matters (Article 81
TFEU).38
The EIR introduced uniform rules on international jurisdiction and applicable
law that – for cases of cross-border insolvency – determined in which Member State the
insolvency proceedings have to be opened and which law is to be applied to the questions
at hand. In parallel, there were uniform rules that ensured that the judgments taken by the
courts having jurisdiction in these cases are recognized, and if needed, enforced in the
territory of all Member States. The EIR has no impact on the content of national
insolvency law. It determines the applicable law but does not prescribe any features or
minimum standards for that law. Therefore, it does not address the divergences across the
Member States’ insolvency laws (and the resulting problems and costs).
The approach of judicial cooperation hence did not comprehensively address the issues
that are relevant from the perspective of cross-border investment. Accordingly, the EIR
only allowed cross-border investors to establish which law would be applicable in the
event of an insolvency of a debtor, but it left unchanged substantial divergences in
national insolvency rules. These differences continued to weigh on cross-border
investors’ ability to anticipate the outcome for value recovery in case of insolvency in
another Member State and hence impair cross-border investment and, more generally,
capital market integration in the EU.
37
A similar scale of insolvency proceedings with cross-border elements may be estimated from the
proportion of outstanding foreing debt claims of MSE companies in the EU. According to the Flash
Eurobarometer survey carried out in June 2016 among small and medium sized enterprises in the [then] 28
EU Member States, on average, 17% of those companies had debt claims against foreign debtors over 2015
fiscal year. However, in some countries this proportion was much higher: 49% in Luxembourg, 45% in
Slovenia, 31% in Austria. Half of the companies with foreign debt claims say foreign debt claims
represented at least 6% in their 2015 turnover. Flash Eurobarometer, Report Insolvency, no. 442, 2016,
para 1 and 2. The survey data was used in the Commission Impact Assessment Accompanying the Proposal
for a Directive on preventive restructuring frameworks, second chance and measures to increase the
efficiency of restructuring, insolvency and discharge procedures, SWD (2016) 357 final, p. 45.
38
Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency
proceedings.
13
The first Action Plan on building a CMU39
of 2015 led to the adoption of the Directive
on Restructuring and Insolvency in 2019. The DRI pursued targeted harmonization in
the specific areas of pre-insolvency measures and debt-discharge procedures but not in
relation to the rules governing insolvency proceedings per se. It obliged Member States
to introduce preventive restructuring procedures with certain minimum standards and to
provide fair debt discharge for failed entrepreneurs40
.
The preventive restructuring procedures are only available to debtors in financial distress
before they become insolvent, (i.e. when there is only a likelihood of insolvency) and
are based on the fact that there is a much greater chance to save ailing businesses when
tools for restructuring their debts are accessible for them at a very early stage and before
they become definitively illiquid. These rules do not bring about any harmonisation of
the rules governing insolvency. The minimum standards on the second chance for failed
entrepreneurs, set out in the DRI, do not address the way insolvency proceedings are
conducted either. They rather relate to the discharge of debts for insolvent entrepreneurs
as a consequence of insolvency and could be described as a regulation of post-
insolvency effects. Nevertheless, the DRI includes a few cross-cutting rules that also
affect insolvency matters to a very limited extent. These rules contain very general high-
level principles concerning specific topics (the training of judges, some professional
standards for insolvency practitioners and the means of communication in insolvency
proceedings) which were so horizontal in nature that it would have been artificial to
regulate them for pre-insolvency and post-insolvency proceedings but not for insolvency
proceedings.
The initiative covered by this impact assessment does not seek to reopen the elements
already covered by the DRI. Beyond these limited elements, the DRI does not harmonise
any substantive insolvency law; its restructuring rules are expressly applicable only on
the condition that the company in question is not yet insolvent. As a result, the
substantive insolvency laws of Member States are currently not approximated at the EU
level and as acknowledged by the EIR remain “widely differing”.41
The limited scope of
the DRI can be explained by the fact that pre-insolvency restructuring proceedings were
considered important in order to create frameworks allowing to preserve value by
avoiding insolvency proceedings where possible in a situation where such frameworks
were previously entirely absent in many Member States. The relative novelty of such pre-
insolvency proceedings to a considerable number of national legal orders made this an
adequate topic for a first step of harmonising substantive law in the broader area of
insolvency law because of the reduced number and sensitivity of clashes with the long-
established principles under national law. This first step having been achieved, the
initiative covered by this impact assessment aims at taking the next step by seeking the
convergence of the rules governing insolvency where a debtor cannot be returned to
viability in pre-insolvency restructuring but has to enter into insolvency proceedings.
39
COM/2015/0468 final.
40
The deadline for the transposition of the Directive on Restructuring and Insolvency is July 2022 and a
review is foreseen for 2026.
41
Recital 22 of the EIR: “This Regulation acknowledges the fact that as a result of widely differing
substantive laws it is not practical to introduce insolvency proceedings with universal scope throughout the
Union. […] This applies, for example, to the widely differing national laws on security interests to be
found in the Member States. Furthermore, the preferential rights enjoyed by some creditors in insolvency
proceedings are, in some cases, completely different. […]”
14
Figure 2 provides for a schematic representation of the coverage of the areas (pre-
insolvency, insolvency, post-insolvency) and actors by the existing legal acts, as well as
identifying the existing gap in EU law (substantive rules on insolvency proceedings).
Figure 2: Aspects and areas relevant to insolvency regulated and not yet regulated in EU law
ASPECTS
AREAS
CROSS-
BORDER
PROCEDURAL
ASPECTS
SUBSTANTIVE ASPECTS
PRE-
INSOLVENCY
INSOLVENCY
POST-
INSOLVENCY
PROCEE-
DINGS
EIR
- Applicable law
-International
jurisdiction
- Recognition of
the effects of
opening
insolvency and of
further
judgements taken
in the course of
the insolvency
proceedings
- Group
coordination
proceedings
DRI
- Debtor in
possession
- Stay of individual
enforcement
actions
-Restructuring
plans
- Cross-class
cramdown
- Protection for new
financing and
interim financing
- Duties of directors
NOT YET REGULATED
AT THE EU LEVEL
- Material elements of
insolvency (transaction
avoidance, asset tracing,
duties of directors (and
liabilities) of companies to
file for insolvency, pre-
packs)
- Procedural elements of
insolvency (opening of
insolvency proceedings,
special insolvency rules for
micro- and small
enterprises)
- Distributional elements of
insolvency (ranking of
claims, creditors’
committees)
DRI
- Debt discharge
proceedings
- Reasons for
disqualification
ACTORS
TARGETED
EIR
- Powers of
insolvency
practitioners in
cross-border
situations
DRI
- Training of judges
- Training of insolvency practitioners
- Supervision and remuneration of practitioners
DRI
- Honest
entrepreneurs
- Possibility for
Member States
to extend to
consumers
1.5.2. The divergences between national laws on key features of insolvency
law
There are important differences across Member States with respect to various aspects of
substantive insolvency law. This section illustrates some of these differences across the
relevant elements as a basis for the discussion of why they emerged as problem drivers in
Section 2.3 of this impact assessment. More details on differences across Member States
are provided in Annex 5.
Rules on transaction avoidance to protect the insolvency estate against undue
transactions and thus ensuring the preservation of value for creditors exist in all EU
Member States. Apart from few exceptions, they cover a broad range of reasons and
recipients and define a maximum timeframe for the retrospective period for voidable
15
transactions42
. However, the features of national systems diverge considerably. In certain
Member States, like France, Germany, Poland, Portugal and Sweden, all legal acts are
subject to avoidance rules, regardless of whether they were performed by the debtor, the
defendant or a third party, provided that they are detrimental to the general body of
creditors. By constrast, in other Member States, like Czechia, Malta, the Netherlands,
Slovenia and Spain, only transactions by the debtor that have disadvantaged the general
body of creditors are covered.43
Different EU regulations enable taking evidence and other asset tracing and recovery
measures in civil or commercial matters across EU Member States44
, although excluding
the insolvency proceedings. The EIR does not specifically address the issue of asset
tracing in the context of cross–border insolvency proceedings. It provides that the powers
of insolvency practitioners are governed by the lex fori concursus45
. Thus, the EU
landscape is very fragmented in this respect and each Member State has its own rules and
entrusts the insolvency practitioners with different powers in respect to the asset
tracing.46
In relation to directors’ duties and liability in the vicinity of insolvency, only a duty to
convene a meeting exists in EU company law (2017 Company Law Directive47
) but there
is no obligation to take a decision on re-capitalizing or liquidating the company in
difficulty. Member States take different strategies to protect creditors in the vicinity of
insolvency by imposing varying duties on directors48
. In a significant number of Member
States49
, directors must file insolvency proceedings within a certain period of time of
their company becoming insolvent. The time in which filing must be done, however,
varies widely across the EU (e.g., “immediately” in Germany, within one month in
Belgium, within two months in Spain, no express time limit in some Member States).
Some Member States make it clear that in the vicinity of insolvency, the focus of
directors should shift to the creditors’ interest.50
In Hungary, the change in duty involves
the interests of creditors as a priority, and directors could be held liable for a form of
wrongful trading. The German approach provides that the directors must call a meeting
of shareholders in case of “serious loss of the subscribed capital” to take measures to
safeguard both the interests of the company and its creditors. Some Member States (like
42
Rules on avoiding certain types of transactions concluded by the management in the vicinity of
insolvency (or when already insolvent) and thereby clawing back the assets concerned to the insolvency
estate (for the benefit of the creditors) represent an immanent part of all national insolvency regimes.
43
A more detailed description of the aspects of transaction avoidance, including a more detailed
description of rules of Member States law in this area, can be found in section 2.1. of Annex 5.
44
Regulation (EC) No 1206/2001; Regulation (EU) No 805/2004; Regulation (EC) No 1896/2006;
Regulation (EC) No 861/2007.
45
Art. 7 EIR.
46
A more detailed description of the aspects of asset tracing, including a more detailed description of rules
of Member States law in this area, can be found in section 2.2. of Annex 5, see in particular the Table about
the powers of insolvency practitioners in the area of asset tracing across EU Member States.
47
Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to
certain aspects of company law, OJ L 169, 30.6.2017, p. 46–127.
48
In certain EU jurisdictions, the existence of a near insolvency situation does not lead to any marked
change in the general duties of directors. The jurisdictions where a change is noticeable are Cyprus,
Denmark, Estonia, Hungary, Ireland, Latvia, and Malta. Denmark, for example, addresses the proximity of
insolvency by providing that directors must exercise special care when this situation exists.
49
The circumstances that trigger the need for directors to file are variously described, but effectively
amount to the demonstrated state of insolvency. For example, in most common law jurisdictions, there is
no obligation on the directors to file proceedings if their company becomes insolvent.
50
See mapping of the divergences in national laws in McCormack et al. (2016), pp. 44.
16
Italy51
) require that, in case, of “serious loss of the subscribed capital”, the board shall
call a meeting and have the company decide, upon losing half of its subscribed share
capital, whether to recapitalise or wind down the company’s business and liquidate it52
.
When an insolvent business has to be liquidated, creditors can usually achieve a greater
recovery rate if the business or a part thereof is sold as a going concern, i.e. as an
operating, value generating economic entity.53
An effective form of a sale of the business
as a going concern in insolvency proceedings is the “pre-packaged sale” or ‘pre-pack’,
where a non-public negotiation phase between the debtor and some possible buyers
precedes the formal opening of the insolvency proceedings. Whereas the liquidation of
the debtor through a going concern sale is allowed in most of the insolvency laws of the
Member States, pre-pack mechanisms exist only in a handful of Member States. Those
that govern pre-packs, do it differently. For example, the sale of the entire assets of a
debtor on a going concern basis is only possible outside of court in France, it requires
court involvement in Belgium unless the pre-pack is organised as amicable settlement.
Whereas pre-pack sales must achieve the continuation of the business in France, the
German rules intend to liquidate the business.
With respect to opening of insolvency, there are typically two insolvency tests under
national law that are used as insolvency triggers: the balance sheet test or the cash flow-
based test. Different Member States use the general cessation of payments (cash-flow)
test and the balance sheet test in different combinations to establish a commencement
standard. Regardless of the causes that lead to insolvency, there is no unambiguous
definition of “insolvency” across all Member States (numerically identifiable and
therefore easily predictable or monitored)54
. Hence, one can currently expect as much as
27 different answers under each Member State law or the question whether a business is
(in)solvent, or likely to be insolvent that is whether or not it is making a profit sufficient
to provide a return to the business owner while also meeting its commitments to business
creditors or where it has sufficient cash resources to sustain itself through a period when
it is not returning a profit. Moreover, in some Member States (e.g. the Netherlands) the
court has relatively wide discretionary powers in assessing whether the debtor has ceased
to pay its debts.
In most Member States, large companies and MSEs are treated alike and there are no
special procedural alleviations to cater for the specific situation that micro- and small
enterprises (MSEs) face when they are in financial distress. Small- and micro
enterprises do not even have access to liquidation proceedings in a number of Member
States, as in most cases such debtors have no or only very few assets left when becoming
insolvent, which circumstance barres them from the opening of insolvency proceedings
(i.e. Austria, Germany, Greece and Italy) or results in an immediate termination of
51
Article 2474 Italian Civil Code.
52
A more detailed description of the aspects of directors’ duties and liability in the vicinity of insolvency,
including a more detailed description of rules of Member States law in this area, can be found in section
2.3. of Annex 5.
53
Recovery values tend to be lower in the alternative “piece-meal liquidation” under which individual
assets of the business are sold separately.
54
In fact, concepts such as "insolvency" or "vicinity to insolvency", as well as “crisis”, which are often
used in the European regulatory framework as well as in individual national laws, are not defined at EU
level.
17
insolvency proceedings (i.e. Belgium and Spain)55
. Simplified liquidation procedures for
MSEs are available only in Czechia, France, Greece, Lithuania, Romania and Slovakia.56
While some features of the ranking of claims of creditors are common to all Member
States (e.g. the prioritization of secured over unsecured creditors), national systems are
substantially divergent57
. Almost all the Member States ensure a preferential treatment of
secured credit58
, but the position of secured creditors vis-à-vis other claims, specifically
those relating to taxes and/or employee rights varies significantly. In the Netherlands –
historically known to be a ‘creditor-friendly’ jurisdiction59
– secured creditors are granted
a strong position in respect of their claims as (in principle) these outrank other creditors
(including those with a right of preference).60
Only in specific exceptions may other
claims take priority over secured claims. The most important example of this is the
preference that is granted to the Dutch tax authorities for certain categories of tax debts
over certain movable assets located on the premises of the debtor.61
In turn, in France – a
jurisdiction historically known for being debtor-friendly62
– secured claims are (in
principle) outranked by other claims.63
In Spain claims concerning salaries, taxes and
social security withholdings are granted (in said order) a status of ‘general privileged
claims’64
, however, these are still outranked by ‘insolvency’ claims, and special
privileged claims65
(i.e., secured with in rem security over specific collateral (e.g.,
mortgage or pledge). On the other hand, in Germany certain categories of secured
creditors do not fall within the ranking order since they shall benefit from an exclusive
right over the economic value of the assets and, in practice, rank ahead all other creditors.
Creditors entitled to separate satisfaction are completely excluded from the concept of
insolvency creditors: they are granted a priority right of satisfaction and have the
possibility to pursue their claims outside the rules of the relevant insolvency legislation66
,
i.e., in normal civil proceedings. In relation to specifically protected interests, Germany,
55
A more detailed description of the aspects of special insolvency regime for micro- and small enterprises,
including a more detailed description of rules of Member States law in this area, can be found in section
3.2. of Annex 5.
56
See McCormack, G. et al. ( 2016).
57
In particular, a number of Member States afford particular privileges to tax and other governmental
claims. Some Member States give a priority or even super-priority ranking (trumping all other claims
including those of secured creditors) to the claims of employees (unpaid wages). Furthermore, there are
significant differences also with regard to the treatment of “new financing” in subsequent insolvency
proceedings.
58
It is a fundamental principle of insolvency law that pre-insolvency entitlements of creditors should be
respected by insolvency and restructuring rules unless there are legitimate grounds to a post-
commencement redistribution of value, see Wessels et al. (2017)
59
See Brown Rudnick (2020).
60
Article 3:279 of the Dutch Civil Code.
61
Wet van 30 mei 1990 inzake invordering van rijksbelasting (Invorderingswet 1990 (IW 1990), Act of 30
May 1990 on the collection of state taxes (Collection of State Taxes Act (CSTA)), article 21.
62
However, the implementation of the RDI in France may lead to a shift towards a more creditor friendly
insolvency framework. On this matter, see Podeur (2021) and Golshani et al, page 14.
63
First and foremost, a portion of employees' pre-petition claims benefits from a super-senior status
(“superprivilège des salaires”) [Arts. L622-17, French Code of Commerce]. Additionally, pre-petition tax
claims also rank ahead pre-petition secured claims, For more information on the national insolvency
framework in France, see Talbourdet and Gumpelson (2021).. For more information on the national
insolvency framework in France, see Talbourdet and Gumpelson (2021).
64
Article 280 of the Spanish Insolvency Act, Real Decreto Legislativo 1/2020,.
65
Article 270 of the SIA.
66
Sec. 47 of the Insolvenzordnung (Insolvency Statute) of 5 October 1994 (BGBl. I p. 2866), as last
amended by Article 35 of the Act of 10 August 2021 (BGBl. I p. 3436).
18
for example, keeps workers in the same rank as all other unsecured creditors because its
law and social safety net shelters workers from the consequences of their employers’
insolvency67
.68
In the vast majority of jurisdictions a creditor committee may/must be appointed and its
general role is to safeguard the interests of creditors. The amount of input that
committees have in the administration of the insolvency, however, varies greatly. This
difference affects the actual extent of creditor involvement in the proceedings. For
example, while in some Member States they are merely carrying out an advisory role
(e.g. in Denmark), in other Member States (e.g. in Greece) the functions of the committee
are, principally, to support and supervise the insolvency practitioner (and even control
the insolvency practitioner) and give consent for some actions to be taken by him/her.
Similarly, in Austria for certain important transactions (e.g. sale of the business), the
consent of the creditor committee is a precondition for their validity. In other Member
States, such as Germany, for transactions of particular importance, such as entering into a
loan contract with considerable burdens on the insolvency estate, the insolvency
administrator needs the approval of the creditor meeting or of an appointed creditor
committee. In Romania, the creditor committee can request the removal of the debtor’s
right to manage its affairs.
2. PROBLEM DEFINITION
2.1. What are the problems?
Insolvency rules are fragmented along the lines of national insolvency systems (see
section 1.5).69
They thus deliver different outcomes characterised by different degrees of
efficiency across Member States in terms of the time it takes to liquidate a company and
the value that can eventually be recovered (see Figure 3). This leads to a pronounced
length of insolvency procedures, and a low average recovery value in liquidation cases
(see Table 1). Differences in national regimes also create legal uncertainty as regards the
outcomes of insolvency proceedings and lead to high information and learning costs for
cross-border creditors.
Low recovery values, long insolvency procedures, administrative costs of the procedures
matter not only for the efficiency of a company’s liquidation. Even more important is that
these three factors and the uncertainty surrounding them determine the magnitude of the
risk premium that creditors factor in when they undertake an investment. A high risk
premium increases the cost of capital for the corporation and, if the risk is particularly
high, dissuades investors to provide credit and cross-border investors to consider
investing abroad.
67
The general lesson to be drawn from this example is that liens should not be granted by insolvency law,
but by those laws - social security law, labour law, etc. - that are responsible for that particular protection
(as is the case in Denmark, for example).
68
A more detailed description of the aspects of ranking of claims, including a more detailed description of
rules of Member States law in this area, can be found in section 4.1. of Annex 5.
69
For a comparison of descriptions of the features of insolvency systems in the EU Member States that are
discussed in this impact assessment, see Annex 5, for more comprehensive comparisons of insolvency
systems, see McCormack et al. (2016), Steffek (2019), Deloitte/Grimaldi (2022).
19
2.1.1. Costly and lengthy (national and cross-border) insolvency
proceedings lead to low recovery values
If companies are liquidated, the recovery value is usually a low proportion of the initial
investment. Whereas investors may be able to estimate the likelihood of insolvency, they
face uncertainty about the consequences of an actual insolvency, which will depend to a
considerable extent on the length and complexity of the individual case. Moreover, the
predictability of outcome in insolvency cases and of recovery rates for cross-border
creditors also depends on the level of discretion exercised by courts and IPs in insolvency
cases. Insolvency laws do not offer adequate guidance on how the discretion should be
exercised by courts (and insolvency practitioners).
Divergences in insolvency laws may increase uncertainty to such an extent that investors
are not able to predict, quantify and manage the risks that affect their investment. This
exposure to uncertainty will be mirrored in a higher risk premium demanded and in
consequence higher funding costs for the corporate sector or even in greater reluctance to
do business with foreign companies at all. Beyond the impact on risk premium, a lengthy
insolvency proceeding reduces the present value of the expected investment returns, as
the opportunity cost for creditors and investors of allocating these funds in other more
profitable investments increases with passing time. Uncertainty about the possible value
or time of recovery is an important factor for financial investors that need to generate
returns or obtain additional refinancing if an investment is not redeemed in time to
manage their liquidity needs.
A protracted time to recover some value may even lead to creditors becoming at risk of
becoming insolvent themselves, leading to a possible cascade of defaults. This could be
the case, especially for business partners that are not financial institutions, but rely on
outstanding payments for the delivery of their products and services.
The scale of the problem is expected to be large: recovery values and recovery time
determine recovery rates, which in turn determine the level of cross-border asset
holdings70
and risk sharing.71
The insolvency experts interviewed in Deloitte/Grimaldi
(2022) stated that they would expect sizeable gains in terms of lower costs and shorter
duration of proceedings from the initiative subject to this impact assessment, pointing to
considerable inefficiencies in the current insolvency regimes. Nevertheless, a
comprehensive quantification of these inefficiences is not feasible due to a lack of data
on recovery rates and on the degree to which they are influenced by the length and
complexity of insolvency procedures.72
Even many banks struggle to report recovery
rates for non-performing loans despite credit provision being their daily business.73
70
See Annex 4, specifically the sections presenting the results of IMF (2019) and Bremus and Kliatskova
(2018). Since these studies use the recovery rate as indicator of the strength of the insolvency regime and
demonstrate a significant link between the recovery rate and measures of cross-border investment, one can
derive that any policy measure that improves recovery rates would also foster cross-border investment.
71
ECB (2018) and IMF (2019) show a significant correlation between recovery rates and the extent risks
are shared across Member States through the capital and credit channel, with improved cross-country risk
sharing being one of the economic benefit of the Capital Markets Union.
72
Standard pricing models used in finance offer little help in estimating recovery values and recovery rates
since these rely on discretionary decisions and timing of insolvency practitioners and courts. Theoretically,
it would be possible to calculate the expected recovery rate as a function of the yield difference of a
corporate bond (or credit default swap) to the safe interest rate and the expected likelihood of default. In
practice, this requires determining two unknown, namely the likelihood of default and the recovery rate,
20
Figure 3. Time and costs of insolvency proceedings and recovery rates
Source: World Bank Doing Business Report.
Despite considerable efforts to produce data on the outcome of insolvency proceedings,
little data is available to date.74
Annex 4, Section 2 explains the different data sources and
their limitations. The analysis conducted in this impact assessment relies primarily on
two sources: The World Bank Doing Business indicators75
presented in the charts above
and data from the benchmark study carried out by the European Banking Authority
(EBA) in 2020.76
The two sources, however, contain rather different data. In the World
Bank exercise, insolvency experts are asked to assess the outcome of insolvency
procedures based on a narrowly defined illustrative bankruptcy case77
. In contrast, the
EBA collected actual data from banks in the EU Member States on gross replacement
rates, net replacement rates (i.e. after judicial costs), time for recovery and judicial
costs.78
The World Bank Doing Business data yielded recovery rates in the case of liquidation in
an EU Member State between 32 and 44 %, with an average for the Member States
and it turns out not feasible to disentangle both without recourse to strong assumption on one of them.73
This is evidenced by the difficulties EBA encountered in sourcing such data for its benchmarking exercise,
see EBA (2020), especially the sections on data quality.
73
This is evidenced by the difficulties EBA encountered in sourcing such data for its benchmarking
exercise, see EBA (2020), especially the sections on data quality.
74
According to the survey performed with the Member States in the process of verification of the
Insolvency Recommendation as well as on the basis of the comparative law study, the overall picture is
very inconsistent: currently, in certain Member States data about insolvency proceedings are not collected,
in certain Member States they are collected but not necessarily in a centralised or electronic manner; in
other Member States where data about insolvency proceedings are collected in a centralised and electronic
manner they are not always published or are not available in an anonymised way, i.e. stay confidential.
75
The evidential value of World Bank's Doing Business scoring is limited. The irregularities in reporting
information to the World Bank were found in relation to four countries, namely Azerbaijan, Saudi Arabia,
United Arab Emirates and China. These irregularities triggered the pause of the Doing Business report
announced on August 27, 2020. The review process did not identify any further specific data irregularities
beyond those affecting these four countries as described in this document. The methodology for scoring of
insolvency frameworks has been reviewed following this incident.
76
See EBA (2020).
77
The first indicator aims at measuring the efficiency of insolvency frameworks by estimating the recovery
rate associated with a stylised corporate insolvency case. This estimate is obtained by surveying
practitioners about the most likely outcome, the expected length, and the cost of a fictitious insolvency case
for a business whose main asset is a hotel. The other indicator ("strength of insolvency legislation")
measures on the basis of expert judgement the extent to which the insolvency framework abides by the
efficiency criteria described in Djankov et al. (2008). See annex 4 for more information on insolvency
indicators.
78
See EBA (2020), Report on the benchmarking of national loan enforcing frameworks,
EBA/REP/2020/29.
21
concerned of 38%.79
The recovery rate in the five best performers outside the EU was 50
to 51%.
Data from the World Bank shows that the length of insolvency procedures and judicial
costs in EU Member States tend to be higher than in other OECD countries (see chart
above). National insolvency experts that provided estimates for benchmark scenario used
for the World Bank Doing Business insolvency indicators pointed to a range of 1.5 to 3.5
years for the duration and judicial costs between 9 and 15% for EU Member States,
which compares to 1.2 years and 5% costs for the fifth best performer in the panel of
non-EU countries.
The EBA benchmarking exercise on national loan enforcement in insolvency (see Table
1) found that on average it takes 3.4 years and costs 1.4% of the recovery value to
enforce corporate loans in the EU. Judicial costs for SMEs loans, however, are much
larger in proportion, at 3.5% of the recovery value, while their time of enforcement is
about the same as for corporate loans. The EBA benchmarking exercise also found that
the simple average of recovery values of corporate loans in the EU is 40% of the amount
outstanding at the time of the default and 34% for SMEs.
Table 1. EU-27 EBA benchmark exercise (2020)
Corporate loans SME loans
Simple
average
Weighted
average Median
Simple
average
Weighted
average Median
Recovery value1
40.4 26.2 16.2 33.8 35.1 4.9
Time to recovery2
3.4 3.9 2.7 3.3 3.5 2.2
Judicial costs1
1.4 0.5 0 3.5 1.2 0
Source: EBA. 1
gross, as a share of the notional amounts at time of default, 2
in years, from the start of the formal
enforcement status to the date of ultimate recovery from the formal enforcement procedures.
The EBA benchmark exercise also revealed substantial variations across Member States,
with the average recovery time ranging from 0.6 to 7 years and judicial costs ranging
between 0 to above 10%.
The pronounced differences across EU Member States, documented in the EBA and
World Bank data, suggest that procedures in some Member States suffer much more
from delays and result in additional costs. Both data sources also show that enforcement
regimes in some Member States yield considerably less efficient outcomes than the best
performers in the EU. The World Bank data suggests that the average outcome for EU
Member States is less efficient in terms of recovery values, time and judicial costs than in
the best performers outside the EU. It is unlikely and no analysis exists that demonstrates
that these differences could be entirely explained by debtor characteristics.80
79
In the World Bank exercise, insolvency experts were asked to provide an estimate for the case that the
underlying firm was either liquidated or restructured. The numbers quoted are from those 10 Member
States and non EU countries in which insolvency experts assumed the firm will be liquidated.
80
One can implicitly derive that the variation in the insolvency outcome is larger than what firm or
industry specific-factors suggest from those empirical studies that use firm level data and despite
controlling for these factors find a significant impact of insolvency indicators on the number of
bankruptcies (Fatica 2022) or funding costs (IMF 2019b).
22
2.1.2. Low predictability of insolvency proceedings lead to high
information costs and constitute barriers to cross-border investments
Differences in legal systems across Member States fragment the single market and
increase transaction costs for cross-border business:81
“disparate national law rules may
lead to higher transaction costs, especially information and possible litigation costs for
enterprises in general and SMEs and consumers in particular. Contractual parties could
be forced to obtain information and legal advice on the interpretation and application of
an unfamiliar foreign law.”82
Already in the mid-1990s, “legal uncertainty was regarded
by the European Commission as the main reason for the fact that the economic dynamics
triggered by the process of European integration in the early nineties developed more
slowly than expected and desired”.83
Transaction costs are caused by “(a) costs of
collecting information, (b) costs of legal disputes, (c) costs of setting incentives for
pushing through legal claims, and (d) other transaction costs” and these “costs are higher
in international transactions than in domestic trade”.84
Legal uncertainty and associated transaction costs could also be expected specifically in
the case of differences in insolvency regimes. The divergence of insolvency regimes
across EU Member States85
discourages cross-border investments through high
information and learning costs and low predictability of outcome of recovery rates. Large
divergences in time to recovery, judicial costs and recovery rates among Member States
suggest that cross-border investors in the single market are at a higher risk of being
unable to predict outcomes of insolvency proceedings if they allocate their investment
portfolio across several/different Member States.
Information costs and low predictability of the investment outcome in insolvency and
recovery rates play a key role for cross-border creditors, since they need to account for
all possible scenarios and so the conditions and prospects for recovery of their
investments in case of failure of the company they are invested in. This aspect is even
more important for unsecured funding operations, which require significant knowledge of
procedures and conditions affecting recovery rates in insolvency. The higher is this
knowledge, the easier and more accurate will be the calculation of loss given default and
probability of default and therewith the price discovery of financial assets, which is key
to the orderly functioning of capital markets.
The more dissimilar the insolvency system abroad is from that in the home country, the
less can domestic experiences and those made in other jurisdictions be used to assess the
expected return on a cross-border investment if the debtor becomes insolvent. The
consistent finding in empirical studies is that geographical distance and clusters of legal
traditions86
are important determinants of cross-border investments. This confirms the
81
See Cecchini (1988) and Wagner (2005).
82
COM(2001) 398 final
83
Wagner (2005).
84
Wagner (2005) provides a holistic analysis of the costs of legal uncertainty.
85
Recital 22 of the European Insolvency Regulation: (22): “This Regulation [the European Insolvency
Regulation] acknowledges the fact that as a result of widely differing substantive laws it is not practical to
introduce insolvency proceedings with universal scope throughout the Union. […] This applies, for
example, to the widely differing national laws on security interests to be found in the Member States.
Furthermore, the preferential rights enjoyed by some creditors in insolvency proceedings are, in some
cases, completely different. […]”
86
This is covered by a dummy variable if the home or destination country follows an Anglo-Saxon,
Nordic, Latin or Germanic tradition or a dummy variable measuring a common legal origin.
23
notion that familiarity matters, suggesting that the more similar the rules, the lower the
threshold to engage and undertake the necessary due diligence.87
Greater differences in
substantive insolvency laws make it more costly to assess the risks of cross-border
investments compared to those realised in a home Member State. High information
barriers with respect to claim procedures increase the costs of legal advice.88
Recent studies presented empirical evidence that the outcome of insolvency proceedings
and their respective design have a significant effect on the magnitude of cross-border
investment across EU Member States. The effect is material even when using different
data sources and specifications for measuring insolvency and cross-border investment.89
The statistical support at macro level that convergence of insolvency regimes to best
practices would foster capital market integration implies by inversion that inefficient and
diverging insolvency regimes are an obstacle to cross-border investment. Due to the
methodological difficulties of (objectively) measuring information and learning costs, the
empirical research about the transmission channels is still scarce.90
The effects of
insolvency regimes on the magnitude of cross border investment should be overall
comparable to those of other institutional determinants such as investor protection,
accounting standards or corporate governance for which the empirical literature
established a significant link to cross-border investment.91
While there is no data about the magnitude of information and learning costs that cross-
border creditors face, these costs can be approximated through the substantial home bias
in investment. Home bias describes the under-proportionate investment in cross-border
equity and debt (and hence over-proportionate investment in home equity and debt).
Home bias is evidenced in a large body of empirical research, and the literature attributes
an important role of informational frictions and uncertainty avoidance in explaining it.92
2.1.3. Stakeholders’ perspectives
129 stakeholders submitted replies to the public consultation on this initiative, which is a
sufficiently large number to derive quantitative results about their positions.93
These
results can, however, not be considered fully representative for the EU. Stakeholders
from one large Member State are over-represented, while there were no submissions
from some EU Member States. Like all public consultations, there is also a self-selection
87
While familiarity appears as a factor separate from information costs in Roque Cortez et al. (2014),
empirical studies tend to cover them with similar variables.
88
On top of other costs and risks, such as language support, translating terms, general standardisation of
tools, access to information. For more, please see the interviews with insolvency experts conducted by in
the study conducted by Deloitte/Grimaldi (2022) on behalf of the Commission (Annex 4, Section 3).
89
See Annex 4, Section 4 for more details on these studies. IMF (2019) and Bremus and Kliaskova (2020)
use the World Bank insolvency recovery rates and the IMF Coordinated International Investment Portfolio
Survey, Kliatskova and Savatier (2020) the OECD insolvency data and the ECB Security Holdings
Statistics.
90
Wagner (2005) reports that the most widespread means to measure legal uncertainty and the underlying
information costs consist in indicators that measure differences in legal institutions (such as the rule of law
or insolvency indicators) or are based on surveys of risk experts or cross-border investors.
91
See for example Giofre (20014), Poshakwalea and Thapa (2011), Ferreira and Miguel (2011). The
legitimacy of using the results of these studies is supported by the finding in Jack (2018) that the World
Banks’ legal rights index is correlated with recovery rates.
92
See for example, Portes and Rey (2005), Aggarwal et al. (2012). Measures of home bias of debt and
equity holdings are part of the CMU indicators.
93
See Annex 2 for more details on the public consultation.
24
bias, implying that stakeholders for whom the issue is particular pertinent are
overrepresented.
The replies to the public consultation on this initiative revealed that stakeholders find that
the problem created for the internal market by differences in Member States’ insolvency
frameworks is serious. 54% of the respondents who provided an answer to the question
perceived the problem for the internal market stemming from the divergence in
insolvency rules as important, attributing a score between 3 and 5 (with 0 meaning no
problem and 5 meaning an extremely significant problem).
Figure 4: Number of responses in the public consultation – Do differences in corporate (non-bank) insolvency
frameworks in EU Member States pose a problem for the functioning of the internal market?
Note: 0 means 'no problem' and 5 means 'extremely significant problems'
An especially large representation of German respondents (58 out of 129) created a
geographical bias in the response rate. The responses revealed a geographical split across
the Northern and Southern Member States. They also showed that researchers and the
business sector see a higher need for policy measures than public authorities. The views
and level of ambition of insolvency practitioners and legal experts differ depending on
the issue.94
94
This may be explained by the fact that insolvency practitioners and legal experts provide legal advice on
cross-border rules. The more aligned the rules in the EU would be, the less the need for such advice migh
be in the future.
0
5
10
15
20
25
30
35
40
0 1 2 3 4 5 No answer
25
Figure 5: Average support rate in the public consultation
by Member State
Figure 6: Average support rate in the public consultation
by sector representation
Note: Average rating on a 0-5 scale with 0 means 'no problem' and 5 means 'extremely significant
problems'. Number of responses on the x-axis.
Source: European Commission.
When asked for the reasons, stakeholders indicated that differences in national
insolvency frameworks deter cross-border investment/lending. In a follow-up workshop
with selected stakeholders, these stakeholders reported on practical difficulties resulting
from the fragmentation or different performance rates of the national insolvency
frameworks. These stakeholders expressed strong support for greater convergence in
insolvency rules in the EU. Annex 2 provide more details about stakeholders’ views.
2.2. What are the consequences?
The first consequence of lengthy, costly and very divergent insolvency proceedings is the
impact on capital allocation, which is likely to be less efficient compared to the situation
when insolvency regimes are more efficient and overall more similar across Member
States. Creditors and investors anticipate the consequences of inefficient insolvency
regimes in their decision to provide credit or to invest.95
They will demand a higher risk
premium or insist on other safeguards such as collateral, which increases capital costs for
the corporates.96
This higher risk can also discourage investors from undertaking the
investment at all, limiting the supply of funding available to companies, leading to higher
funding costs for corporations and, more broadly, to less efficient capital allocation in the
EU economy.
The design of insolvency systems therefore has consequences for the provision (supply)
of credit, capital costs and the allocation of capital. The academic literature reviewed in
Annex 4, Section 4 found empirical evidence of significant adverse effects of
inefficiencies in insolvency regimes on cross-border capital flows, credit provision,
95
For a theoretical analysis of the interaction of bankruptcy rules and corporates’ financial structures in
terms of optimal contract design, see von Thadden et al. (2010). See Annex 4, Section 4.2 for an analysis
on the impact of insolvency regimes on credit provision.
96
Davydenko and Franks (2008) suggest that weak credit protection induces creditors to look for
compensating measures, in particular to request higher collateral. See Annex 4, Section 4.3 for literature on
the impact on credit conditions.
26
funding cost and, ultimately, the adjustment capacity of the economy, with follow-on
effects on the diffusion of technical progress and productivity growth.97
Whereas the
earlier economic research found that better insolvency regimes lead to more lending to
the economy in cross-country comparisons,98
newer studies point that positive effects of
more efficient insolvency regimes are better visible in funding costs or non-price credit
conditions in advanced economies.99
Annex 4 gives more details of this literature.
Since they impair cross-border investment, both differences and inefficiencies in
insolvency regimes fragment the single market for capital in the EU and deter the
realisation of the CMU that seeks to build an integrated market for capital in the EU.
Since market practitioners consider divergence of insolvency regimes a central obstacle
to cross-border investment, absence of tangible progress in this policy field could
jeopardise the credibility of the overall CMU project. The studies quoted in the
introductory section provide evidence that more efficient (and more converging)
insolvency regimes spur cross-border investment and macroeconomic risk sharing.100
Finally, differences and inefficiencies in insolvency regimes can also have an impact on
business relocations. Business can relocate either to declare bankruptcy and avoid paying
creditors (insolvency tourism), or to gain certain advantages that would allow them to
benefit from the availability of more favourable insolvency laws. In practice, however,
while the possibility for the company to migrate to a different and more favourable
jurisdiction may be an option in theory, this may end up being costlier and more
inefficient than staying in the debtor’s own jurisdiction. A recent study finds that
relocation can only be an option for large companies.101
In any event, the reduction or
elimination of key differences between national insolvency laws and an enhanced degree
of efficiency of insolvency regimes across the EU would remove incentives for
relocations that are driven by the existing divergences.
2.3. What are the problem drivers?
The members of the expert group on insolvency, the stakeholders in the public
consultation and the external contractor performing the economic study102
in the
preparation of this Report recognised the differences in certain targeted aspects of
insolvency rules as drivers of the problems identified above. Insolvency tools available in
these areas appear to be very different across Member States (See also Section 1.4. of this
impact assessment). For several of these elements, rules are missing completely in some
Member States’ insolvency regimes; where they exist, their design may deliver
97
A more efficient insolvency regime speeds up economic recovery after recessions in Jorda et al (2020),
which they link to fewer zombie companies holding back productivity growth in countries with more
efficient insolvency procedures. Also OECD research (McGowan, et al. 2017 and 2018) found that capital
blocked in zombie companies is higher, the weaker the insolvency regime, which slows down capital
reallocation, weakens the adjustment process and ultimately slows down the diffusion of technical progress
and productivity growth. See Annex 4, Section 4.1 for a discussion of the effects.
98
See Djankov et al. (2008), replicated in Uttamachandani et al. (2021).
99
See AFME (2016) and IMF (2019) on capital costs, Davydenko and Franks (2008) and Deakin et al
(2017) on non-price credit terms.
100
“[C]ross-country risk sharing in the euro area remains quite low, highlighting the importance of policy
initiatives such as the capital markets union and the completion of the banking union. [..] More efficient
insolvency frameworks appear to be associated with higher risk sharing via both the capital and the credit
channels”, Draghi (2018).
101
Spark, Tipik, Study on the issue of abusive forum shopping in insolvency proceedings, DG JUST 2022.
102
Deloitte, Grimaldi (2022).
27
suboptimal outcomes, at least in some of the Member States. They are grouped below
according to the role they primarily play in triggering various problems.103
One driver
might lead to several problems. Similarly, several drivers might contribute to the same
problem and reinforce it.
2.3.1. Inadequately designed (or missing) features and large cross-border
divergences on asset recovery proceedings
Some of the components of insolvency regimes help recover as much capital as possible
from the insolvent company. If they are missing or not well designed, there is scope for
moral hazard because the owner, debtor or director of a company may face an incentive
to procrastinate on filing for insolvency (“gamble for resurrection”) or to use their better
knowledge of the company to redirect resources away from the estate, thereby leading to
a lower value that can be distributed to creditors. Detecting whether transactions have
been initiated for this purpose or whether assets are placed in hidden places allows
increasing the recovery value.
Without suitable measures that govern transaction avoidance, it is difficult to claw back
assets that were alienated in the vicinity of insolvency, for example transactions to
benefit owners or transactions at unjustified prices. Member States have currently very
different rules to govern transaction avoidance aimed at the rescission of, or the
compensation for, transactions that are detrimental to creditors and had been performed
prior to the opening of insolvency proceedings. Divergences among Member States go
across all the key elements of transaction avoidance, such as the suspect periods, the
legal acts concerned, the limitation period and so on (Grimaldi and Deloitte 2022). For
example, only transactions of the debtor are considered in some Member States (Czechia,
Spain, Malta, the Netherelands, Slovenia), whereas all legal acts performed by the debtor,
the defendant or a third party that are detrimental to the general body of creditors are
subject to avoidance actions in others (Germany, France, Poland, Portugal, Sweden).
There are also divergences in the suspected periods and in the limitation periods across
Member States. Such differences lead to information and learning costs in particular for
cross-border investors and makes cross-border investments, especially in companies in
financial difficulties, more costly.104
Consultations with stakeholders (see Annex 2) revealed problems related to asset tracing,
especially where the asset is situated in another Member State than the one where the
proceedings have been opened. Each Member State has its own rules and entrust the
insolvency practitioners with different powers in respect of asset tracing. This implies
that powers of insolvency practitioners may not include coercive measures if they are not
provided by the applicable law, unless ordered by a court of the specific Member State or
the right to rule on legal proceedings or disputes. Missing or cumbersome possibilities of
asset tracing impair the capacity of courts, insolvency practitioners or other parties with a
legitimate interest to determine and locate the assets, examine the revenue generated by
often fraudulent activity, and follow its trail. As a “follow the money” tool, asset tracing
103
These problem drivers are more granular than those that for example World Bank and OECD have
subjected to a mapping into numerical values. While this lack of numerical indicators for granular features
of insolvency regimes complicates the empirial search for evidence, Annex 4, Section 2 reports on
properties for some of them that are linked to the problems and consequences elaborated above.
104
Recovery values as measured in the EBA (2020) benchmarking exercise are however not higher in those
Member States with a broader group of actors subject to rules on transaction avoidance.
28
is of particular significance in an insolvency context, as debtors have an incentive to
remove assets from the insolvency estate.
Directors and managers’ have a key role in the vicinity of insolvency. It is detrimental to
the recovery value if rules are absent or ineffective that govern (i) when directors have to
file for insolvency, (ii) whether their goal should shift to the creditors’ interest, or
(iii) whether they are liable if it is found that they acted, prior to the advent of formal
insolvency proceedings, with intent to defraud creditors. Procrastination in the start of the
process, including of attempts to engineer restructuring solutions early on, however, tend
to reduce the recovery value.105
Duties (and potential liability) for directors are very
differently defined across the EU. In some Member States there is not even such a duty,
while in others there is a duty to file within a very short timeframe or more generically in
a ‘timely manner’. As illustrated in Annex 5 Section 2.3, the time in which filing must be
done varies widely across the EU and directors have different obligations vis-à-vis
shareholders.
This divergent landscape generates additional costs, uncertainty and, hence, obstacles for
investors that operate cross-border. This can be further complicated by the fact that
investors can also hold directors’ positions in various companies and face different
obligations in companies in different Member States. This is particularly the case, in both
large and small innovative companies, for very active investors with large stakes that
want to be more engaged with the governance of their (invested) companies.
Recovery values are low and could be different across Member States, everything else
being equal, also because pre-pack sales are not available in Member States. At present,
many Member States either do not have pre-pack procedures or have very different rules
regulating them. Some of those Member States that have rules on pre-packs are among
those with the highest recovery rates (Denmark, Netherlands and Sweden).106
2.3.2. Inadequately designed (or missing) features and large cross-border
divergences in the governance of insolvency proceedings
Procedural efficiency is determined by the capacity of public actors such as courts and
insolvency practitioners to deal with the liquidation of a company.
Without the involvement of public actors in insolvency proceedings, the possibility of
creditor runs leads to a market failure, i.e. creditors who claim first will be served first
and those that claim last will receive only what is left.107
A market failure occurs since
this can lead to companies being liquidated prematurely. Since it is not rare that
companies face liquidity shortages and payment difficulties, there is a risk that creditor
runs lead to the liquidation of viable companies that face temporary difficulties.
The absence of lighter procedures for micro and small companies (MSEs) contributes to
the workload of courts and insolvency practitioners. MSEs are often not wound down
properly108
but remain in limbo. Incentives to close their cases are distorted because the
105
For an analysis of incentives to file for insolvency and their impact on recovery values, see for example
Gurra-Martinez (2020).
106
Three other Member States with pre-pack regimes are however not: France, Italy and Poland.
107
See Hart (2000), Longhofer and Peters (2004).
108
This is for example suggested by the comparison of almost 700,000 exits of businesses with less than 5
employees with about 2700 cases of corporate bankruptcy in a sample of six Member States (BE, DE, FR,
NL, FI, SE) in 2019.
29
costs of proceedings can easily exceed the value of the estate. For MSEs, in particular,
traditional long and complex liquidation procedures easily cost more money than what
they are able to generate in proceeds for creditors. To allow an orderly liquidation of
MSEs, some Member States already have a lighter regime, which may even avoid the
launch of standard proceedings if resources are structurally limited (size of the firm).
However, the picture is rather patchy across the EU and the conditions and the definitions
of eligible MSEs vary considerably.109
While France and Greece introduced simplified
rules for MSEs recently,110
MSEs for example in Austria, Germany and Italy will find
their application for opening insolvency proceedings rejected if their remaining asset
value is too low to cover the expenses of that insolvency proceeding.
Companies normally face financial distress some time before an insolvency procedure is
initiated. From the perspective of the creditor, the insolvency trigger is therefore a
determinant of the length of time s/he is exposed to uncertainty. In the absence of a
harmonised definition there could be as many as 27 different answers to the question of
whether a business is (in)solvent and the insolvency procedure should start, which creates
high information and learning costs for cross-border creditors. In some Member States
the main determinant is the cash flow, i.e. a company is declared insolvent when it
cannot pay its debts as they become due. In other Member States, it is also the value of a
company’s liabilities on its balance sheet outweighing the value of its assets. Most
Member States apply a combination of both determinants and many also require a
durability criterion (See Table A5.1 in Annex 5).
2.3.3. Inadequately designed (or missing) features and large cross-border
divergences on procedures for distribution of recovered values
A number of components in insolvency regimes govern the position of all types of
creditors and define rules that determine the share of the value of the estate that can be
paid to each creditor.111
Their design impacts on their bargaining position and incentives
of each creditor to support the resolution of the insolvency case.
Knowledge of these rules is important for investors and creditors when they decide to
provide credit or to invest. Transparency and fairness of these rules is also important for
those business partners of a defaulting company that became creditors through their
provision of goods and services to the defaulting company. Creditors are heterogeneous.
There are differences in the type of claims on a defaulting company (financial, trade
credit, labour liabilities, obligations vis-à-vis public authorities). Creditors’ different
priority status (secured, senior, junior) generally entails high information and learning
costs for (other) creditors and have a substantial impact on the recovery prospects and
risk premia.
The large divergences across Member States on how distribution of recovered value is
organised mean that costs are even higher for creditors acting cross-border, which may
hamper their willingness to do business. Cross-border creditors will in particular need to
understand what the existing rules mean for their position in the group of creditors and
109
Thresholds for access to simplified MSE insolvency proceedings diverge: the value of the company's
business needs to be less than EUR 100,000 in Greece; the company’s assets can be be a maximum of EUR
5 million and creditors be less than 50 in Spain; assets need to be below EUR 300,000, gross revenues
below EUR 200,000 and debt a maximum €500,000 in Italy. See Grimaldi and Deloitte 2022.
110
2019 and 2021, respectively.
111
Including tax authorities and employees.
30
relative to preferred creditors, debtors and other stakeholders, such as employees or
public authorities. They are likely to be disadvantaged, facing obstacles to coordinate
with domestic creditors due to different legal regimes, language and less knowledge
about the (divergent) insolvency systems and domestic actors. Creditors from third
countries encounter problems identical to those of cross-border creditors within the
EU.112
The potential drivers that contribute to determining the distribution of recovered value
among the different creditors include the ranking of claims and creditor committees (in
the scope of this initiative) and a few others (which are not in scope and briefly discussed
in a separate section below).
The ranking of claims is of key interest to creditors since it determines the distribution of
the remaining value of a defaulted company. It presents an important source of
uncertainty because the impact of the ranking of creditors on the expected recovery rate
is generally hard to predict for all creditors. They are a particular challenge for cross
border creditors since systems are substantially divergent across Member States and the
differences are not sufficiently transparent. For example, a number of Member States
afford particular privileges to tax and other governmental claims (for example Italy,
France, Spain). Some Member States give a priority or even super-priority ranking
(trumping all other claims including those of secured creditors) to the claims of
employees (unpaid wages).113
A new phenomenon with potential impact on the ranking
of claims concerns the remediation of environmental damage.114
Given their impact on
the risk premium and, hence, the cost of lending, divergences in this area may act as a
significant deterrent for engagement by cross border creditors.
While creditor committees exist in most Member States,115
different rules across Member
States and limited powers and scope in some of them (see Table A5.9 in Annex 5) for
creditor committees contribute to the high information and learning costs for cross-border
creditors, in particular due to the difficulty to coordinate their actions during proceedings
or the risk of facing hold-up problems.116
Cross-border creditors are, in particular,
disadvantaged by language barriers and unfamiliarity with domestic proceedings. Unless
they hold a sizeable claim against the defaulting company, cross-border creditors are
likely to face a bargaining disadvantage relative to domestic creditors. As creditors’
committees provide an institutional guarantee that creditors can articulate their views in
the insolvency proceedings, in particular thanks to their oversight by the insolvency
practitioners, cross-border creditors may specifically benefit from this tool to compensate
their disadvantages listed above. Thus, rules on creditor committees can have a decisive
impact on the recovery value.
112
The remoteness of creditors from third countries should have an effect on where they invest. Whereas
intra-EU investors often invest in neighbouring countries, extra-EU investors have an incentive to focus on
large Member States to counter their information costs with higher scale economies in larger markets.
113
For example, Cyprus, France, Italy, Lithuania, Poland.
114
The issue is of relevance for the Environmental Liability Directive (Directive 2004/35/EC), which
offers an EU framework for preventing and remediating environmental damage in accordance with the
‘polluter pays’ principle, as enshrined in the EU Treaties.
115
Exceptions are Belgium, Greece, Latvia and Malta. It is of advisory nature in Denmark, limited to
business reorganisations in Sweden and requires court intervention to be established if the firms is below
certain size in France.
116
Hold up problems describe when some parties block decisions that are in the interest of the group in
order to gain a larger benefit for themselves.
31
2.3.4. Stakeholders’ views about problem drivers
When the DRI was negotiated as well as in their replies to the public consultation,
Member States reasoned that the close links of insolvency law with other areas of
national law would make full harmonisation of insolvency rules not feasible at this point.
Many stakeholders, however, argued that the complexity and opacity around national
insolvency laws is a barrier to cross-border investments as it makes it costly to
understand and measure the risk in investing in the EU. This applies to both EU as well
as non-EU investors.
Stakeholders expressed divergent views in the public consultation about the importance
of the different problem drivers as an obstacle to the single market.117
For example,
insolvency practitioners highlighted in particular divergent rules on asset tracing and
avoidance actions as important obstacles.118
Financial institutions identified the
insolvency trigger and the ranking of claims as the key obstacles, whereas non-financial
business indicated asset tracing and the ranking of claims. Firms that provide consultancy
or other services to businesses flagged the insolvency trigger, directors’ duties in the
vicinity of insolvency and the ranking of claims as most concerning. Researchers argued
that both avoidance actions and the ranking of claims needed to be harmonised, whereas
public authorities generally considered the need to act on any of the proposed elements as
low.
Figure 7: Stakeholder views on the extent problem drivers constitute a problem for the functioning of the single market
on a scale 0 to 5, average reply in the public consultation (left-hand chart) and average per stakeholder group (right-
hand chart)
Note: 0 means 'no problem' and 5 means 'extremely significant problems'.
The relevance of the different problem drivers can also be derived from the indications
about their cost and time saving potential that the insolvency experts surveyed in
Deloitte/Grimaldi (2022) attributed to them. The existence of cost and time saving
potential suggests that current rules are not efficient. Table 2 shows how many of the
insolvency experts supported measures in this area and their assessment of the
effectiveness of EU harmonisation from the perspective of cross-border insolvency
procedures. It suggests that foreign investors would derive benefits mainly from
measures that improve asset recovery and transparency, and perhaps see less in relative
terms direct benefits from common MSE regimes and creditor committees. Similarly to
the results of the public consultation, German and Swedish respondents were less
117
See section 3 in Annex 2 for a description of the methodology and more detailed results.
118
Their overrepresentation in the panel leads to a high average rating for these elements.
32
supportive of wider harmonisation efforts than French, Spanish or Italian respondents.119
Respondents from Romania and Poland were on average even more supportive than
those from the Southern Europe in this survey, differing from the views of respondents
from Central and Eastern Europe in the public consultation, to which neither Polish nor
Romanian stakeholders contributed.
Table 2: Indications by insolvency experts about the impact of policy measures on the effectiveness of an EU regime
from the perspective of cross-border creditors
Avoidance
actions
Asset
tracing
Directors
duties
Pre-
packs
MSE
Ranking
of claims
Trans-
parency*
Creditor
committee
Approval
rate+
82.4% 85.8% 74.1% 70.0% 53.4% 61.6% 87.5% 51.6%
Score** 0.7 1.0 0.8 0.6 0.4 0.5 1.1 0.3
Note: + a % share of the 120 interviewed insolvency experts who indicated an increase in effectiveness out
of all positive replies to “Considering the overall effectiveness of the cross-border insolvency procedure, as
concerns the liquidation of debts and the satisfaction of the claims of creditors, please provide us your
estimate of the change in the overall effectiveness determined by the introduction of EU rules” [in this
area]. * A glossary of insolvency terms and of the equivalent professional figures in different jurisdictions.
**. The score is defined as 0 indicating no efficiency gains, 0.5 marginal gains, 1 normal gains and 2
significant gains and likewise for negative values.
Source: FISMA with Survey data from Deloitte/Grimaldi.
2.3.5. Out -of-scope drivers
The proper functioning of the courts and the high quality of judges can significantly
contribute to reducing the length of proceedings120
and increase the ability to distinguish
viable from non-viable companies121
. The long recovery time documented above is also
the result of (insufficient) court capacity.
In the same way, the qualifications and incentives of insolvency practitioners can have a
significant impact on the running and outcome of insolvency proceedings. On the one
hand, costs for insolvency practitioners, for example, reduce the payback to creditors and
often make the opening of bankruptcy procedures non-economical for smaller
companies. On the other hand, insolvency practitioners often play an essential role in
ongoing proceedings. Notably, they can act on transaction avoidance and trace assets,
manage the operations of the insolvent estate and influence how the debtor’s assets are
sold. The powers and efficiency of insolvency practitioners thus affect the length of the
insolvency framework and therewith the trust cross-border investors place on the
efficient treatment of their claims. The exposure of insolvency practitioners to conflict of
interests, the absence of mandatory professional assurance and – possibly – standards
relating to their remuneration makes them sensitive to moral hazard that can compromise
their role as neutral and independent actors.
Nevertheless, despite their importance, this initiative excludes an intervention on the
capacity and quality of judicial systems and qualifications and incentives of insolvency
practitioners. First, major interventions to improve capacity and quality of domestic
courts and insolvency practitioners adds a major complexity to the overall EU action,
such as the need to have significant political support (currently lacking) for major
119
German and Swedish respondents were particularly more negative on the effectivenss of an EU regime
for pre-packs, MSEs and transparency. Swedish experts were also critical on asset tracing and creditor
committees.
120
See, for example, Kruczalak-Jankowska et al. (2020).
121
See Ayotte and Yun (2007).
33
reforms of domestic judicial systems and significant investments in available
infrastructures and personnel. Moreover, the Directive on Restructuring and Insolvency
is already expected to lead to some convergence towards more efficient court structures
and framework for insolvency practitioners. As the Directive is being transposed, it is
still too early to take stock or envisage another EU intervention.
34
2.4. How will the problem evolve?
In the absence of an initiative on the convergence of insolvency laws, EU action would
remain restricted to the few general provisions in the Restructuring Directive on
insolvency proceedings concerning digitalisation, training of judges and insolvency
practitioners and data collection and to country specific recommendations issued each
year towards several Member States122
. This does not leave ground to believe that action
would be taken across Member States to move in the direction of a coordinated or
comparable solution for the problems and problem drivers identified above (see Annex 6
for a review of progress with insolvency reforms in the Member States).
The expected phasing out of policy measures to keep distressed companies as going
concerns during the Covid-19 economic downturn and the significant adjustment
122
Recommendations in relation to insolvency frameworks to Member States within the annual European
Semester exercise address only a small number of Member States and, thus, cannot achieve a consistent
solution to an EU-wide problem. Maintaining the status quo will imply ongoing disparity between the
national legislations on insolvency.
Drivers Problems Consequences
D.2 Missing or inadequately designed
elements in insolvency cases
D.1 Large divergences of national
insolvency proceedings across
Member States
 Asset value recovery tools (e.g.
transaction avoidance actions,
directors’ duties to file for
insolvency, pre-pack sales and other
asset sales)
 Governance of proceedings (e.g.
insolvency triggers, proportionate
rules for MSEs)
 Tools for distribution of recovered
value (e.g. creditors’ committees,
ranking of creditors)
Out of scope Drivers
– Quality and capacity of judicial systems
– Qualifications and incentives of Insolvency
Practitioners
C.2 Negative impact on
single market for capital
 Limitation to cross-
border investment and
business operations
 Less risk sharing
through capital and
credit markets
P.2 Low predictability of
insolvency proceedings
leads to high information
costs, weaker price
discovery and constitutes
a barrier to cross-border
investment
P.1 Costly and lengthy
(national and cross-
border) insolvency
proceedings lead to low
recovery values
C.1 Less efficient allocation
of capital
 Higher capital costs and
smaller supply of cross-
border capital
 Lower adjustment
capacity of the economy
(more ‘zombie firms’
and less entry with
negative impact on
growth)
35
challenges for the economy123
are likely to increase the number of business exits in the
future.124
The exposure of the EU economy to energy price shocks and supply-chain
bottlenecks evidenced in 2022 reveal the vulnerability of the EU economy to pronounced
economic shocks. Whenever these hit the economy, companies may come into conditions
where their debt level turns out unsustainable or may find that changes to demand and
factor costs make their business models no longer viable.125
The baseline scenario is
therefore one in which a rising number of insolvency cases will continue challenging the
capacity of judicial systems. The absence of converging insolvency regimes will imply
that the magnitude of cross-border investment and extent of cross-border business
relationships would remain below its potential.
3. WHY SHOULD THE EU ACT?
3.1. Legal basis
Since the objective of this initiative is to ensure the functioning of the Single Market, the
EU has the right to act under the Treaty. Article 114 TFEU provides a suitable legal basis
for the approximation of legislation and administrative actions in Member States. The use
of Article 114 is justified by problems for the functioning of the Single Market, which
result from the disincentives to invest across borders (described in more details above) as
a consequence of the divergences and inefficiencies in national insolvency laws.
3.2. Subsidiarity: Necessity of EU action
The functioning of the single market is in the interest of the EU and all Member States.
Without EU actions, there is no mechanism to foster that elements of national insolvency
regimes would become more similar over time. An important obstacle to the functioning
of the single market for capital and the completion of the CMU would remain unadressed
and many companies would be deprived of access to (cross-border) investment. Member
States’ different starting points, legal traditions and policy preferences imply that reforms
at national level in this area are unlikely to lead to converging insolvency systems.
Member States that assess their insolvency regime as already well-functioning may not
undertake any reforms that make elements of their system more similar to those in other
Member States. Among those Member States with higher recovery rates, there are only
two that have undertaken insolvency reforms in the last years or committed to doing so in
the recovery and resilience plans.126
Member States that consider their insolvency system
as in need of reform are likely to focus on improving elements that promise an increase
of effectiveness of the national system and tailor them to their domestic preferences
rather than aiming to make them more similar to those in other Member States.127
123
Including the transition to a greener and digital economy and the strengthening of the EU’s strategic
open autonomy. “Insufficient efforts to address labor market rigidities, debt overhang, and inefficient
insolvency processes could impede efficient reallocation of resources, thus leading to significant labor
market hysteresis, low productivity growth, and sizable economic scarring,” IMF (2022).
124
See ESRB (2021), OECD (Demmou (2021).
125
See Fell et al. (2021).
126
These are Spain and Slovenia. Further information on insolvency-related reforms in Member States is
included in Annex 6.
127
The European Insolvency Regulation “acknowledges the fact that as a result of widely differing
substantive laws it is not practical to introduce insolvency proceedings with universal scope throughout the
Union” (recital 22). This attests that Member States’ individual action in the area of insolvency will not
suffice to ensure convergence of their insolvency regimes.
36
Since cross-border creditors are not part of the electorate, there is a risk that national
reforms will be biased towards the interest of domestic stakeholders and not place
sufficient attention to the interests of and disadvantages faced by cross-border creditors.
3.3. Subsidiarity: Added value of EU action
Action at the European level is better suited to substantially reduce the fragmentation of
insolvency regime and ensure convergence of targeted elements of Member States’
insolvency rules towards the rules that would work well across all Member States. Rules
at national level with a cross-border component, such as cross-border asset tracing,
information to cross-border creditors, would be less suitable to address the needs of
cross-border creditors and imply higher information and learning costs for them than if
they were following a common design at EU level.
Measures at the EU level would ensure a level-playing field and avoid distortions of
cross-border investment decisions caused by both lack of information about and actual
differences in the designs of elements in insolvency regimes. This would help to facilitate
cross-border investments and competition while safeguarding the orderly functioning of
single market. Since divergences in insolvency regimes are a key obstacle to cross-border
investment, addressing this obstacle will be crucial to realise a single market for capital
in the EU.
EU action would act as motor of reform and help overcome policy inactivity in the
Member States to address issues with core insolvency rules.128
The options proposed
respect the principle of proportionality, are adequate for reaching the objectives and do
not go beyond what is necessary. They aim at striking a balance between establishing
pan-European standards in targeted areas, while at the same time, leaving sufficient
flexibility to Member States to adapt to local conditions and to maintain the consistency
of insolvency rules with the broader national legal system.
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?
4.1. General objectives
This policy initiative aims to contribute to the more efficient allocation of capital in the
single market and enhance market integration under the CMU. While it cannot and will
not, on its own, achieve capital market integration in the EU, it could, alongside other
CMU measures (outside the scope of this initiative), contribute to the creation of more
favourable conditions for better market integration.
 A first general objective is to allocate capital in the economy more efficiently,
which means supporting the provision of credit to companies and improving the
adjustment capacity of the EU economy as elements crucial for balanced
economic growth and a highly competitive social economy. This requires
accomplishing more efficient (non-bank) insolvency regimes in the Member
States that are able to generate a higher recovery value of liquidated companies in
a shorter time and at lower costs than at present.
128
See Annex 6 for a review of progress with insolvency reform in the Member States in the last decase
and their announcement of reforms in their recovery and resilience plans.
37
 The second general objective is to ensure the free movement of capital in the
single market by fostering investors’ trust and increasing cross-border investment,
with the ultimate objective of creating a level playing field for all economic
operators in the EU concerned with regards to insolvency rules regardless of their
location. This demands to make the design of insolvency regimes more similar
across Member States and reduce the information and learning costs that they
entail for cross border creditors. .
Both general objectives reinforce each other. The more efficient the insolvency regimes
at national level, the more conducive they are to cross-border investment in the single
market. The more similar the elements of insolvency rules are in Member States, the
more active would be cross-border investors and therewith - the more intense would be
competition among providers of funding and the lower would be the cost of financing for
companies.
4.2. Specific objectives
The initiative aims to initiate a completion of the toolbox used in insolvency cases by
adding specific, targeted elements to insolvency regimes, pursuing the following specific
objectives:
 The development of more efficient and similar rules in Member States for better
value recovery, notably in the fields of transaction avoidance, asset tracing,
directors’ duties and pre-pack procedures.
 The development of more similar rules in Member States for more efficient
insolvency proceedings, notably with respect to MSEs procedures, insolvency
triggers and insolvency rule transparency to support a timelier conclusion of
insolvency proceedings for non-bank companies.
 The development of more similar rules for efficient and fair distribution of
recovered values in Member States, notably in the field of creditor committees
and the ranking of claims to reduce legal uncertainty and information costs related
to insolvency processes for cross-border creditors.
Insolvency rules need to be consistent with the wider legal system in the Member States
such as company law, labour law and property law. The convergence of insolvency rules
should not compromise neither the consistency of national insolvency regimes with other
parts of the national legal systems nor a fair treatment of debtors, creditors and other
stakeholders in companies undergoing insolvency procedures.
5. WHAT ARE THE AVAILABLE POLICY OPTIONS?
The problem analysis identified a number of elements related to the value recovery tools,
governance of proceedings, and tools for efficient value allocation typically used in
insolvency cases that insolvency experts identified as either missing in national
insolvency laws in some Member States or inadequate in other Member States to address
the problems of overly lengthy and costly insolvency proceedings and low predictability
of insolvency proceedings, notably for cross-border creditor. Building on those findings,
this section assesses how the problem would evolve if there is no intervention (baseline
scenario) and what policy options can be considered to address such problems. Annex 5
complements this section by providing more details on the individual building blocks.
38
5.1. What is the baseline from which options are assessed?
Without action at EU level, Member States are likely to either keep their existing
insolvency regimes unchanged over the next years or introduce limited changes that
would very likely not be aligned across the EU. After the transposition of the Directive
on (preventive) Restructuring and Insolvency, which had to be concluded by July 2022,
Member States are unlikely to enhance further the convergence between substantive
elements of their national insolvency regimes.
Against the forecast of rising bankruptcy figures in light of winding down of public
support measures related to Covid-19 and slowing economic activity as a consequence of
the energy inflation shock,129
a rising case load is likely to increase further the duration
of insolvency proceedings. This could be partially mitigated by action by Member States
to improve court capacity. Annex 6 reports on what kind of measures Member States
already envisage to undertake in the area of insolvency in their reform and resilience
plans. Furthermore, were not already done, Member States could also improve judicial
capacity by making better use of digital means, as well as react to a rising number of
insolvency cases by reallocating courts and judges’ capacity to address bottlenecks.
While such measures would partly help address the first identified problem, they are
unlikely to happen in a uniform matter across the EU.
The prospect of a rising case load and widening divergence in the efficiency of
insolvency procedures should be seen against the backdrop of a gradual improvement in
cross-border investment flows stimulated by other CMU policy measures and the
resulting more important role of cross-border creditors in this context. Increased cross-
border activity is likely to exacerbate further the issue around the length and ensuing
bottleneck of insolvency proceedings across Member States.
Ongoing (or future) CMU measures in other areas will not make this initiative
superfluous, but should contribute to addressing other obstacles to cross-border
investments.130
In doing so, these proposals may also implicitly raise the potential
number of cross-border insolvency cases in the future. The Commission proposal on the
European Single Access Point for company data, once agreed by the co-legislators,
should increase the visibility of companies across the EU and hence further facilitate
cross-border investment.131
The upcoming Commission proposal on the Listing Act
should make the use of funding through public markets by companies more attractive,
also contributing to more public offers of securities cross-border. Cross-border activity is
likely to remain significantly below its potential if structural barriers, at least in the area
of insolvency, remain unaddressed. The importance to tackle the insolvency-related
barriers would remain irrespective of progress made on other determinants. Slow and
costly treatment of cross-border creditors’ claims in a liquidated estate and low value
recovery, unless tackled, will serve as a serious obstacle and disincentive for them to
engage in cross-border investment in the future, reducing the EU growth potential
overall.
129
See for example, Demmou et al. (2021), Allianz Research (2022).
130
IMF (2019) identified supervisory convergence and transparency of data as the other two important
policy triggers to cross-border investment (in addition to national insolvency regimes). Other Commission
initiatives aim at tackling these other areas (e.g. report on the operation of the European Supervisory
Authorities and the proposal on the creation of the European Single Access Point).
131
COM/2021/723 final, COM/2021/724 final and COM/2021/725 final.
39
The assessment of the quantitative impact of the envisaged policy measures will use, as a
benchmark, the EU averages for recovery values, judicial costs and recovery time
experienced by banks as creditors.132
Since the numbers pre-date the COVID crisis, they
are not distorted by the low bankruptcy numbers accomplished by the public support
measures in the last years. They are the most recent indicators that represent “normal”
business conditions and therefore considered to be suitable for the baseline. Although
these values may not be necessarily representative of all creditors, variations in their
values would be expected to closely mirror variations for other creditors.
5.2. Description of the policy options
Available policy options have been carefully selected and grouped, among others,
considering the experience during the negotiatons of the Restructuring and Insolvency
Directive, the deliberations and final recommendations of the expert group, the results
from the public consultation, a study by an external consultant and extensive interactions
with stakeholders. More specifically, the impact assessment considered the areas put
forward for harmonisation of insolvency regimes by stakeholders in the public
consultation. Furthermore, the group of experts on restructuring and insolvency law133
elaborated on the scope of these areas. Finally, the external study (Deloitte and Grimaldi
(2022)) provided further analysis on the impact of harmonisation in these areas and how
the rules in question are currently applied in Member States.134
Measures that target different elements of insolvency proceedings are packaged in two
options that differ in their degree of ambition. Option 1 focuses on targeted elements for
which some commonalities already exist across Member States. They would not
necessitate that Member States overhaul fundamental principles of their current national
insolvency laws (and other areas of national law that are related to insolvency laws).
Option 2 is more ambitious as it aims to address the problem more holistically. It
includes some elements that certain respondents (e.g. corporates) to the public
consultation signalled as obstacles to the efficiency of insolvency proceedings and the
removal of which would be beneficial to foster cross-border integration. These in
particular concern a trigger for insolvency proceedings and the ranking of claims.135
As
set out in later in this impact assessment (see in particular sections 7 and 8), the higher
ambition in option 2 may, however, lead to potential conflicts with other areas of law in
Member States, determined by differences in legal tradition, history and policy
preferences across Member States.
The composition of those packages was intensely analysed, especially on the elements
that distinguish the two options. The elements presented in option 1 reflect
recommendations by insolvency experts about what they considered appropriate. Option
2 is a credible alternative to Option 1, reflecting the perspective of wider economic and
business interests. Given the number of building blocks and links between them, the
132
Report on the benchmarking of national loan enforcement frameworks, EBA, 2020.
133
https://ec.europa.eu/transparency/expert-groups-register/screen/expert-
groups/consult?lang=en&groupID=3362
134
See Deloitte/Grimaldi (2022).
135
Although the ECB did not submit a response to the public consultation, the quote below indicates an
important role for elements in option 2: “Market participants would find it easier to invest in firms located
in different Member States if core elements of insolvency regimes, such as the definition of insolvency
triggers, avoidance actions and the ranking of claims, were harmonised at best-practice levels”, de Guindos
et al. (2020).
40
present grouping of options was considered the only feasible approach to present options
with different levels of ambition. Each option, by design, covers a number of elements to
ensure that the reform under each option has a meaningful impact (which would not be
the case if, instead of grouped options, each element would be presented as a separate
option). No additional elements have been identified in interactions with stakeholders
and experts, which would also be politically feasible and could thus be incorporated in
either (or both) options.
Both options suggest legislative changes, namely through a new Directive, whereas the
option to pursue them through a Recommendation was discarded from the onset (see
section 5.3).
5.2.1. Option 1: Targeted measures on procedural efficiency and value
maximization (‘Targeted harmonisation’)
Option 1 presents targeted measures grouped based on the problem driver they primarily
address.
5.2.1.1. Measures targeting value recovery
Under this option, a set of targeted measures would aim to increase value recovery for all
creditors, including cross-border creditors in the EU. More specifically, these measures
would aim to increase the effectiveness of transaction avoidance rules and subsequent
asset tracing for its recovery across the EU. Furthermore, they would aim to introduce
more discipline on timely filing of insolvency to avoid unnecessary value destruction in
case of delayed filings. Finally, they would seek to put in place harmonised rules on
procedures allowing for better value recovery through a pre-pack arrangement.
In the case of transaction avoidance, a minimum set of harmonised conditions for
exercising avoidance actions would be introduced. 84% of the respondents to the public
consultation supported a more comprehensive harmonisation of avoidance actions and
for the harmonisation of elements such as the different avoidance grounds, of the
objective and subjective conditions leading to avoidance, as well as of the time periods
prior to the opening of insolvency, which count as relevant for avoidance claims.136
More
concretely, the following key elements of the transaction avoidance legal framework
would be clarified in EU law: types of suspicious transactions, avoidance grounds,
related parties, the period during which the avoidance measures can be enacted, and,
finally, legal consequences of avoidance, including the liability of third parties and rights
of the opponent.
Transaction avoidance measures would be complemented by measures strengthening
asset traceability through a better-facilitated access by insolvency practitioners to asset
registers, notably in a cross-border setting (i.e. when assets have been moved to/acquired
in another Member State during the period relevant for transaction avoidance rules). In
the public consultation, almost 85% of the stakeholders favoured harmonised rules on
assistance (including the interconnectivity of relevant registers) in the cross-border
136
All stakeholder groups showed support for all of the proposed subjective criteria to be used as possible
conditions to qualify a transaction as avoidable action. Also, the use of objective criteria was supported.
The most often quoted objective criteria were that: 1) The transaction happened within the ‘suspect period’
(77%); 2) the transaction is to the detriment of the general body of creditors (70%); and 3) the debtor was
insolvent at the time of the transaction (53%). The majority of stakeholders (74%) agreed that the ‘suspect
period’ should be harmonized at EU level.
41
tracing of assets of the insolvent debtor. This would be achieved by enhancing in EU law
the access rights of practitioners to a registry in another Member State. This can also
build on the already existing arrangements for access to EU-wide interconnected
registries (BRIS, BORIS, etc.137
).
Furthermore, to avoid potential asset value losses due to a delay in filing for opening the
insolvency proceeding, directors would be obliged to timely file for insolvency within a
pre-defined period of time (e.g., at least within the three months of failing the insolvency
test of the Member State). Directors failing to comply with this obligation would be held
liable. The public consultation yielded widespread support (81%) for minimum
harmonization at EU level of the duties and obligations of directors in the event of
vicinity of insolvency or when the company is insolvent. In particular, the most
beneficial aspect of harmonization would be to impose a duty on the director, once the
company is insolvent, to file for insolvency proceedings (71%).138
Finally, under this option, a minimum set of harmonised standards for a pre-pack
liquidation procedure would be introduced to maximise the value preservation in the sale
of all or part of the business. The pre-pack rules would set out harmonised conditions for
conducting negotiations on the sale of the business before insolvency filing, with the deal
finalised in insolvency, hence enabling the realisation of the value of the insolvency
estate right or shortly after the official opening of the proceedings. The pre-pack
arrangement could thus avoid significant value destruction, which usually happens, when
the assets can be realized only at a later stage of the proceedings, long after the
opening.139
The pre-pack rules would include safeguards to ensure transparency and
equal treatment of creditors, to avoid abuses. In addition, these safeguards would need to
ensure that employees’ rights are not unduly curtailed by the pre-pack administration,
including the right to information and consultation.
5.2.1.2.Measures targeting procedural efficiency
With SMEs being the backbone of the EU economy, it is important to ensure that the
new rules work well also for smaller companies in the EU, for whom the cost of the
ordinary (i.e. established) insolvency procedure is prohibitively high, and where a more
rapid debt discharge would allow to unblock the entrepreneurship capital for new
projects. Under this option, a special harmonised insolvency procedure would be set out
in EU law tailored to the needs of micro and small enterprises (MSE). This MSE
insolvency proceeding would be designed proportionally to the needs of MSEs, their
creditors and other stakeholders, allowing them to be wound down orderly at low costs.
Instead of establishing derogations for MSEs from the existing general rules of
insolvency proceedings, this option would suggest a bespoke MSE procedure at EU
level.
This specific procedure should follow a flexible, modular approach, in which the default
liquidation process is run with reduced formalities and without the involvement of
lawyers or insolvency practitioners. Additional elements, such as the involvement of an
137
In its proposal for the 6th
Anti-money Laundering Directive, the Commission proposed the EU-wide
interconnection of the national centralized bank account registries. The proposal is being negotiated by the
EU legislator. See COM/2021/423 final.
138
Two thirds of the respondents supported a clarification that in the vicinity of insolvency directors should
formulate plans to take preventive action.
139
A functioning market for distressed assets would leverage the benefits of pre-pack sales.
42
insolvency practitioners or the ordering of a moratorium could be included optionally, on
the request of the debtor or creditors, thereby keeping costs as low as possible. The
procedure would set out simple rules on the entry conditions and the administration of
procedures (including digitalisation and automation of key procedural steps140
and the
use of electronic auctions to generate revenues from MSE assets141
). In order to make this
procedure attractive for MSEs, the procedure would be coupled automatically with a
debt-discharge. The system shall ensure that liquidations could also be carried out where
the debtor’s assets do not cover the costs of the procedure.
In addition, under this option, Member States would be required to further enhance
transparency of the key features of their respective insolvency rules, by making such
information easily accessible to investors on a public website and in a pre-defined user-
friendly format, with the e-Justice Portal as default option.142
This would take the form of
a brief factsheet document with standardised key information that would be essential for
(potential) investors to make a “glance-through” assessment of the insolvency framework
in a given Member State, in a comparable way. The factsheet would provide targeted
information about relevant insolvency triggers. It would also contain information on the
average duration of an insolvency proceeding in a given Member State. A requirement
for Member States to raise awareness among the potential investors on these factsheets
would be part of the option.
5.2.1.3.Measures targeting the distribution of recovered values
To ensure a distribution of recovered values that is perceived as fair and predictable, this
option introduces requirements for improving the representation of interest of the
creditors throughout the proceedings and for enhancing the transparency about the
ranking of claims.
In relation to the representation of the creditors in the insolvency proceedings the option
would set out the minimum harmonisation requirements on creditors’ committees. These
measures would encompass the establishment of the committee, the organisation of
meetings, the voting rules and the powers and duties of the creditors’ committees.
As regards the ranking of claims of different types of creditors, the option would
introduce enhanced transparency requirements to ensure that Member States make public
the easily readable information on the ranking of claims in their jurisdiction in a
simplified (user-friendly) format, possibly on the e-Justice portal. This disclosure should
include references to national laws setting the ranking and possible exceptions to the
standard ranking of claims in corporate insolvency.
140
Electronic communication with courts and IPs is standard in about 75% of the EU Member States. see
Steffek (2019).
141
The majority of Member States uses on-line judicial auctions, though few only in insolvency cases, see
https://e-justice.europa.eu/content_judicial_auctions-473-en.do.
142
While the e-Justice portal already includes some information on national insolvency proceedings,
presented according to a Q&A template, the detail and presentation of information differs across Member
States, making it difficult to consult especially for non-lawyers. Furthermore, while the Insolvency
Regulation, which has introduced a requirement for Member States to include a description of national
insolvency laws on the e-Justice portal, has been in application for several years, not all Member States
have by now included the required information on the portal.
43
5.2.2. Option 2: A more comprehensive harmonisation of insolvency
regimes in the EU (‘Wide harmonisation’)
Option 2, in addition to the policy options set out under option 1, would include a
number of additional elements that would seek to pursue a more comprehensive
harmonisation of national corporate insolvency rules across the three dimensions (value
recovery, procedural efficiency and distribution of recovered values). This option is more
holistic and ambitious, moving beyond what insolvency experts considered as broadly
consistent with the existing rules in Member States and touching on the areas that are
deeply intertwined not only with the fundamental principles of national insolvency laws,
but also with other areas of law such as property, company or labour laws in many
Member States.
5.2.2.1.Value recovery measures
On value recovery, option 2 would include the transaction avoidance and asset tracing
measures, as well as the minimum standards on the pre-pack as set out under option 1.
In addition to those measures, option 2 would also include further reaching measures on
asset seizure and recovery. Under this option, in addition to better equip insolvency
practitioners to trace assets moved to another Member States, their ability to seize assets
across borders would also be enhanced. A harmonised judicial mechanism could be set
up in Member States’ laws by the help of which insolvency practitioners of other
Member States could easily freeze bank accounts or seize other assets belonging to the
insolvency estate. Such a streamlined mechanism would complement the existing legal
possibilities for insolvency practitioners, which – according to qualitative evidence – do
not ensure asset preservation flawlessly.143
Furthermore, under option 2 a general principle would declare the shift of fiduciary
duties of the directors of the company in the vicinity of insolvency. Hence, directors
would be required to consider the interests of the creditors alongside the interest of
shareholders. The requirements (and ensuing liability) would thus extend beyond a mere
obligation to file for insolvency.
5.2.2.2.Measures targeting procedural efficiency
On procedural efficiencies, in addition to the special insolvency regime for MSE already
set out under option 1, option 2 would also seek to harmonise the insolvency trigger (i.e.
the start of insolvency proceedings) across Member States by putting forward a common
liquidity criterion. This criterion would serve as the latest point in time by when the state
of insolvency would have to be established. Member States would nevertheless be
allowed to add a stricter (economic) test to bring forward the moment of the
establishment of insolvency (but not to delay it). This harmonised liquidity test would set
out the methodology for concluding on illiquidity of a company. It could for example set
out that a company that was not in a position to meet its debt obligations within a pre-
143
Under Article 21 of the EIR, insovlency practitoners have the same powers in other Member States as
attributed to them by the law of the insovlecny proceedings (lex forum concursus), these powers have to be
applied, however, in compliance with the law of the Member State within the territory of which it intends
to take action. Insolvency practitioners may also resort to the rules of Regulation (EU) 655/2014
establishing a European Account Preservation Order procedure, but the scope of this instrument is limited.
44
defined period (e.g. 90 or 180 days) would be deemed insolvent. Court discretion and
case-by-case assessment would be limited to exceptional cases.
Two thirds of the respondents to the public consultation supported a harmonised trigger
for insolvency. The notable exception were the responses from public authorities. The
most popular proposed common trigger for insolvency was based on a liquidity test.
5.2.2.3.Measures targeting distribution of recovered values
On distribution of recovered values, option 2 would, similarly to option 1, include the
rules on creditors’ committees. In addition to these rules, option 2 would also include a
harmonisation of certain elements of the ranking of claims (without harmonising the full
domain of ranking of claims that was deemed non-feasible and hence discarded upfront).
Under this targeted harmonisation, rules would be introduced, for example, to exclude
the privileged treatment of some unsecured claims, such as tax claims. The responses to
the public consultation on the ranking of claims were met with certain opposition from at
least some groups of stakeholders. Furthermore, there was overall opposition to the
proposed harmonisation of the carve-out rules (i.e. when a group of creditors is given
preferential treatment by being treated before any creditor in the ranking of creditors) and
of rules to protect ‘new-financing’
5.3. Options discarded at an early stage
This initiative focuses solely on traditional insolvency proceedings, to complement the
existing minimum harmonisation on preventive restructuring. Elements in insolvency
regimes that deal with preventive restructuring schemes, i.e. mechanisms that can be
accessed by the debtor before the state of formal insolvency under national law, were,
thus, discarded upfront from being part of any option.
Table 3: Measures under the two policy options
Option 1
Targeted measures on procedural efficiency and value
maximization
Option 2
A more comprehensive EU insolvency regime
A1: measures that target asset recovery:
Transaction avoidance
Minimum harmonisation (i.e. stricter national rules permissible)
of specific rules, such as scope of legal acts concerned, avoidance
grounds, definition of related parties, the period before insolvency
under scrutiny, legal consequences of avoidance /including the
liability of third parties/ and rights of the opponent
As in option 1
Asset tracing and
recovery
Improving access of IPs to asset registers abroad, with focus on
access via systems of EU-wide interconnections – BRIS, BORIS,
etc.
Enhancing the ability of IPs to seize assets in other Member States.
Improving their access to asset registers abroad and their direct powers
of seizing or recovering assets from abroad.
Directors’ duties and
liability
Obligation to file for insolvency (within a time limit no longer
than 3 months) and related liability
In addition, a change of fiduciary duties of the directors in the vicinity of
insolvency
Going concern sales in
insolvency
Minimum standards for a pre-pack liquidation regime As in option 1
B1: measures that improve procedural efficiency
Insolvency trigger
Obligation to enhance transparency (public [e-Justice Portal]
website) of the main elements of insolvency rules, including
insolvency trigger
Targeted harmonisation of liquidity criterion for the latest possible
triggering of the procedure
Specific treatment of
micro- and small
enterprises
Special liquidation procedure for MSEs coupled with a debt
discharge for entrepreneurs (this should be an expedited, low-cost
procedure, that also applies in asset-less scenarios).
As in option 1
C1: measures that govern the distribution of recovered values:
Ranking of claims
Obligation to enhance transparency (public [e-Justice Portal]
website) on creditor ranking
Harmonisation of the treatment of public claims
Creditors’ committees
Minimum standards (i.e. rules at national level providing more
influence for creditors are permissible) on the elements of
establishment, meetings, voting rules, powers and duties of
creditors’ committees. Setting up a committee in individual cases
would depend on the decision of the creditors.
As in option 1
The analysis in preparation of this impact assessment revealed that Member States’
starting positions on the harmonisation of ranking of claims are very different and are
strongly linked with other national policy objectives, values and legal traditions (such as
the protection of employees). Moreover, their interference with other parts of legal
systems imply that harmonisation in this area is likely to affect in a significant manner in
particular national property and labour laws. The option to introduce a comprehensive
harmonisation of the ranking of claims was therefore discarded as potentially problematic
from subsidiarity perspective and politically non-feasible.
The option to propose non-legislative measures was also considered at an earlier stage.
The public authorities that replied to the public consultation expressed a strong
preference for a recommendation, the insolvency practitioners for a combination of a
legislative instrument and a recommendation, whereas all other participants (including
corporates) favoured a legislative instrument (either on a stand-alone basis or in
combination with a recommendation). Following an assessment, it was concluded,
however, that non-binding measures, such as a Commission Recommendation, would be
insufficient to entice Member States to conduct sufficient reforms in the complex area of
insolvency. Non-binding measures are highly unlikely to be sufficient to ensure the
harmonisation of insolvency regimes that are at present very different across Member
States. This is corroborated by recent experience in the area of EU insolvency policy.
The invitation addressed to Member States in the form of the Commission
Recommendation of 12 March 2014 on a new approach to business failure and
insolvency (2014/135/EU) was only sporadically followed by them. Even those who
enacted national legislation on the basis of the Recommendation, have done this in a
divergent and inconsistent manner, that did not produce convergence towards the
standards suggested in the Recommendation. It has therefore been deemed subsequently
necessary to propose the Restructuring Directive.144
Given the proximity of the policy areas covered and the general sensitivity of the matters
related to insolvency law, a similar outcome could be expected for non-legislative
measures in the context of this initiative so that it seems justified to discard that as an
option. Therefore, the impacts of a non-legislative measure that would contain the same
elements as those set out in options 1 or 2 are not assessed in this impact assessment.
Based on the recent experience referred to above one would have to expect a very limited
uptake and, even in the event of an uptake, it would have to be expected to be uneven
across those Member States that would take measures. Any impact from a
recommendation would thus be at best a small fraction of the impacts identified under
either of the two options, with the analysis highly conditional on (likely to be random and
hence speculative) assumptions about the level of voluntary uptake in Member States.
6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?
The initiative will improve tools in all Member States to create the conditions that could
reduce the duration of the proceedings or recover more value. Whether this potential will
be exploited will depend on the application in practice. It will for example depend on
whether the judicial system has the capacity to deal with insolvency cases and IPs have
144
OJ L 74, 14.3.2014, p. 65–70. Similarly, a self-regulation instrument, such as the aforementioned
UNCITRAL Legislative Guide, is difficult to apply in the area of substantive insolvency laws, where there
is a strict legislative regulation in all Member States, which is highly divergent from one Member State to
the other.
47
no incentive to abuse the additional powers they would be entrusted with. The analysis of
the impacts assumes that the two factors outside the scope of the initiative, i.e. the
organisation of courts and the regulation of IPs, do not act as deterrent to the effective
use of the enhanced tools at their disposal. Judicial capacity is likely to become an issue
if the expectation of a higher number of corporate insolvency cases materialises. Most of
the measures discussed in this impact assessment, however, are expected to lead to
shorter procedures and lower judicial costs, with the exception of the MSE regime, for
which the countervailing effects are further discussed in more detail below.
6.1. Benefits and costs of a targeted regime
6.1.1. Measures targeting asset recovery
Targeted measures in this area would increase the value that can be recovered from the
liquidated estate, with the largest benefits expected in those Member States that have not
yet implemented efficient practices in this area. In those Member States, insolvency
practitioners, whose task it is to preserve the insolvency estate in the collective interest of
the creditors, would be equipped with better tools to preserve value. More efficient rules
would allow and encourage insolvency practitioners to focus on avoidance actions early
in the administration, avoiding procrastination in ascertaining whether certain
transactions may be revoked. Moreover, they would enable insolvency practitioners to
collect the necessary evidence and be sufficiently meticulous in their investigation.145
Almost 84% of the stakeholders in the public consultation favoured harmonised rules on
assistance (including the interconnectivity of relevant registers) in the cross-border
tracing of assets of the insolvent debtor.146
In particular insolvency practitioners and
researchers supported EU action in this area, whereas the support of public authorities,
financial and non-financial business entities was somewhat less pronounced. Almost
90% of the stakeholders agreed that insolvency practitioners should have full access to
property and collateral databases.
The possibility to use pre-packs in all Member States that do not permit this tool yet
would improve the recovery value and could shorten the duration of insolvency cases in
those Member States. The requirement for directors to file timely and the associated
liability for them would further limit value destruction in the vicinity of insolvency. The
public consultation revealed widespread support among stakeholders (81%) for minimum
harmonisation at EU level of the directors’ duties in the vicinity of insolvency or when
the company is insolvent.147
Nevertheles, the extent of support varied depending on a
stakeholders’ group. Whereas 93% of the practitioners/professionals supported minimum
harmonization at EU level of the directors’ duties in the vicinity of insolvency, only 50%
of the public authorities were of the same opinion.148
More efficient rules on transaction avoidance – as supported by 84% of the respondents
to the public consultation - would be beneficial for all creditors, whether they are
145
See Keay (2018).
146
Stakeholders’ replies to the more detailed questions reveal that such rules would be most useful in
relation to the following types of assets: real estate (78%), company interest (60%), bank accounts (75%)
and claims other than those arising from bank accounts (46%).
147
In particular, the most beneficial aspect of harmonisation would be to impose a duty on the director,
once the company is insolvent, to file for insolvency proceedings (71%).
148
With an average rating of 2.8 assigned by insolvency practitioners/lawyers and 1.5 by the public sector
on a 0 to 5 scale (see Figure 8).
48
domestic or cross-border. Nevertheless, given their inherent information disadvantage
and resulting increased difficulties to influence the running of the proceeding, cross-
border creditors would stand to benefit even more than domestic creditors if the rules on
avoidance actions become more similar, efficient and transparent. Stakeholders signalled
that the enforcement of in particular cross-border assets and the detailed and divergent
rules applied across Member States have led to differences in the amount that could be
recovered and the time it could take to claw back assets. Hence, more harmonised rules
on transaction avoidance and asset tracing would help to level the playing field and to
increase value recovery, notably in cross-border proceedings. Enhanced possibilities,
through a more facilitated access to asset registries in other Member States to trace assets
abroad, would also reduce the costs for insolvency practitioners (and insolvency
proceedings overall).
For cross-border creditors, transparency and alignment of rules are particularly
important.149
For example, while cross-border creditors would benefit from the
possibility to opt for a pre-pack procedure – another tool enhancing value recovery – they
may see themselves disadvantaged if the rules governing the pre-pack are opaque and
accountability is unclear. Only subject to the necessary safeguards for the protection of
interests of all affected creditors in pre-packs, the measures would make it overall less
costly for cross-border creditors, including by making it easier for them to find out about
the respective rules in other jurisdictions and to assess the prospects for claw-back.
Creditors from third countries face the same challenge as cross-border creditors within
the EU.
Furthermore, creditors stand to benefit from improved tools for value recovery not only
in insolvency, but also long before it – notably when making their decision to invest.
Since the more efficient and aligned rules around value recovery increase creditors’
confidence to obtain better or fairer access to the debtor’s assets in case of insolvency,
they allow for more certainty in assessing the cost of capital against which credit is
granted. In particular, when rules are more aligned across Member States, creditors who
give a loan to a debtor in another Member State will find it easier to evaluate the impact
of transaction avoidance law of another Member State (compared to their own) in their
assessment of the consequence of the debtor’s insolvency on their investment150
.
The conduct of the insolvent companies and their directors is key to influence the
prospects of value maximization and recovery rate in the concrete proceedings. The
introduction of more efficient rules on directors’ duties and liabilities would address the
moral hazard problem and reinforce the incentive to timely file for insolvency (as a
counterweight to the aversion to acknowledge business failure), which is likely to
increase the recovery value. Company directors would face higher liability risks, which
may lead them to demand higher salaries, and likely higher premia for liability insurance.
While honest debtors would not undertake measures to procrastinate the filing of
insolvency, hide assets or divert them at the brink of insolvency, such opportunistic
149
While not a subject of the public consultation, the survey by Deloitte and Grimaldi (2022) revealed that
about 80% of the interviewed insolvency experts supported measures towards more transparency. See
Table 4.
150
The applicable law in question is that of the lex fori concursus (Art. 7(2)(m) EIR), which can be
mitigated for the interest of the creditor by a more lenient rule of the lex causae (Art. 16 EIR). Both laws
can be different than the law of the State where the creditor resides.
49
behaviour at the expense of creditors has been observed in practice.151
The new measures
would discourage and limit the ability of those debtors to hide assets.
The impact of changes in these areas on the public sector is expected to be small.
Nevertheless, they can lead to lower incurred costs of judicial review if procedures
become shorter. It is also possible that easier cross-border asset tracing and seizure leads
to higher demand for court involvement. While it is not possible to provide numerical
estimates to what extent this latter effect could impair judicial capacity, the analysis in
Annex 4 suggests for which Member States judicial bottlenecks are more likely to be an
issue (see also section 6.1.2). They are hence the ones more likely to (but not necessarily)
be exposed to any possible adjustment costs (if such costs materialise) from the
introduction of the proposed measures, leading to potential procedural delays. Since
option 1 is calibrated to target only those elements in insolvency regimes where the
harmonised rules do not introduce major inconsistencies with other pieces of national
law, the impact in terms of the need to provide additional legal clarity or adjust other
pieces of national law should be limited. Exceptions could stem from the need to address
possible issues from avoidance actions on property rights and from asset tracing on data
protection.
6.1.2. Procedural efficiency measures
In the presence of transparency about the key features of insolvency regimes, both
creditors and debtors would be able to assess under which conditions an insolvency
process starts and how it will run its course. It means procedures related to the beginning
of protective measures (e.g. avoidance actions), beginning of insolvency proceedings
(e.g. insolvency trigger), use of outside expertise (e.g. insolvency practitioners),
governance supporting effective decision making (e.g. creditors committee). This allows
debtors to react effectively (and if necessary pre-emptively) as well as for creditors to
seek solutions. These measures towards procedural efficiency would allow to shorten
proceedings at certain, more difficult phases, allowing for quicker and fairer decision
making and for more efficient running of proceedings overall.
Transparency on insolvency triggers reduces uncertainty to creditors and in particular to
cross-border creditors, who would incur lower information and learning costs. This
should translate into a higher willingness of these investors to provide credit to
companies at the beginning and lower cost of financing to those companies as a result.
The Deloitte/Grimaldi (2022) study reports that insolvency experts attribute sizeable
efficiency gains to more transparency in a cross-border context, supporting the notion
that information costs are an important obstacle in practice (see Table 4).
In addition to better transparency, which would empower both creditors and debtors to
use the most effective toolkit to ensure a more efficient proceeding, procedural rules
could also be made more proportionate to a specific type of a company in insolvency.
Thus, a dedicated MSE liquidation procedure, by reducing formalities, increasing the use
of electronic means of communication and limiting the involvement of insolvency
practitioners and lawyers would reduce the costs of the procedure. Together with the
statutory debt-discharge, this would make the insolvency regime more attractive for
ailing debtors (entrepreneurs). Better access to insolvency procedures would reduce the
debtors’ (i.e. entrepreneurs’) bias towards keeping the company alive as long as possible.
151
See the insolvency case of a drugstore chain in Germany 2012.
50
The conduct of insolvency proceedings even in cases where today such proceedings are
not opened because the assets of the debtor do not cover the judiciary costs (so called
‘asset-less cases’), would generate additional costs for financing these proceedings
(possibly for the public budget, the businesses or insolvency practitioners). These
additional costs as well as the costs of dealing with a higher overall number of insolvency
proceedings152
are, nevertheless moderate as this simplified procedure would entail much
lower costs than those of normal insolvency proceedings. The cost also needs to be
considered against the potentially sizeable benefits of orderly winding down of distressed
micro- and small businesses, coupled with a debt-discharge for the entrepreneurs
concerned. Since the bankruptcy of a MSE has direct consequences for the entrepreneur,
a fast and orderly liquidation through MSE procedures could accelerate discharge and
help create a second chance for these entrepreneurs.
In general, cross-border creditors tend to be less exposed to MSEs given their low
transaction value (also known as ‘investment ticket size’) compared to larger companies.
However, once can observe that cross-border creditors started to take interest, for
example, in very innovative start-ups that are prepared to pay high-risk premia for access
to capital. In those cases, cross-border creditors would favour a possibility for a quick,
efficient and low-cost winding down of a company.153
Furthermore, with other policy
measures ongoing at EU level to increase the visibility of SMEs across Member States
(such as the creation of the European Single Access Point for company data154
), the
number of cross-border creditors taking interest in SMEs is likely to increase in the
future. Since the proposal seeks to ensure a quicker value recovery in MSEs, it makes
MSEs more attractive for cross-border investors, complementing other actions under the
CMU. An investor association indicated that risk-capital investors (e.g., private equity
firms) see virtue in second chances and hence a quick debt discharge for innovative and
driven entrepreneurs. For smaller creditors of MSEs (which are likely to be in majority
for MSEs), ill-placed to absorb high fees of insolvency practitioners, the MSE regime
would also help reduce legal costs.
The fact that national insolvency frameworks are not always adapted to treating properly
(and in a proportionate manner) insolvent MSEs represents a lost opportunity for the
economy: these companies are in many cases deprived of the possibility to benefit from
an orderly exit (if unviable) or from an adequate restructuring (if viable). This would
apply to a very large number of EU companies, given that MSEs represent in some
Member States up to 90% of the total count and 98% of the firms that exit.155
The
entrepreneurship capital becomes effectively locked in these companies, which become
in many cases zombie-companies, with founding entrepreneurs unable to benefit from
debt discharge in a timely manner and unable to start anew sufficiently quickly.
Establishing a more proportionate regime for MSEs, and in particular granting access
rights for MSEs to insolvency proceedings, would mean that more EU micro companies
152
As a consequence of the fact that companies who, at present, are not eligible for insolvency proceedings
or are not interested in going under the protection of insolvency, due to the high costs, will opt for the
expedited procedure
153
For a case study on cross-border transfers of SMEs, see European Commission ‘Improving the evidence
base on transfer of business in Europe: annex C: case study on the cross-border dimension of business
transfers,’ February 2021, available at: https://data.europa.eu/doi/10.2826/94014.
154
Proposal for a Directive of the European Parliament and the Council amending certain Directives as
regards the establishment and functioning of the European single access point, COM(2021) 724 final.
155
94.3% of enterprises in the business economies had 0 to 9 employees in 2018 according to Eurostat
numbers for the EU-27 and would be counted as MSEs.
51
would be liquidated in a court insolvency proceeding (rather than outside one, which is
often the case today).
Numerical estimates of the impact of this option on the length of proceedings and the
outcome of the insolvency process are difficult to get by because by their nature, there is
no good basis to estimate the level of information and learning costs. However, the
insolvency practitioners surveyed by Deloitte Grimaldi (2022) point to a reduction in
recovery time and an increase of the recovery value of about 12% if a harmonised MSE
regime is introduced. They reported sizeable efficiency gains from the introduction of
tools that provide transparency about insolvency triggers and other features of insolvency
regimes, suggesting that the benefits could be sizeable.
Table 4. Indications from insolvency experts about the impact of harmonisation on the cost and time of insolvency
procedures as a result of EU rules in the different areas.
MSEs regime Transparency
Glossary* Standard
ontologies**
Cost savings Time savings Increase in efficiency
Approval rate+ 52.5% 52.6% 87.5% 77.4
Amount in % 11.9 12.5 NA NA
Efficiency score *** 0.6 1.1 0.9
Note: + share of the interviewed 120 insolvency experts that indicates the measure would lead to a decline in costs or
time. % values are calculated as weighted average of the mean of the ranges indicates. They show by how much % the
average insolvency expert thinks costs or time would decline. See Annex 4 for full numbers and more details. * A
glossary of insolvency terms and of the equivalent professional figures in different jurisdictions, **A set of concepts
and categories in the insolvency subject area and domain showing their properties and the relations between them,
*** 0 indicates no efficiency gains, 0.5 marginal gains, 1 gains and 2 significant gains and likewise for negative
values.
Source: FISMA with Survey data from Deloitte/Grimaldi 2022.
The public sector could benefit from a simplified MSE insolvency regime because it
reduces the costs of judicial review. MSEs that already have insolvency proceedings
opened (or will open them in the future) before the court under the ordinary procedure
would switch to a more alleviated and quicker one, economising judicial capacity. For
example, the introduction of an MSE regime in France in 2019 aimed to reduce the time
of judicial review from more than two years to one; cost savings could be proportional to
the expected time shortening. Member States may also realise cost savings by using their
existing electronic auction platforms for seized assets to sell assets of insolvent estates to
foster quick and cost-efficient realisation of proceeds. The creation of cross-border links
between these auction platforms would enlarge the potential bidder base and therewith on
the proceeds that can be realised. The new regime may also allow for a possibility for
MSEs to have a full debt discharge in an out-of-court setting, e.g. before competent
administrative authorities, with faster and cheaper procedures.
Furthermore, the introduction of a simplified regime for MSEs will not necessarily lead
to a higher number of insolvency cases by micro enterprises across all Member States.
For example, it has not been observed in France since 2019, following its introduction.156
It is, however, likely to increase the case load in those Member States that practice to
reject applications for opening insolvency proceedings because of a lack of assets in the
insolvent estate. Deloitte/Grimaldi (2022) reported that some “Member States do not
even open (i.e. Austria, Germany, Greece and Italy) or immediately terminate
156
The estimates in Annex 4, Section 4.1 show a negative correlation between business exits and the
recovery rate, suggesting that there may be fewer business exits in a more efficient insolvency regime.
52
proceedings (i.e. Belgium and Spain) if the debtor does not have sufficient resources to
cover at least the proceedings’ expenses.” In Germany and Austria, it applies to about
30% of the cases.157
Annex 3 provides some numerical estimates about the potential effect of the introduction
of an MSE regime on judicial capacity under the assumption of a proportional increase in
the case load for judges and no cost savings from other measures. The scenario analysis
suggests judicial costs could vary between EUR 900 million up to a maximum of EUR 2
billion. The underlying calculations and assumptions are further detailed in Annex 4,
Section 3.2. Nevertheless, key assumptions underlying these calculations are highly
uncertain. Some aspects of the impact on the judicial capacity remain to be impossible to
quanify.
The calculations do not incorporate two mitigating effects of the MSE regime that should
reduce costs for the public sector. First, even when insolvency proceedings are not
opened for MSEs due to a lack of sufficient assets, a judge still has to establish that the
conditions of opening are not met and take the decision to refuse the opening of
insolvency proceedings. These steps generate judicial costs, although they usually are
lower than those of opening and conducting a full-fledged insolvency proceeding.
Second, the opening of insolvency proceedings concentrates the handling of all claims
against the debtor in the insolvency proceedings and makes it therefore inadmissible for
creditors to enforce their claims through individual enforcement actions. If insolvency
proceedings are not opened, individual creditors can and often go to court anyway to get
a judgment that in reality may only become enforceable when the MSE has assets again.
Courts therefore often have to deal with multiple proceedings on claims by creditors
against the insolvent business, negatively impacting the available judicial capacity in a
Member State. These effects are likely to mitigate significantly or even outweigh
completely the additional costs (i.e. a possible negative impact on judicial capacity) from
the new MSE regime. Finally, even in case the introduction of the MSE regime increases
(which is not certain) costs for the public sector due to the impact on judicial capacity,158
it will have a positive impact on the economy and growth overall due to earlier discharge
of failed debtors.
Annex 4, Section 3.2 attempts to identify which Member States’ judicial capacity could
be particularly vulnerable to a higher caseload. The assessment uses two metrics of
judicial efficiency – clearance rates and time of non-criminal court cases159
. It is assumed
that Member States with a currently already low clearance rate and longer duration of
insolvency cases are likely to experience even more difficulties in coping with the
consequences of introducing the MSE regime, notably if the latter leads to more
insolvency cases to be brought before courts. Based on these metrics, Cyprus, Ireland,
Spain and Malta were identified as the Member States that would potentially be the most
exposed to a possible negative consequence from the MSE regime on their respective
court capacity. Spain has, however, just introduced a special shortened insolvency
procedure for micro-companies with a value of less than two million euros or with fewer
157
See Annex 4, Section 3.2.
158
The costs of an MSE regime depend on the number of MSEs that use an insolvency procedure relative
to those that are closed without an insolvency procedure. The costs to the public sector also depend on the
share of assetless MSEs that use an insolvency procedure, see Annex 4, Section 3 for assumptions and
estimates of quantitative effects.
159
The indicators were taken from CEPEJ (2022), which is underlying the EC Justice Scoreboard.
53
than ten employees. Since this procedure is already available also for microcompanies
with no assets, the EU MSE regime is unlikely to lead to a further significant impact
(beyond that from the implementation of the national regime) on its judicial capacity.
In addition to the costs for the public sector from a possible increase in insolvency
proceedings, the public sector would also incur limited additional costs from developing
the tools for better transparency on the features of insolvency regimes and insolvency
triggers.160
Since the basis for such tools is already available on the e-justice platform, it
should be possible to achieve it without considerable additional investments. It is
estimated that the development of factsheets for better transparency in all EU Member
States may cost from EUR 67 000 to EUR 90 000.161
These costs are mainly of a one-off
nature and are likely to be by far outweighed by reducing the economic cost of legal
uncertainty, such as a lower (than could otherwise be) level of cross-border investment
and the need to procure expensive legal advice in the vicinity of insolvency.
6.1.3. Measures targeting the distribution of recovered values
Well-defined rules about the role of creditor committees and transparency about the
ranking of claims would reduce the costs associated with deciding on how the recovery
value should be distributed among the creditors. They may have little impact on the role
of debtors. Nevertheless, as these rules could reduce the costs of negotiations with
creditors, both the debtor and the insolvency practitioner tasked with the liquidation of a
company would be expected to see their costs reduced.
Creditor committees allow creditors to cooperate and more effectively coordinate their
decisions, which is important given that multi-creditor lending relationships are common
in the EU. Creditors may have different views about the best way forward, face collective
action problems and can generate holdout problems that may prevent the insolvency
practitioners from achieving an agreement that maximises the collective interest of all
creditors. Clear rules on the role of creditor committees reduce the time and costs to find
common solutions, which reduces the risk of holdout problems and may increase the
recovery value. The survey by Deloitte/Grimaldi (2022) asked insolvency experts
whether EU rules on creditor committees could yield time savings: almost two thirds of
those who voiced a view on this agreed. According to the respondents, the presumed
reduction in time thanks to creditor committees could amount to 1.4%.
While creditor committees ensure that the common interest of creditors is adequately
protected, representation in creditor committees is more costly for cross-border creditors
and their bargaining with other creditors is more complicated. Hence, similar (i.e. more
aligned) and efficient rules on key aspects of powers and roles in creditors’ committee
can help especially cross-border creditors to exercise their rights and lead to a fairer
treatment, thereby making cross-border lending more attractive and further reducing the
cost of capital for companies.
More transparency on insolvency rules partly compensates for the difficulties for cross-
border creditors arising from language barriers, translation obligations and from being
less familiar with the position of other creditors. Especially the complexity of the
national insolvency rules pertaining to the ranking of claims may make the outcome
160
The provision of transparency on insolvency regime has the character of a public good. The non-rivalry
of information leads to a suboptimal degree of transparency when organised by private actors.
161
See Annex 3.
54
particularly difficult to anticipate for cross-border creditors. Transparency about the
ranking of claims means investors are better able to assess what part of the residual value
of the company will be distributed to them.
When a company is wound down, employees, tax authorities and other public authorities
including those administering the procedure often enjoy preferential treatment that puts
them above other creditors. Transparency on creditor ranking and common rules on the
role and powers of creditor committees would reduce tensions in the actual negotiations
with other creditors, while leaving the choice about the actual ranking to the Member
States. They are likely to lead to less disputes about the decisions of insolvency
practitioners and fewer reviews by courts of their decisions, which would be to the
benefit of both length and costs of insolvency proceedings for the public sector.
The role given to creditors’ committees in an insolvency regime is directly linked with
the roles attributed to other actors (courts, insolvency practitioners) – and altogether these
rules ensure the appropriate balance between the interests of creditors and debtors.
Common rules on creditors’ committees may therefore require the public sector to ensure
consistency with other laws governing property rights. This would lead to some
adjustment costs for the public sector.
Table 5 summarises key benefits and costs for the different stakeholders involved.
Table 5. Key benefits and costs, by stakeholder type – Option 1 (see also Annex 3)
Creditors
Cross-border creditors/
investors
Insolvent company
and directors (going
concern)
SMEs
Employees
Insolvency
practitioners
Public sector
Benefits
- Less assets being diverted from
the insolvency estate (indirect)
- Less costs for the lodging of
claims and participation to the
insolvency proceedings (direct)
- Value maximization of
distributable assets through more
effective tools (asset recovery,
directors’ duties, pre-packs,
direct)
- Better coordination among
creditors to maximise value
recovery and efficient distribution
(creditors committees, direct)
- Similar to domestic creditors
- Lower information and
learning costs (costs of
familiarizing themselves with
the rules of the foreign
regimes) through greater
transparency and comparable
factsheets (direct).
- Easier participation and
greater influence in
proceedings through
standardized rules on
creditors’ committees (direct)
- More certainty about
when the company is
insolvent (direct)
- Higher chances of
timely selling going
concern parts of its
business (indirect)
- Increased availability of
an orderly liquidation for
micro- and small
businesses in financial
distress
- Debt discharge for
entrepreneurs concerned
by the liquidation of
MSEs (automatic second
chance)
- Access to orderly
liquidation in asset-less
cases reduces MSEs
moral hazard (indirect)
- Higher chances
to preserve
employment for
going concerns
parts of the
business (indirect)
- Easier access
to asset tracing
registries
(direct)
tools to recover
value from asset
disposal (e.g.
avoidance
actions; direct)
- Shorter
insolvency
proceedings
overall
(indirect) and
for MSEs
specifically
(direct)
Costs
- In prepacks limited options for
involvement in negotiations
compared to standard
restructuring
- Familiarisation costs (likely
small or negligible)
- Higher liability of
directors may be reflected
in higher wage demands,
more difficult recruitment
of directors, company
procedures / information
flows or higher liability
insurance costs (indirect)
- Further internal
procedures and an
information flows to
enable due diligence in
case of a pre-pack sale
(indirect)
- Familiarisation costs
(likely small or
negligible)
- Higher liability risks for
directors and
entrepreneurs (indirect)
- Familiarisation costs
(likely small or
negligible)
- Negligible
- Increased costs
if MS decided
to finance the
treatment of
asset-less cases
through IPs
More
proceedings for
assetless MSEs
(indirect), costs
to establish and
maintain
transparency
tools (direct)
6.2. Benefits and costs of a comprehensive EU regime
6.2.1. Measures targeting asset recovery
Option 2 foresees a wider harmonisation of the asset recovery measures, beyond the
elements targeted in option 1 (transaction avoidance, asset tracing and directors duties)
than the targeted measures.
More specifically, in comparison to option 1, option 2 includes two additional ambitious
elements, which would allow for a more far-reaching insolvency reform at EU level:
directors’ duties and options for IPs to seize assets abroad. If directors are under the
obligation to consider the interests of the creditors alongside the interest of shareholders
(and may be held liable if they fail to do so), they face an incentive to take less risks in
their business decisions to avoid insolvency becoming a possibilility and initiate
proceedings earlier than without such liability. Whether this stronger incentive leads to
material changes in directors’ behaviour will depend on specific circumstances and is
likely to be different across companies and directors. It will also depend on the courts’
capacity to ensure effective enforcement. If creditors consider their interests better
protected uniformly across the EU, they would face lower transaction costs when
considering credit to entities in other Member States. The flip side of stronger liability
vis-à-vis creditors in the vicinity of insolvency are potential loyalty conflicts between
shareholders and directors that shareholders need to consider when appointing directors.
Better opportunities for insolvency practitioners to seize assets would facilitate their
work, speed up the recovery process and are likely to increase recovery values. Since
they currently face hurdles to act in cross-border insolvency cases, their empowerment to
asset seizures could significantly improve their efficiency. The stronger powers for
insolvency practitioners could also reduce the likelihood that transaction-avoidance
actions are carried out in the run-up to insolvency. Creditors would benefit from this
action, especially when engaged in credit to cross-border companies. Honest debtors
should not be negatively affected by these rules.
Overall, both these elements are likely to lead to a higher value recovery for investors,
including cross-border creditors, in the EU. Deloitte/Grimaldi (2022) interviewed
insolvency experts about their expectations regarding how an EU regime on the different
elements would impact on the costs of recovery and the time of insolvency procedures. A
large majority of the 120 respondent expects savings of cost and time from the
comprehensive harmonisation of the different elements. Their numerical estimates
suggest a significant improvement in the range 9-16%.
Table 6: Indications from insolvency experts about the impact of comprehensive harmonisation on the cost and time of
insolvency procedures as a result of EU rules in the different areas
Avoidance actions Asset tracing Directors duties Prepacks
Cost Savings
Approval rate+ 57.4% 60.0% 47.5% 58.3%
Amount in % 10.0 13.4 9.3 13.5
Time savings
Approval rate+ 54.1% 65.1% 46.7% 67.5%
Time of procedures in % 16.1 16.1 9.4 12.6
Note: + Share of the interviewed 120 insolvency experts that indicated the measure would lead to a decline
in costs or time. % values are calculated as weighted average of the mean of the ranges indicates. They
show by how much % the average insolvency expert thinks costs or time would decline. See Annex 4 for
full numbers and more details.
Source: FISMA with Survey data from Deloitte/Grimaldi 2022.
57
However, at the same time, both elements are also likely to be much more difficult to fit
into the existing legal orders of the Member States, potentially causing frictions with
other areas of national law. For example, the redirection of directors’ duties from
shareholders to creditors would conflict with the existing provisions in company law in
Member States. Addressing these issues would lead to follow-on costs for the public
sector because it would need to restore the consistency with these parts of national law.
Furthermore, it is likely to lead to certain legal uncertainty, at least at the beginning (until
the relevant aspects of national law are fully clarified and jurisprudence of the court is
settled), and adjustment costs in companies if shareholders want to appoint different
directors in anticipation of possible loyalty conflicts. This would lead to costs for
companies and creditors who would have to revert to expensive legal advice. The
insolvency specialists in the expert group advised that these costs could be substantial
and may thus outweigh the incurred cost savings.
Respondents to the public consultation were on average as supportive to a clarification
that directors should secure the interest of creditors in the vicinity of insolvency as to the
introduction of an obligation to file for insolvency.162
They were less supportive to
introducing minimum standards at EU level that lead to the establishment of liabilities
for directors.163
The public sector and the stakeholder groups that represent potential
debtors and creditors, i.e. non-financial and financial business, expessed the most critical
view on the establishment of liability for directors, whereas insolvency practitioners and
researchers were most supportive of such a measure. Although the public consultation
did not explicitly ask for views on asset seizure, stakeholders that replied to related
questions expressed stronger support for the less intrusive powers for insolvency
practitioners.164
The public support for harmonisation in this area may therefore be
limited. Responses from public authorities and non-financial corporates on the debtors’
side were most critical, while those from research and financial corporations on the
creditors’ side were on averge more supportive of more intrusive measures.
6.2.2. Procedural measures
In addition to the improvements to procedural rules foreseen in option 1, option 2 would
seek to align across the EU the test for the insolvency trigger. By establishing a point
when the company can no longer procrastinate the start of the insolvency procedure, a
liquidity trigger would bolster recovery values. A common test would ensure a timely
insolvency start over the debtor’s estate across the EU, removing differences across and
inefficiencies in some Member States. In practice, it would harmonise the notion of
insolvency that would introduce a harmonised reference point also for other elements of
the insolvency regime, including for determining the scrutiny period for avoidance
actions.165
162
Two thirds of the respondents supported “A clarification of the focus of duties of the director when a
company is near to insolvency or is actually insolvent to look at the interests of the creditors”. Two thirds
also supported “A duty of the director, once the company is insolvent, to file for the appropriate insolvency
proceedings”.
163
Half of the respondents supported this.
164
More than two thirds of respondents supported powers to compel the production of books and records
and to conduct audits compared to one third that supported search orders or the duty to report suspicious
transactions to law enforcement authorities.
165
It could also play a role outside insolvency procedures for example in state aid procedures that could
benefit from a harmonised determination of firms in difficulties.
58
It follows from the broader scope that cross-border creditors would benefit more from a
harmonised insolvency trigger than from the mere provision of transparency about the
multitude of triggers across the EU Member States (foreseen under option 1). Since
differences in insolvency triggers are sizeable at present, such harmonisation can
generate sizeable savings for cross-border investment on information, learning and legal
advice. Researchers and consultancy services supported overproportionally the
harmonisation of insolvency triggers in the public consultation. Public authorities and
stakeholders representing non-financial business were the least supportive.166
Two thirds
of respondents to the public consultation favoured a liquidity criterion.167
The support
was spread evenly across all stakeholder groups, except for respondents from the public
sector, who favoured the combination of two triggers (a liquidity criterion complemented
with a balance sheet criterion).
While a harmonised trigger reduces uncertainty to creditors and in particular to cross-
border creditors, by removing discretion, in certain cases it may also negatively affect
creditors. For example, financial institutions may need to write off in certain instances
credit positions on their balance sheet faster, which reduces their capital buffer.
Companies in those Member States that currently rely on an overindebtedness criterion
would now need to file earlier for insolvency under the common liquidity trigger. To
avoid that the trigger is enacted for technical (i.e. temporary), rather than structural (i.e.
long-term) problems, companies in these Member States would need to adjust their
business plans/cash flows to limit liquidity constraints, taking precautions for payment
modalities. This leads to additional costs for these companies.
Debtors (i.e. companies) would benefit from clarity on the insolvency trigger primarily in
the run-up to insolvency. An unclear trigger, where the court enjoys a considerable
degree of appreciation/discretion, creates a situation of legal uncertainty. Once the
liquidity threshold is breached, it inflicts reputational damage and will in many cases cut
off the company from new financing. This accelerates the need to wind down the
company and takes away (or considerably reduces) any possibility that it can remain a
going concern. The setting of a clear trigger for the start of the process that leads to the
liquidation of the company may, however, improve incentives for debtors to seek
solutions in pre-insolvency proceedings.
In the presence of a common liquidity trigger, both creditor and debtor would be able to
assess under which conditions an insolvency process starts, which should create
incentives for debtors to react pre-emptively as well as for creditors to seek solutions
before courts get involved. This helps avoid that the start of an insolvency procedure is
postponed until the companies’ position deteriorates so much that prospect of value
recovery is low.
The sizeable differences in insolvency triggers across Member States imply costs to
adjust to the new harmonised regime for debtors that have planned their business along
the existing rules and for investors that provided finance in the knowledge of the current
regime.168
Costs for companies would arise from the need to implement a more
sophisticated cash-flow management to contain the risk of liquidity shortfalls. These
166
Replies in the public consultation also show a clear geographical division. Stakeholders from Member
States in the North and West are on average less supportive than those in the South and East.
167
13% expressed a preference for a liquidity criterion in combination with a balance sheet criterion.
168
On the concept of the costs of legal change, see Van Alstine (2002).
59
adjustments would likely be transitory and could be mitigated through grandfathering
rules. While costs for stakeholders to adjust and to familiarise themselves with new
standards may not be negiligble, they are one-off costs and their importance declines
with time.
Nonetheless, the introduction of a common regime would mean a fundamental regime
change in those Member States that relied on a balance sheet criterion, i.e. where
insolvency was defined through overindebtedness. These Member States would also need
to address tensions with other parts of law, for example if the introduction of a liquidity
criterion would compromise property laws and constitutional freedoms. The reservations
expressed by Member States in the public consultations to a harmonisation of insolvency
triggers suggests the adjustment costs could be substantial. The adjustment costs reflect
the divergences across Member States in other parts of law, than financial or insolvency
laws, that govern how business is organised and contracts with other business entities are
concluded/governed. These are often ruled in substantial law with links to civil law or
constitutional law. Although it is not possible to provide a cost estimate for the ensuring
legal uncertainty and the costs of adjusting other laws, one of the few studies in this area
found that the costs of substantial changes to legislation is a multiple of those that change
rules on technical proceedings.169
6.2.3. Measures targeting the distribution of recovered values
In addition to the elements set out in option 1, option 2 foresees a partial harmonisation
of the ranking of claims.
Debtors would have broadly the same benefits and costs as in option 1. Additional
benefits to creditors accrue from enhanced clarity about the position of some privileged
creditors. Since clarity about the ranking of claims is crucial for creditors to determine
their recovery value, it is a key element of insolvency regimes from their perspective.170
Since it is rather common that little is left to an estate after the state’s claims have been
fully settled, an abolishment of the privileged treatment of tax claims would allow a
larger recovery value to be distributed to other unsecured creditors. Secured creditors
would also appreciate that their claims become less contestable by other creditors. Their
better protection should translate into a larger willingness to provide secured loans.
However, changes to the ranking of creditors would entail distributional effects, which
can be sizeable. The public sector would receive fewer revenues if tax claims are no
longer privileged. Moreover, applying the experience of the banking sector, a rising share
of secured credit can lead to asset encumbrance, implying less assets becoming
disposable in insolvency cases overall (and hence to other creditors).
Any harmonisation of parts of the ranking of claims that would allow creditors to better
and more easily assess, which share of the recovered value would be distributed to
creditors, would be of particular benefit to cross-border creditors. The increase in
transparency envisaged under option 1 would lead to a smaller reduction in their
169
The estimates by Ngiem et al (2012) suggest that the costs of creating substantial legislation is about 7
times higher than that of legislation that addresses technical issues.
170
Consistent with this view, de Guindos et al (2022) describe the ranking of claims, insolvency triggers
and avoidance actions as core elements of insolvency regimes of which the harmonisation “at best practice
levels” would facilitate cross-border investment.
60
information costs than the harmonisation of the privileges of certain creditors under
option 2. This should positively affect cross-border investment.
Consistent with this argument, financial stakeholders were over-proportionally
supportive towards harmonisation of the ranking of claims in their replies to the public
consultation. Researchers, consultancy services and financial stakeholders were the most
supportive while public authorities were the least supportive of the proposal. The
responses to the public consultation, however, showed no clear (i.e. across all stakeholder
groups) preference for which elements of the ranking of claims should be harmonised as
a priority.171
Stakeholders from the non-financial sector gave most support to secured
credit and those from the financial sector and business services to new finance. Both
correspond to their business interest as debtors, creditors and consultants, respectively.
Lawyers and insolvency practitioners expressed the highest support to shareholder loans,
followed by public claims. In contrast, 90% of public authorities responding to the public
consultation preferred to maintain the priority status of certain claims in insolvency
proceedings. Responses from public authorities were thus the most critical to the
harmonisation of the elements pertaining to the treatment of public claims than any other
stakeholder group.
171
About half of the respondents ticked all possibilities: claims of secured creditors, unpaid employees,
public claims, shareholder loans, new finance (multiple replies were possible).
Table 7: Key benefits and costs, by stakeholder type – Option 2 (incremental benefits/costs versus option 1
Creditors
Cross-border
creditors/ investors
Insolvent company and
directors (going concern)
SMEs
Employees
Insolvency
practitioners
Public sector
Benefits
- Less assets being diverted
from the insolvency estate
(indirect)
- Less costs for the lodging of
claims and participation to the
insolvency proceedings (direct)
- Better coordination among
creditors to maximise value
recovery and efficient
distribution (direct)
- Value maximization of
distributable assets through
more effective tools (pre-packs,
direct)- Less uncertainty on
identifying when the firm is
close to insolvency (direct)
- Lower information and
learning costs (costs of
familiarizing themselves
with the rules of the
foreign regimes) through
greater transparency and
comparable factsheets
(direct).
- Easier participation and
greater influcence in
proceedings through
standardized rules on
creditors’ committees
(indirect)
- More certainty about when the
company is insolvent (direct)
- Higher chances of timely sell
going concern parts of its
business (indirect)
- Increased availability of
an orderly liquidation for
micro- and small businesses
in financial distress
- Debt discharge for
entrepreneurs concerned by
the liquidation of MSEs
(automatic second chance)
- Access to orderly
liquidation in asset-less
cases reduces moral hazard
(indirect)
- Higher chances to
preserve employment
for going concerns
parts of the business
(indirect)
- Easier access to
asset tracing
registries (direct)
- More effective
tools to recover
value from asset
disposal (e.g. pre-
pack; tools to seize
assets across
borders, direct)
Higher tax
revenues from
higher
investment and
productivity of
the economy
(indirect)
Costs
- In prepacks limited options for
involvement in negotiations
compared to standard
restructuring
- Less flexibility to address
temporary liquidity problems
and to preserve going concern
(indirect)
- Familiarisation costs
(likely small or
negligible)
- Higher liability and litigation
(with shareholders) risks for
directors may be reflected in
higher wage demands, more
difficult recruitment of
directors, company procedures /
information flows or higher
liability insurance costs
(indirect)
- Further internal procedures
and an information flows to
enable due diligence in case of
a pre-pack sale (indirect)
- Need for better business
procedures to manage cash
flows (direct and recurrent)
- Familiarisation costs (likely
small or negligible)
- Higher liability risks for
directors and entrepreneurs
(direct)
- Need for better business
procedures to monitor and
manage cash flows (direct
and recurrent)
- Familiarisation costs
(likely small or negligible)
- Position in ranking
may be affected by
the change of ranking
of public claims as a
consequence of
harmonisation of the
latter (indirect)
- Financial losses
if IPs have to carry
the costs in cases
of asset-less
companies
Fewer public
revenues from
less favourable
treatment of
public claims
(direct)
Need to address
conflicts with
other pieces of
law (indirect)
The public sector would suffer from revenue shortfalls in those Member States where tax
revenues are currently privileged and would have to be deprioritised. This might
seriously affect fiscal revenues of a Member State with an insolvency backlog. At the
same time, a deprioritisation of public claims would support companies’ and in particular
SME’s access to finance since private creditors need to factor in that in case of an
insolvency, their claim will be junior to those of the public sector. In those cases where
the public sector steps in and pays employees’ due wages, a deprioritisation of public
claims would reduce the incentive for the public sector to support employees.172
7. HOW DO THE OPTIONS COMPARE?
7.1. Benefits and costs across the elements of insolvency regime
The introduction of the described measures under option 1 on avoidance actions, asset
tracing, directors’ duties, pre-packs target to preserve the best value of assets in a
liquidation case and would lead to a significant improvement over the base line. The
harmonisation of some key features of avoidance actions and directors’ duties and the
better asset tracing in cross-border cases would also provide assurances to cross-border
creditors and reduce their information costs. Some measures in the option are likely to
reduce the time of insolvency processes (e.g. pre-packs have a specific feature to allow
for a quick approval of the sale; better asset tracing possibilities (access to registers) will
also reduce the time to reclaim assets, MSE insolvency proceedings will be more
proportionate). Although these measures will lead to some adjustment costs for the
public sector, insolvency practitioners and companies, they should not be substantial
because the targeted elements under option 1 are not expected to produce major
inconsistencies with other areas of law.
A special regime for MSEs and transparency on insolvency triggers would increase the
recovery value because more MSEs would be subject to an orderly liquidation and faster
debt discharge. The MSE regime would be designed to deliver a shortening of the
insolvency process and decrease the costs incurred for MSEs, which would both improve
their situation compared to the baseline. This would also reduce debtors’ incentive to
procrastinate. Transparency on the insolvency triggers may not reduce the duration of the
proceedings, but would rather allow creditors and debtors to better anticipate the start of
insolvency and for creditors to better price the risks. These measures are likely to lead to
further costs for the judicial infrastructure dealing with an increased number of MSE
insolvency cases and to the public sector in charge of the production of comparable and
simple yet meaningful information on insolvency regimes. But such costs are expected to
be far outweighed by the benefits described above.
The primary target of more harmonised rules on creditor committees in option 1 and 2
and improved transparency on the ranking of claims in option 1 is to reduce legal
uncertainty and information costs for cross-border creditors relative to the baseline.
Creditor committees improve the articulation and representation of the interest of
creditors with a particular benefit for cross-border creditors. It is not evident whether
they would have an impact on recovery values. It is likely that they would have a positive
effect on the willingness of creditors to cooperate and thus possibly reduce the length of
172
Nevertheless, Directive 2008/94/EC, on the protection of employees in the event of the insolvency of
their employer, guarantees a minimum level of protection for employees which is not removable by
Member States.
63
the proceedings. While the production of the information for the transparency tool would
give rise to some (limited) administrative costs mainly of one-off nature, more
harmonised rules on creditor committees should not have any notable cost effects
compared to the baseline.
A comprehensive EU regime (option 2) on asset recovery measures would lead to further
effectiveness gains relative to the baseline because the additional elements on asset
seizure and directors duties may further increase value recovery and its speed relative to
option 1. The addition of asset seizure is likely to lead to a stronger impact than the
addition of fiduciary duties in option 2 relative to option 1. About 75% of the insolvency
experts surveyed in Deloitte and Grimaldi (2002) indicated a more than minor increase in
the efficiency of insolvency cases from access to cross-border registers for the purpose of
asset tracing. 173
The larger scope of option 2 would also contribute more to the reduction
of legal uncertainty and information costs for cross-border investors than under option 1.
The higher effectiveness with regard to the preservation of asset value and shorter
insolvency proceedings would make the market exit of firms less costly under option 2.
The more comprehensive coverage of elements in Option 2 would also contain the risk of
forum shopping more strongly than option 1, albeit the sparse evidence that this is a
material risk.174
New types of compliance costs would arise under both options compared to the baseline,
with comparatively higher compliance costs for option 2. The harmonisation of elements
at EU level would require that Member States undertake further legislative measures to
restore consistency with other pieces of law (in particular under option 2, where conflicts
with other areas of law are likely). In addition under option 2, courts would have to
provide timely jurisprudence on the general principle of shifting the fiduciary duties for
directors, at least in Member States where this principle has not existed so far. Some of
the measures would increase compliance costs for companies and insolvency
practitioners, which would have to comply with stricter requirements (more under option
2 than under option 1).
The more ambitious measure on insolvency triggers under option 2 may reduce legal
uncertainty and information costs for cross border creditors relatively more than under
option 1 and lead to earlier openings of insolvency procedures with positive effects for
asset recovery and the length of proceedings. Adjustment costs for stakeholders and costs
for the public sector to ensure that the harmonised insolvency trigger is consistent with
other areas of national law (company and property laws) would however be substantial
under option 2.
Since the ranking of claims is a major source of uncertainty, the inclusion of common
rules on the ranking of claims would have a more sizeable effect on cross-border
173
See Annex 4,Section 3.1. In the absence of data in the study by Spark and Tipik (2022) on tracing and
recovery of debtor’s assets by insolvency practitioners to estimate the effect of the broader and narrower
coverage on asset seizure and given comparable estimates by insolvency experts in Deloitte and Grimaldi
(2022) about the increase in efficiency accomplished by access to registers for the purpose of asset tracing
and more powers for IPs to trace and seize assets (see chart in Annex 4), it seems a conservative
assumption that the limitation to asset tracing in option 1 reduces the impact of by two thirds compared to
what insolvency experts expect to result from a comprehensive solution that includes asset seizure.
Regarding, directors duties, option 1 covers broadly two third of the elements of option 2, it is therefore
assumed for the numerical simulation that the absence of fiduciary duties reduces the impact of directors’
duties by a third.
174
See the Spark and Tipik (2022) study on forum shopping.
64
creditors’ legal certainty and information costs than the transparency requirements under
option 1, even if the harmonisation is limited to a narrow subset of the universe of
creditors. The impact of such reforms for Member States would nevertheless be sizeable
because the ranking of claims touches upon the central elements of property rights and
have strong implications on how the public sector will behave in the run-up to an
insolvency. Apart from the risk of foregone public revenues from the deprioritisation of
tax claims, the public sector may become less supportive of companies in distress, with
potential far-reaching consequences for broader economic performance.
7.2. Quantification of effectiveness
The Deloitte Grimaldi survey asked insolvency practioners to assess the impact of the
different measures on recovery values and time to recover. Table 8 translates these
estimates into changes to the recovery rate,175
using the EBA numbers for the average EU
recovery number and time to recovery as baseline. It is shown that the recovery rate
would increase by just under 2 percentage points under option 1 and almost 3 percentage
points under option 2 relative to the base line. The measures on asset recovery contribute
most to the higher recovery rate. Reductions in time and the saving of costs under options
1 and 2 are almost at par in their contribution to the increased recovery rate. Note, that
the difference in the effect between option 1 and option 2 is largely driven by the
underlying assumptions.176
Table 8: Induced changes to costs and time of recovery and resulting increase in the recovery rate
Asset recovery Insolvency
procedures
Distribution of
recovered assets
Sum
Option 1
Cost savings in % -28 -12 0 -36
Time reduction in % -31 -13 -1 -40
Induced increase in
recovery rate (%-pts) 1.02 0.38 0.02 1.42
Option 2
Cost savings in % -39 -12 -3 -49
Time reduction in % -44 -13 -5 -54
Induced increase in
recovery rate (%-pts) 1.56 0.38 0.13 2.07
Note: Assumptions are a recovery value of 40.4%, recovery time 3.4 years, judicial costs 1.4%, interest
rate 1.36%. For more details, see Annex 4, Section 3.
175
The present value of the recovered value net of judicial costs, see Annex 4, Section 3.1 for the formula
to calculate recovery rates.
176
The survey responses from insolvency experts could be read as the expected outcome of the most
ambitious policy option. Regarding the options on pre-packs, MSEs, ranking of secured claims and creditor
committees, the policy options are ambitious and therefore their indications were taken as a basis for the
estimate of the impact of their realisation on the recovery rate. On avoidance actions, it is conceivable that
more elements than suggested could be harmonised. Since the measure includes the core elements, an
estimate that the measure yields 2/3 of the indicated effect seems conservative. Since cross-border asset
tracing is a preparation to asset seizure, the table below assumes that the effectiveness of asset tracing
without asset seizure in option 1 yields only 1/3 of the effect. Regarding directors’ duties, option 2 is
encompassing, while the absence of a change in the direction of their interest from shareholders to creditors
should lead to a discount. It is assumed that the obligation to file for insolvency accounts for 2/3 of the
impact on the recovery rate.
65
7.3. Assessment of judicial efficiency and adjustment costs
The elements discussed under both policy options would improve the efficiency and
effectiveness of national judicial systems in dealing with insolvency proceedings, which
is in the scope of the initiative, addressing both the first general objective and specific
objectives. For example, an earlier start of proceedings (due to enhanced duties for
directors to file for insolvency) as well as better means to avoid asset misuse, and better
means to trace the already misused assets, should facilitate (and expedite) the work of
courts and insolvency practitioners. The creation of an MSE regime is the only measure
in this initiative that may lead to a possibly higher workload of courts. While these costs
may be substantial in some Member States, these costs could (at least in part) potentially
be outweighed by newly gained efficiencies of a more streamlined regime, which are,
however, not possible to quantify. Member States would also be expected to put in place
additional measures, using their discretion, to address a possible strain on court capacity
due to the MSE regime.
Other measures in the competence of Member States, that they may undertake
individually, or past measures already adopted, may further improve the efficiency and
effectiveness of national insolvency frameworks but are considered as out of scope
drivers. These could, for example, relate to setting up specialised courts (or court
chambers), dedicated exclusively to insolvency proceedings, or better training of
insolvency judges. In addition, there could also be additional measures that Member
States can take building on recent EU law setting out rules for insolvency practitioners
(e.g. on conflict of interest). Finally, any negative impact may be further mitigated by
ongoing wider improvements to court proceedings, such as the upcoming digitalisation of
the judicial system177
, as well as the ongoing efforts in Member States to improve the
efficiency of their judicial system.
Comparing the costs of the different options is difficult. Option 1 is expected to simplify
and shorten the insolvency process, and should hence reduce the costs involved. It,
however, requires that the public sector adjusts the existing legal provisions and
introduces transparency enhancing measures. The resulting costs for adjusting legislation
in principle should not be large.178
The introduction of the MSE regime may potentially
lead to a higher burden for the judicial system if the efficiency gains from a simplified
regime are outweighed by the costs from more MSE insolvency proceedings (which is
not certain). In this case, higher costs for the public sector would result from granting
acess to insolvency proceedings for assetless entities. Estimates of both costs to the
public sector and benefits to the broader society are included in Annex 3, which also
documents the assumptions used and the underlying uncertainty of the estimates.
It is expected that option 2 would lead to higher costs than option 1. All costs identified
under option 1 would also be relevant under option 2. Option 2, however, gives rise to
additional costs on top of those identified under option 1: the loyality conflicts between
directors and shareholders, possible legal disputes in cross-border asset seizure, the need
for implementation of more advanced cash-flow management by firms, short-falls for the
177
Proposal for a Regulation laying down rules on digital communication in judicial cooperation
procedures in civil, commercial and criminal matters; Proposal for a Directive aligning the existing rules
on communication with the rules of the proposed Regulation.
178
There is little data on the cost of producing legislation. A study on this topic is Ngiem et al (2012). It
identified average costs of USD 2.6 million for an act in New Zealand (adopted by Parliament) and USD
382,000 for producing a regulation in New Zealand (not adopted by Parliament), and USD 980,000 for bill
enacted by all US state governments.
66
public sector resulting from less fiscal revenue and rising asset encumbrance in insolvent
firms. Some of the measures considered under option 2, notably cross-border asset
seizure and a liquidity-driven insolvency trigger may lead to inconsistencies with other
areas of law in some Member States. This would likely create (at least initially) a
considerable degree of legal uncertainty (unlike in option 1) for stakeholders that the
public sector would have to address, thus incurring substantially higher (additional)
costs.179
This is the reason why option 2 scores lower that option 1 in terms of efficiency.
7.4. Coherence with national and EU law
Discussions with insolvency experts in preparation of this impact assessment helped
identify those elements, which focus on narrow and technical improvements to national
insolvency rules that do not interfere with broader legal systems in Member States and
the principles established in the EIR. Since option 1 is limited to these elements, it is
coherent with the Member States’ broader legal frameworks. The changes envisaged in
option 2 would possibly lead to conflicts with the fundamental principles in other pieces
of national law and necessitate costly efforts for Member States to resolve them. Option 2
therefore scores worse on coherency compared to option 1.
Both options are considered to be in full coherence with other EU legislation in this field,
notably the DRI and the EIR, and address problems, which this other existing legislation
does not tackle. The initiative instead focuses on the areas that were left outside the scope
of the DRI, i.e. the substantive insolvency law. The two options set out in the impact
assessment do not contain any changes to the areas that are affected by the
implementation of the relevant provisions of the DRI.
The initiative is coherent with the Environmental Liability Directive (ELD) and does not
impair the effectiveness of the ELD, which aims to limit the accumulation of
environmental liabilities and to ensure compliance with the ‘polluter pays’ principle.
ELD obliges Member States to take measures, including financial mechanisms in case of
insolvency, with the aim of enabling operators to use financial guarantees to cover their
responsibilities under ELD. These mechanisms aim to ensure that claims will be served
even in cases where the debtor becomes insolvent.
7.5. Synthesis
Table 9 synthesises the qualitative and quantitative arguments in an ordinal ranking of
the two policy options. Double or triple pluses or minuses were allocated when the
difference from the baseline was assessed as significant or very significant in line with
the reasoning in this section. They were allocated with the objective to accomplish a
ranking that is consistent across the different dimensions and sub-options of options 1
and 2. The effects of suboptions were aggregated because their effects cumulate. The
three dimensions of effectiveness were aggregated into an overall score through a simple
average, which implies an equal weight of each dimension. The overall score is the
balance of benefits (+) and costs (-).
The markings suggest that option 2 is superior to option 1 in terms of its effectiveness for
value recovery and reducing legal uncertainty and information costs. However, option 1
and option 2 rank (more or less) on equal terms in their effectiveness with regard to the
procedural efficiency and the distribution of recovery value, where advantages are
179
The estimates by Ngiem et al (2012) suggest that the costs of creating substantial legislation is about 7
times higher than that of legislation that addresses technical issues.
67
outweighed by some disadvantages. For example, more predictable triggering of the
insolvency procedure needs to be balanced against the disadvantage that the liquidity
trigger removes the scope for discretionary choices from the system. Furthermore, the
advantage of clarity on the ranking of public claims has largely a re-distributive impact
whereas the impact on information and learning costs might be small.
Overall, there are crucial trade-offs between the two options. Option 2 would be more
effective in tackling the long-standing divergences in insolvency regimes, while it would
carry higher costs and coherence issues for many Member States. In terms of
effectiveness, option 2 would lead to a greater improvement of recovery rates due to
more effective asset seizure and greater (overarching) liability for directors. It would also
lead to a greater reduction of legal uncertainty and information costs for cross-border
investors than under option 1 due to a targeted harmonisation of insolvency triggers.
However, option 2 would be more costly than option 1, as it would lead to
inconsistencies with the existing broader national legal systems which would imply large
costs for Member States and make this option more politically challenging. For example,
any harmonisation in relation to the ranking of claims in insolvency (even if limited to
the treatment of public sector claims, as proposed under option 2) would have wider
implications for the treatment of claims in general and raise broader issues of tax law as
well as of social security legislation. Therefore, the overall advantage of option 2 over
option 1 in terms of its effectiveness in achieving the objectives comes at the cost of cost-
efficiency and lower coherence. Option 1 allows to achieve the objectives at lower costs
and is more coherent with EU and national law, and is therefore preferred over option 2.
Table 9: Comparison of options
EFFECTIVENESS EFFICIENCY
(cost-
effectiveness)
COHERENCE Score
Objectives
Policy option
Preserve the best
possible value of assets
that are due for
liquidation
Support a
timelier
conclusion of
insolvency
proceedings
Reduce legal
uncertainty and
information costs
related to
insolvency
processes
SUM (each
objective
weighted
with a third)
Adjustment costs
Consistency with EU and
other national laws
Targeted measures (option 1)
3 3 5 3.66 -2 0 1.66
Asset recovery (avoidance
actions, asset tracing,
directors’ duties, pre-packs)
++ + ++ - ≈
Procedural measures: MSEs,
transparency on insolvency
features
+ ++ + - ≈
Distribution of recovered
assets (creditor committees and
transparency on ranking)
≈ ≈ ++ ≈ ≈
A comprehensive EU
insolvency regime (option 2) 4 3 7 4.66 -3 -3 -1.34
Asset recovery (avoidance
actions, asset tracing,
directors’ duties, pre-packs)
+++ + +++ - -
Procedural measures: (MSEs,
insolvency triggers) + ++ ++ - -
Distribution of recovered
assets (creditor committees and
targeted ranking of claims)
≈ ≈ ++ - -
69
The trade-off between benefits and costs also transpires in the views from stakeholders.
Although the average responses to the public consultation were biased by the
overrepresentation of German stakeholders, which gave a more sceptical view than those
from other Member States, the breakdown by stakeholder groups in Figure 8 yields
interesting insights. Researchers and representatives of business services, amongst which
most were from consultancy firms, voiced overall the most supportive view. Insolvency
practitioners were more ambitious in particular on some aspects of the reform (but not
all), whereas public authorities advocated for a more cautious approach in almost each
area. All stakeholder groups (except for public authorities) gave higher scores for the
existence of a problem than for the need of reform. Financial stakeholders were overall
supportive of more ambitious harmonisation than non-financial corporations, including
on the ranking of claims and the insolvency trigger (part of option 2). This is consistent
with the perception that the most visible benefits are likely to accrue to creditors while
benefits for debtors would be more indirect and less visible, such as better access to
credit.
Figure 8: Average reply by stakeholder group to the public consultation: In which area do you consider the insolvency
framework of the jurisdiction where you operate is to be reformed? Scale 0-5
8. PREFERRED OPTION
Based on the comparison of effectiveness, efficiency and coherence, option 1 is selected
as the preferred option. Option 1 delivers similar benefits to option 2 in terms of a shorter
duration of insolvency proceedings, although a somewhat lower impact on bettervalue
recovery. However, option 1 will accomplish the objectives in a more cost effective
manner than potion 2. The preferred option is both internally and externally coherent. In
terms of ‘internal’ coherence, the proposed measures fit together as they address various
key phases of insolvency proceedings180
and do so with the underlying policy objectives
in mind to improve the efficiency of the insolvency proceedings and increase the
recovery value.
180
Figure 2 shows that the measures address crucial steps in an insolvency proceeding.
70
The measures on transaction avoidance and on asset tracing mutually reinforce each
other in the maximisation of the value of the insolvency estate. This, combined with an
obligation of the directors to become active early and the possibility of maximizing the
value of the business at an early stage through pre-packs, makes the preservation of the
business as a going concern more likely. There is, in effect, a higher likelihood that a pre-
pack deal may actually materialise because there is more value and directors have a
strong incentive to take action earlier. The simplified regime for MSEs could be seen as
slightly less efficient than the rest, considering the potential impact on judicial capacity
that was discussed above. However, it would create clear benefits for both MSEs (
simplifying the review and debt discharge process) and creditors (leading to higher
recovery rates), which would improve the efficiency of the overall insolvency regime to
the benefit of the economy as a whole.
The preferred option is also externally coherent, by fitting well with previous EU
interventions in the area of cross-border insolvency (the EIR and of preventive
restructuring (the DRI). The EIR, in particular, covers the potential conflicts of laws (and
jurisdictions over the proceeding) arising in cross-border insolvencies. The preferred
option focuses instead on targeted harmonisation of measures for key areas of insolvency
proceedings, which were not addressed previously. It therefore complements the EIR and
other EU policy interventions taken over the years in the area. The comparison of options
in section 7 has considered this together with the coherence with Member States’ law
overall.
Economic impacts
In terms of economic impacts, the preferred option is expected to bring significant
benefits for creditors, companies, including SMEs, and the wider economy.
Creditors will benefit from expected higher value recovery arising from better
possibilities for IPs to counter transaction avoidance and trace assets, including across
borders, less asset deterioration from earlier and faster insolvency procedures and better
opportunities to use pre-pack sales. Creditor committees will also allow them to more
effectively coordinate their decisions. Cross-border creditors will further benefit from
higher transparency on key characteristics of insolvency regimes and ranking of claims,
which is expected to significantly reduce related information and learning costs.
Companies, especially those operating in a cross-border context, will face more uniform
conditions and lower legal uncertainty of what will happen if they become insolvent.
This sets incentives to act in time in case of financial turmoil, which increases their
chance of survival. For those firms that do not manage overcoming financial distress, the
more efficient framework should lead them to look for either preventive restructuring or
liquidation. They benefit indirectly from the higher chances of settling parts of the
business as going concern. Directors will face higher liability risks, which may lead them
to demand higher wages. The initiative should not lead to higher compliance costs in
general.
The initiative is expected to indirectly improve the competitiveness of the EU business
sector through better prospects to wind up zombie companies. This should contribute to
the reallocation of capital and labour to more productive means and hence have positive
impacts on the broader economy. Since better predictability of the outcome of insolvency
71
procedures fosters credit provision from domestic and cross-border actors, it facilitates
access to finance, which improves the competitive position of companies.
Insolvency practitioners will benefit from lower costs due to easier access to asset tracing
registries and better opportunities to recover value from asset disposal. There will be a
higher demand for their services due to more MSEs becoming orderly wound down.
Since a share of MSE are likely to be asset-less at the time of filing for insolvency,
insolvency practitioners may not be able to recover their expenses, depending on how the
treatment of asset-less cases will be financed.
In terms of magnitudes, the model scenario suggests that pursuing the preferred option
would reduce the cost of recovery by approximately 40% (in terms of relevant judicial
costs) and the time of recovery by 50% relative to present conditions. These benefits are
conditional on the good application in practice of the new rules and on that neither
limited capacity in courts and IPs nor IPs abuse of their enhanced possibilities impair the
performance of insolvency systems. Using the end-2021 interest rate as discount rate, the
average recovery rate would increase from 37.2% to 38.7%. This implies a non-trivial
improvement that results from more efficient public proceedings.
Taking the empirical estimates in Annex 4 and in the economic literature presented
therein at face value, a 1.5 percentage point increase in the recovery rate could translate
into a 1.5 basis point compression in debt funding costs and a 1.5 percentage point
increase in intra-EU cross border portfolio asset holdings181
. Further sizeable savings are
expected in information costs for cross-border investors from more harmonised rules
across Member States and from the transparency-enhancing measures.182
Since the
initiative addresses a major obstacle to capital market integration, the envisaged changes
are expected to lead to a non-trivial increase in cross-border investment on the single
market, with positive spill over to other policy measures under the CMU umbrella
towards this end. A full harmonisation of insolvency regimes that also includes the
insolvency trigger and the ranking of claims could deliver even larger gains in terms of
capital market integration, as set out earlier in this impact assessment.
Impacts on SMEs
The SME test concluded that this initiative is relevant for SMEs since the dominant part
of insolvency cases concern SMEs.183
The measures in this inititative would increase the
recovery rate for businesses including for SMEs. This would reduce risks for creditors
and would make financing for SMEs cheaper and more easily accessible (i.e. with less or
181
These numerical estimates result from combining coefficients and numbers from very different studies
that use different methodologies, data and terminologies on a best-effort basis. Considering that this
initiative addresses a very narrow determinant of cross-border capital flows and of the development of
capital markets, the effects seem sizeable, but remains realistic.
182
These are not measurable at present. Nor is it sensible to formulate a target value for recovery rates and
its components. Although some Member States perform much better than others in the EBA benchmarking
exercise, the lack of representativeness of the sample and its narrow focus on bank loans prevent using it to
establish broader numerical targets or to assess how the expected improvement in recovery rates compares
to such target.
183
While statistics about the size breakdown of insolvent firms exists only for few Member States, SMEs
represent at least 90% of the insolvency cases. See Annex 4, Section 3.
72
even no collateral), ceteris paribus. SMEs are even more likely to benefit from this as
they are inherently more risky and hence more likely to face insolvencies.
The SMEs would also benefit directly from the creation of special insolvency regimes for
MSEs that are more proportionate to their needs than the currently existing “one-size-
fits-all” proceedings. It should allow more MSEs to be wound down in orderly
procedures. Their improved access to orderly liquidation in asset-less cases reduces
moral hazard. Entrepreneurs concerned by the liquidation of MSEs can expect easier debt
discharge, which gives them a faster second chance.
The initiative does neither impose reporting burden nor compliance costs on SMEs. They
would need to familiarise themselves with the new rules if they approach the state of
insolvency. Under the assumption that most solvent SMEs are not familiar with
insolvency rules under the current regime, these information costs should not be
substantially higher than now (in fact they could be lower due to new transparency
measures put forward by the initiative).
Costs related to “one in, one out”
The initiative is expected to give rise to some costs, but no cost impacts related to the
‘one in, one out’ approach have been identified. Costs for businesses may arise from the
need to familiarise themselves with the new rules and indirectly as a result of the
increased liability for directors, but these are not of administrative nature184
Limited
administrative costs are expected to arise for the Member States with the production and
updating of factsheets providing greater transparency on national insolvency frameworks
(since they materialise for public sectors only, these costs are out of scope of the
Commission’s “One-In-One-Out” commitment). Those Member States that do not yet
have an electronic judicial auction platform would need to bear the cost of setting one up
and those Member States that have such platform, but do not use it for insolvency cases
would need to adapt them for the purpose of auctioning assets of MSEs.
Cost savings are overall expected for judicial system (insolvency lawyers and courts) as
some procedures set out at a Member State level will be made simpler. Only in the
second step, these will be passed on to creditors in the form of higher recovered value
and then to businesses in the form of cheaper (or more accessible) financing. Hence,
these costs savings, while potentially sizeable, do not count under the under
Commission’s “One-In-One-Out” principle. Similarly, the cost savings from a dedicated
simplified insolvency procedures for MSEs relate to the simplification of national rules
and not to administrative obligations under EU legislation and are therefore not counted
under the “One-In-One-Out” commitment.
Annex 3 further elaborates on expected benefits and costs.
184
These may include possible higher wage demands, more difficult recruitment of directors or higher
liability insurance costs. There may also be costs for reports to directors about liability risks and
information disclosure and costs about information disclosure when pre-packs are used. It was not feasible
to estimate the size of these costs, although they are expected to be moderate.
73
Environmental impacts
No direct environmental impacts and no significant harm, either direct or indirect, are
expected to arise from the implementation of the preferred option. The initiative may
have some indirect positive impacts on fostering the transition to a more sustainable
economy by reducing the share of zombie companies in the economy. This could enable
reallocation of capital and labour towards companies with a higher rate of innovation and
productivity and thus may indirectly contribute to accelerating structural change towards
more sustainable production. This effect would however be indirect and is not possible to
quantify. It also does not interfere with measures under the ELD. On the contrary, a more
efficient insolvency framework would contribute to a speedier and more effective
recovery of asset value overall and hence would facilitate the compensation of
environmental claims of an insolvent company even without having recourse to financial
security instruments, in full consistence with the aims of the ELD. With regards to these
claims, it would partially contribute to the predictability for investors and other
economic actors which is one of the objectives of the European Climate Law, though
greater transparency on the ranking of claims – and hence this initiative is considered to
be consistent with the objectives of the European Climate Law.
Social impacts
Employees are not directly impacted. The stronger incentives for entrepreneurs and
directors to avoid insolvency resulting from the higher predictability of the outcome of
insolvency procedures increases employees’ changes to keep their jobs in going concerns
parts of the business. The position in gone concern parts of the business is unchanged
relative to the baseline. Often, the government compensates employees for outstanding
wages and salaries. The incentive for the government to provide this compensation
should not be affected by the measures. No further significant social impacts are
expected.
Impact on Sustainable development goals (SDGs)
This initiative is expected to directly or indirectly contribute to the achievement of SDG
no. 8 (Decent work and economic growth), SDG no. 9 (Industry, innovation, and
infrastructure) and SDG no. 16 (Peace, justice and strong institutions). Annex 3 provides
more detail.
Digital by default
This initiative has slightly positive impact on digitalisation, arising notably though higher
degree of process automation in the simplified insolvency procedure for MSEs and use of
digital portal (e-Justice portal) to provide user-friendly information on the key features of
insolvency regimes and ranking of claims. Based on our assessment, it can be considered
future-proof.
External impacts
While this initiative does not specifically target third countries or their entities, creditors
from third countries are also expected to benefit from the measures. The benefits would
materialise through the same channels as for intra-EU creditors and also the magnitude of
the benefits should be comparable. As a result, more efficient and harmonised insolvency
74
regimes in the EU Member States could increase investment flows from abroad. The
impact on the financial and the current account is, however, not quantifiable without
recourse to a large set of economic assumptions.
Impact on fundamental rights
The preferred option respects the rights and principles set out in the Charter, in particular
those in Article 17 (right to property), Article 16 (freedom to conduct a business), Article
15 (freedom to choose an occupation and right to engage in work), Article 47 (2) (right to
a fair trial), Article 27 (Workers’ right to information and consultation within the
undertaking) as well as Article 8 (protection of personal data) and Article 7 (respect for
private and a family life). The free movement of persons, services and establishment
constituting one of the basic rights and freedoms protected by the Treaty on the European
Union and the Treaty on the Functioning of the European Union is relevant for this
measure.
The preferred option shall not have any negative impacts on fundamental rights since
most Member States recognize that the need to safeguard the rights of creditors must be
balanced against the rights of debtors and the general interest of saving companies and
jobs. Fundamental rights of right to property and right to an effective remedy and to a fair
trial are guaranteed under this preferred option. Overall, the impact on fundamental rights
will be neutral. Although certain elements may affect the right to property and the right
to an effective remedy and to a fair trial, safeguards will be foreseen in each case in order
to ensure that these are proportionate in view of attaining the objectives and respect the
rights and principles set out in the Charter of Fundamental Rights.
9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?
The proposal is expected to follow normal implementation procedures for directives. Ex-
post evaluation of all new legislative measures is a top priority for the Commission. The
Commission shall review the outputs, results and impacts of this initiative five years after
the legal instrument becomes effective.
The key indicators to measure the impact of this policy initiative in relation to the
selected objectives include recovery rates, recovery time and costs of insolvency
proceedings (as percentage of the recovered value). While separating the effect of the
initiative from external factors will arguably be challenging and will only be possible to
do in an evaluation, Commission services plan to create and monitor the following data
sources that could be useful for the review:
 Recovery values and time of recovery in the enforcement of bank loans will become
available from the insolvency benchmarking exercise, which the Commission
committed to undertake in the 2020 CMU Action Plan. Preparations for this exercise
are currently ongoing with the EBA. While this data is limited to bank loans, it is
certainly an important number considering that most of companies funding is
through (secured and unsecured) bank loans.
 New data on the length of procedures, and possibly the recovery rate and the size of
the debtors involved in such proceedings (medium, large or micro-enterprises), as
well as the outcome of the procedures opened will become available, following the
adoption of an implementing act under the DRI, which imposes reporting obligations
75
on Member States. It will allow the Commisison to analyse the length of insolvency
procedures, the breakdown of insolvencies for different sizes of companies and,
dependent on Member States’ ability to provide relevant data, recovery values and
job losses due to insolvencies. Notwithstanding the upcoming adoption of the
Commission proposal for the implementation act, it would, however, take at least
several years to collect the necessary time series to perform a robust analysis of any
impact.
 Surveys with insolvency and investors to gauge the effect of the different measures.
It can be envisaged to run a suvey among insolvency practitioners and experts akin
to the survey conducted by Deloitte/Grimaldi.
 The development of the number of insolvencies, credit volumes and costs and cross-
border capital flows and home bias in international investment based on the statistics
produced by Eurostat, ECB, EBA JRC and national actors (statistical offices and
court statistics). These data would then be used by the Commission to analyse the
impact of the intiative.
An evaluation is envisaged 5 years after the implementation of the measure and
according to the Commission's better regulation Guidelines. The objective of the
evaluation will be to assess, among other things, how effective and efficient it has been
and to recommend whether new measures or amendments are needed.
76
ANNEX 1: PROCEDURAL INFORMATION
1. Lead DG, Decide Planning/CWP references
Co-lead DGs: Directorate-General for Justice and Consumers (DG JUST) and
Directorate‑General for Financial Stability, Financial Services and Capital Markets
Union (DG FISMA)
Decide Planning: PLAN/2020/8631 – Initiative to increase the convergence of
substantive corporate (non-bank) insolvency laws
2. Organisation and timing
A Commission inter-services steering group (ISSG) was established in September 2020
for preparing the initiative. It was chaired by Directorate-General Justice and Consumers
(DG JUST) and was steered in close cooperation with Directorate‑General for Financial
Stability, Financial Services and Capital Markets Union (DG FISMA). The following
DGs and services participated at the inter-service group: Legal Service (SJ), Secretariat
General (SG), Directorate-General for Competition (DG COMP), Directorate‑General for
Economic and Financial Affairs (DG ECFIN), Directorate-General for Employment,
Social Affairs and Inclusion (DG EMPL), Directorate-General for Internal Market,
Industry, Entrepreneurship and SMEs (DG GROW), Directorate-General for Mobility
and Transport (DG MOVE), Directorate-General for Communication (DG COMM),
Directorate-General for Trade (DG TRADE), Directorate-General for Taxation and
Customs Union (DG TAXUD), Directorate-General for Structural Reform Support (DG
REFORM), Directorate-General for Environment (DG ENV).
Given the fact that the Insolvency initiative was included in the Commission work
programme 2022, the previous ISSG was replaced, in line with the Commission working
methods, with a new ISSG chaired by the Secretariat-General in November 2021. The
new ISSG had the same members.
The ISSG held so far three meetings:
on 14 September 2020, where it discussed and validated the inception impact assessment
report, the consultation strategy and the questionnaire to the on-line public consultation,
on 25 May 20201, where it discussed and validated the terms of reference of the external
economic study supporting the preparation of the Impact Assessment by the
Commission,
on 18 May 2022, where it discussed and validated the Impact Assessment report to be
submitted to the RSB.
On 7 September 2022, where it discussed how the comments by the RSB were
accommodated.
Another meeting of the Steering Group is scheduled to discuss and validate the
Commission proposal.
77
3. Consultation of the RSB
Before the finalisation of the Impact Assessment report, DG JUST and DG FISMA
received advice from the members of the Regulatory Scrutiny Board (“RSB”) at an
upstream meeting organised on 8 February 2022.
The Impact Assessment report was then examined by the Regulatory Scrutiny Board and
received a negative first opinion on 24 June 2022. The Board noted a lack of evidence of
how insolvency proceedings affect cross-border investment and considered the analysis
of divergences across Member States as insufficient. The Board also called for a better
articulation of the link of this initiative to the RDI and the EIR. It also missed an analysis
of the impact on the Member States’ judicial capacity, information on views of different
stakeholder groups, a more balanced assessment of options and a clear presentation of the
trade-offs. It asked for a more robust assessment methodology and transparency on
underlying assumptions.
The Commission services revised the impact assessment in accordinace with the opinion
received from the Board. More concretely, the Commission services further
substantiated, where required by the Board, the elements in the core text (including by
moving certain parts from the annexes), added more details about the Member States’
insolvency systems in the core text as well as added methodological clarifications to the
annexes. The analysis about the relationship between this initiative and the RDI, the
motivation and impacts of the policy options were deepened and the presentation of
methodological steps and trade-offs improved. Additional analysis was carried out on the
impact of the initiative on judicial capacity in Member States and on SMEs. The views of
various stakeholder groups in the public consultation were consistently added across the
core text of the impact assessment (in particular, in sections 5 and 6). Tables with details
about the Member States’ insolvency regimes were added to annex 5, the responses to the
public consultation to Annex 2 and an SME test in Annex 7. The table below presents a
point-by-point list of the RSB critcisism and how it was addressed.
RSB opinion on
shortcomings
Approach taken to resolve the shortcomings Addressed in
1a The report does not
provide sufficient
evidence of how
current insolvency
proceedings
negatively affect
cross-border
investment in the
single market.
There is a rich body of assessments/reports made by
international bodies, think tanks, expert groups that
analysed the impact of divergent insolvency rules on the
level of cross-border investment and market integration .
The authors moved upfront and made more visible the
evidence in this area stemming from reports of
international bodies/ empirical studies that show
insolvency proceedings are a crucial determinant of cross
border investment and market integration.
Section 1.1;
Annex 4,
Section 4
While there is no possibility to show direct empirical
evidence how strongly each problem driver holds back
cross-border investment and market integration, the survey
data allows to establish estimates by how much targeted
harmonisation of individual features would increase
recovery rates and reduce recovery time. This magnitude
now serves as illustration of how proceedings hold back
cross-border investment/market integration.
Tables 2 and
6; Section
7.2; Annex 4,
Section 3.1;
in particular
Table A4.9
The text also includes now a comparison of the importance
of insolvency rules as obstacle to cross border investment
Section 1.1;
Annex 4,
78
relative to other factors, identified by international
institutions.
Section 4.4
b It does not
convincingly
demonstrate why the
EU should act now
The initial draft downplayed the impact of the economic
downturn on the need to improve the economic adjustment
capacity through more harmonised insolvency proceedings
(as the forecast that insolvencies would increase once the
Covid support measures ran out, did not materialise). Since
the inflation pressure has mounted and the likelihood of
outright recession has further increased in the meantime,
these arguments were strengthened to underpin the
urgency. Latest economic studies suggest that efficient
insolvency rules have an important role in facilitating
economic adjustment (at times of
crisis/recession/recovery). This argument was made more
prominent.
Sections 1.4
and 5.1
c The analysis of how
divergent the
situation is in
Member States is
insufficient
More information on cross-country differences in
insolvency rules has meanwhile been added to the core
text. Furthermore tables with key characteristics of each
problem driver for each Member States were added to
Annex 5, using a study that was prepared for this purpose.
Moreover, examples from Member States have been added
to the description of problem drivers (i.e. which features of
the building blocks exist in which Member States).
Section 1.5;
Section 2.3;
Annex 5
2a The report does not
clearly set out the
articulation between
the initiative and the
2019 Restructuring
and Insolvency
Directive
The differences between the 2019 Directive on
Restructuring and Insolvency (DRI), EU Insolvency
Regulation (EIR) and this initiative are now more
extensively explained. It is made clear that the new
initiative covers elements that the DRI/EIR do not address,
since it will seek targeted harmonisation of substantive
rules on insolvency.
Section 1.5
and in
particular
Figure 2
b It does not clearly
identify the
remaining gap after
the latter is transposed
in July 2022.
The authors added a table that shows which parts of
insolvency rules are not harmonised with the EIR and the
DRI.
Section 1.5
and in
particular
Figure 2
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.
The impact assessment now clearly says that all measures
will contribute to make the insolvency regime more
efficient and therewith help Member States cope with
judicial capacity. The area where this is questioned by the
RSB is a simplified regime for micro and small enterprises
where the Board argued that the introduction of such a
regime could lead to higher costs in those Member States
that currently refuse opening an insolvency procedure if
MSEs have too few assets to pay for the legal costs. These
effects were explained more clearly in the impact
assessment and estimates produced to show the effects on
court capacity to the extent possible (the most exposed
Member States identified).
Section 6.1.2;
Section 7.3;
Annex 4,
Section 3.2
4a The report does not
provide a balanced
assessment of options
and is geared
towards the
preferred option.
The reasoning was strengthened and fine-tuned and the
presentation of how both options were selected has been
revised to render it more balanced. Stakeholder
perspectives on the different options were also included to
demonstrate that option 1 and option 2 would be favoured
by different stakeholder groups. Because of its higher level
of ambition option 2 is assessed as more impactful, but it
also generates additional difficulties and costs that were
more visibly indicated.
Section 5.2 ;
Section 6.2,
Chapter 7
79
b It does not present
clearly the trade-offs
that policymakers
face.
The text was made more explicit about the trade-offs.
Option 2 would be more effective, but at the expense of
higher adjustment costs and less coherence with the
fundamental legal principles in Member States. Legal
uncertainty during the adjustment time and higher costs for
restoring legal clarity are explicitly referred to.
Section 7.5
5a The report does not
present a robust
assessment
methodology nor sets
out clearly the
underlying
assumptions.
Assumptions were made more transparent and limitations
more clearly spelled out. The description of the assessment
methodology has become more transparent. The
presentation was modified by summing up the three
objectives into a single effectiveness criterion and by
splitting efficiency and coherence into two separate
criteria.
Section 7.1;
Section 7.3;
Section 7.5;
Annex 3;
Annex 4,
Section 3
b The SME test is
missing.
An SME test was added in an additional annex. The
description of the impact of an MSE regime on micro and
small firms was already covered in the relevant section of
the impact assessment.
Annex 7;
Section 6.1.2;
Annex 4,
Section 3
The RSB examined the revised impact assessment and issued a positive second opinion
on 10 October 2022 without reservations. The board noted that the impact assessment
substantially improved, following the second submission. The board only made a very
few suggestions for further improvements. Firstly, it suggested to detail more the analysis
of factors that are likely to affect court capacity. Secondly, it proposed to further
elaborate on the plans to collect data for future monitoring and evaluation. The final text
of the impact assessment accommodated these comments to the extent possible, by
adding additional detail on other factors that may influence court capacity and on data
collection.
4. Evidence, Sources and Quality
In the preparation of this impact assessment, DG JUST and DG FISMA consulted a wide
range of experts and stakeholders and used several different methods to gather evidence.
Evidence used in this impact assessment was gathered based on a Commission’s
consultation strategy, which included: (i) public feedback to the inception impact
assessment; (ii) an open public consultation; (iii) a meeting with stakeholders ; and (iv)
and a meeting with Member States representatives. (v) DG JUST and DG FISMA also
received expertise through a collaboration with the Commission Expert Group on
Restructuring and Insolvency Law consisting of both individual experts appointed in a
personal capacity (so called “Type A” experts) and experts appointed to represent a
common interest shared by stakeholder organisations in a particular policy area (so called
“Type B” experts). The Commission held nine meetings with the expert group between
April 2021 and January 2022, which helped to inform the development of policy options,
especially the legislative ones. The results of all these consultation activities are
presented in ANNEX 2 of this report.
DG JUST and DG FISMA also gained further insight into the subject of this report with
the help of available resources, such as existing literature, reports and studies. The
detailed list of these sources are to be found in the list of references at the end of this
report, the list below covers only those external studies, which the Commission itself has
launched for the purpose of preparing this initiative:
80
 Deloitte/Grimaldi (2022), Study to support the preparation of an impact assessment
on a potential EU initiative increasing convergence of national insolvency laws,
Draft Final Report, DG JUST, March 2022.
 Spark, Tipik, ‘Study on the issue of abusive forum shopping in insolvency
proceedings’, DG JUST, February 2022 (specific contract nr.
JUST/2020/JCOO/FW/CIVI/0160) .
 Spark, Tipik, ‘Study on tracing and recovery of debtor’s assets by insolvency
practitioners’ DG JUST, March 2022 (specific contract nr.
JUST/2020/JCOO/FW/CIVI/0172).
 European Commission, ‘Improving the evidence base on transfer of business in
Europe : annex C : case study on the cross-border dimension of business transfers,’
Executive Agency for Small and Medium-sized Enterprises, Publications Office,
February 2021, available at: https://data.europa.eu/doi/10.2826/94014.
 Stanghellini, Mokal, Paulus, Tirado et alii, Best Practices in European
Restructuring - Contractualised Distress Resolution in the Shadow of the Law ,
2018.
 Steffek, F., ‘Analysis of individual and collective loan enforcement laws in the EU
Member States’, DG FISMA, November 2019, available at
https://ec.europa.eu/info/publications/191203-study-loan-enforcement-laws_en.
 McCormack, G. et al., ‘Study on a new approach to business failure and
insolvency, comparative legal analysis of the Member States’ relevant provisions
and practices’, DG JUST, January 2016, available at
https://op.europa.eu/en/publication-detail/-/publication/3eb2f832-47f3-11e6-9c64-
01aa75ed71a1.
All of these external studies have deployed a variety of different methods for data
collection, including desk research, on-line public surveys (targeted or public), structured
interviews with stakeholders or validation workshops. In these studies data collection
encompassed all 27 Member States, and the analytical methods used were able to deliver
results in a representative manner, almost all studies are accompanied by national reports
per Member States.
In general, the report was based on solid theoretical understanding gained in particular
through desk research, collaboration with participants of the expert groups and research
and data collection by the external contractors of the studies mentioned above. Moreover,
many stakeholders have shown great interest and willingness to share their views through
the consultation activities described above. The report thus draws on that thorough
feedback. All EU jurisdictions were represented in the consultations.
With regard to the robustness of the data and information received, the quantitative and
qualitative nature of the meaures at hand, a detailed description can be read in Annex 4 to
this report.
81
ANNEX 2: STAKEHOLDER CONSULTATION
In line with its Consultation Strategy, the Commission carried out different and
complementary consultations of stakeholders.
The Inception Impact Assessment was published on 11 November 2020, and received
feedback from 26 stakeholders. Replies came in from various stakeholders from the
financial sector, some stakeholders from the trade and industry sector, from three central
governmental bodies (Portugal, Finland, Austria) and from different representatives of
the insolvency practitioners, among them from the European umbrella organisation of
insolvency practitioners (INSOL Europe). The feedback can be read on the dedicated
website of the Commission.185
An on-line public consultation was launched in order to receive input from all the
concerned stakeholders. The public consultation was launched on 18 December 2020 and
after an extension of the original consultation period by more than two weeks ended on
16 April 2021. 129 contributions from 17 Member States and from the UK were
submitted, with almost 45% of the responses coming in from Germany, more than 9%
from Italy, 8.5% from Belgium and equally 4.65% of the responses from the Netherlands,
Spain and Lithuania. One third of the replies were made on behalf of practitioners and
professionals with interest in the field of insolvency (this category includes insolvency
practitioners as well as lawyers). Approximatley 17% of the responses were submitted by
stakeholders in the financial sector, almost 12% by stakeholders from the business and
trade sector, 7% from social- and economic interest organisations and 5.5% from the
members of the judiciary (judges). In addition, 10 replies (7.75%) were received from the
public authorities of 8 Member States, with only 7 replies originating from the central
governmental level.
As to the substance of the responses, they were in general in favour of the initiative.
Stakeholders indicated that the problems created by differences in Member States’
insolvency frameworks to the further development of the internal market are reasonably
serious, and that differences in national insolvency frameworks deter cross-border
investment/lending. According to the perception of the stakeholders, the current
fragmentation affects the functioning of the internal market in particular with regard to:
1) avoidance actions; 2) the tracing and recovery of the assets belonging to the
insolvency estate; 3) the duties and liability of directors in the vicinity of insolvency and
4) how insolvency proceedings are triggered. Consequently, the overwhelming majority
of stakeholders were in favour of an EU action enhancing convergence in this policy
field (either in form of a targeted legislation /37.21%/, as a recommendation /23.26%/, or
as a combination of both /27.13%/).
As to the specific issues pertaining to insolvency law, there was widespread support
(81.4%) for minimum harmonization at EU level of the duties and obligations of
directors in the event of vicinity of insolvency or when the company is insolvent. Those
respondents flagged, in particular, that the most beneficial aspect of harmonization would
be to impose a duty on the director, once the company is insolvent, to file for insolvency
185
https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12592-Insolvency-laws-
increasing-convergence-of-national-laws-to-encourage-cross-border-investment_en
82
proceedings (70.54%). Similarly, there was widespread support amongst stakeholders for
harmonisation the various aspects vis-a-vis the duties, responsibilities and powers of the
IPs. With regard to the issue of ranking of claims, whereas certain areas of reform were
supported (i.e. abolishing the priority status of tax and other public claims), this section
saw a higher proportion of opposition to harmonisation. There was overall opposition to
the proposed harmonisation of so called ‘carve-out’ rules (a proportion of assets
recovered on the claims of secured creditors should be distributed to unsecured
creditors). A number of stakeholders felt that the financial position of employees in the
context of insolvency proceedings might be appropriately protected by enhancing the
protections available under employment law directives, in particular, by strengthening
the safeguards available under national wage guarantee funds. Furthermore, there was a
wider support for a more comprehensive harmonisation of avoidance actions,
encompassing the harmonisation of the different avoidance grounds, of the objective and
subjective conditions leading to avoidance, as well as the time periods prior to the
opening of insolvency which count as relevant for avoidance claims. Finally, respondents
spoke in favour of simplifying and improving the conditions of asset tracing and recovery
(e.g. 87% supported the idea that insolvency practitioners have full access to property
and collateral databases)
The Commission organized a dedicated meeting with a group of selected stakeholders
(on 8 March 2022). A workshop composed of selected stakeholders with particular
interest in insolvency proceedings. The selection has been made on the basis of the scale
of representation (stakeholders with European representation activity were invited).
Invitees included representatives of the financial sector, the business- and trade,
employees, practitioners and professionals working in insolvency proceedings, the
representatives of employees and consumers, as well as academic areas and think-tanks.
In the meeting, stakeholders proactively contributed by reporting on practical difficulties
resulting from the fragmentation or different performance output of the national
insolvency frameworks. They also expressed support towards a greater convergence in
the legal landscape of insolvency proceedings in Europe.
The preparation of the initiative was supported by the Group of experts on
restructuring and insolvency law. This Expert Group of the Commission consisting of
individual experts was set up originally for the preparation of the proposal leading to the
Directive on Restructuring and Insolvency. This time, the group was extended with 10
individual experts appointed as representatives of a common interest shared by
shareholders in a particular policy area (the interest groups represented were financial
creditors, trade creditors, consumer creditors, employee creditors, insolvent or over-
indebted debtors). Between April 2021 and January 2022, the expert group held nine
meetings. The detailed list of experts, as well as the meeting reports are available in the
Register of Commission expert groups accessible on
https://ec.europa.eu/transparency/expert-groups-register/screen/expert-
groups/consult?do=groupDetail.groupDetail&groupID=3362.
In connection with the preparation of the proposal, the Commission launched and carried
out two external studies dealing with specific areas of insolvency. Both studies were
carried out by a consortium consisting of Tipik and Spark Legal Network. The first one,
assessing abusive forum shopping practices in insolvency proceedings after the 2015
amendments to the EIR addresses also the question to what extent differences between
83
national insolvency frameworks serve as incentive for stakeholders to abusive forum
shopping. The second study is dedicated to the analysis of the subject of asset tracing-
and recovery in insolvency proceedings. Both studies included empirical analysis, for
which data collection by the contractor involved both public on-line surveys and
structured interviews with a range of stakeholders from all Member States of the EU.
Both studies are available at the website of the Commission.
The Commission also consulted Member States in several iterations throughout the
preparation of the proposal. The initiative has been addressed several time by the finance
ministers of the Member States, where support was expressed towards the initiative. The
Council Conclusions (ECOFIN) of 3 December 2020 on the Action Plan186
encouraged
the Commission to deliver on this initiative. These Conclusions were confirmed by the
Euro Summit statement of 11 December 2020.187
In April 2021, ministers of the
Eurogroup area concluded that national reforms of insolvency regimes shall progress in
coherence with parallel work streams led by EU institutions, which were undertaken in
the CMU Action Plan188
. Similarly, the statement of the Euro Summit meeting of 25 June
confirmed that “structural challenges to the integration and development of capital
markets, particularly in targeted areas of corporate insolvency laws, need to be identified
and addressed”.189
At the same time, given the close link of insolvency laws to other areas of national law
(such as property law and labour law), and the differences concerning the main policy
objectives of insolvency law, seven Member States sent a joint letter to the Commission
to express reluctance to engage in substantial harmonisation discussion. Two others have
separately expressed the same reluctance.
On 22 March 2022, the Commission organised a workshop with the governmental
experts of the Member States in connection with the upcoming initiative. Here, Member
States underlined the need for a deep and detailed problem analysis, as well as the
importance of having a clear diagnosis of the actual practical problems, their scale, on the
scope of stakeholders affected by them and on their actual impact on the internal market.
Similarly, as to the nature of a future action at European level, these Member States
reiterated their words of caution, and suggested that measures shall focus on the
improvement of efficiency of insolvency proceedings.
186
Council Conclusions on the Commission’s Action Plan, doc. nr.12898/1/20 REV 1.
187
Doc. nr. EURO 502/20.
188
See Commission’s note for the discussion at https://www.consilium.europa.eu/media/49192/20210416-
eg-com-note-on-insolvency-frameworks.pdf, The summing-up letter of the discussion is available at
https://www.consilium.europa.eu/media/49366/20210416-summing-up-letter-eurogroup.pdf
189
Doc. nr. EURO 502/21.
84
Appendix to Annex 2: Summary report – online public consultation
1. INTRODUCTION AND OVERVIEW OF RESPONDENTS
Discrepancies in Member States’ national insolvency laws create barriers to the free
movement of capital in the internal market. Such discrepancies, in particular, make it
more difficult to anticipate the outcome for value recovery in cases of insolvency. In
2015, the Commission concluded in its original Action Plan for a Capital Market Union
that “convergence of insolvency and restructuring proceedings would facilitate greater
legal certainty for cross-border investors and encourage the timely restructuring of viable
companies in financial distress”.
Although minimum harmonisation rules were set out by the Directive on Restructuring
and Insolvency (Directive (EU) 2019/1023), significant differences continue to exist in
core areas of insolvency law, such as a common definition of insolvency, the conditions
for opening insolvency proceedings, the ranking of claims, avoidance actions, and the
identification and tracing of assets belonging to the insolvency estate.
The present initiative complements the Directive on Restructuring and Insolvency and
thus focuses on aspects of insolvency laws not addressed there.
This public consultation helped prepare this initiative by gathering the perception and
views of affected stakeholders on a range of issues including: the liability and duties of
directors of companies in the vicinity of insolvency; the status and duties of insolvency
practitioners; the ranking of claims; avoidance actions; identification and preservation of
assets belonging to the insolvency estate; core procedural notions.
Figure A2.1: Respondents to the Public Consultation questionnaire by group
Academic/resea
rch institution…
Business
association
15%
Company/bus
iness
organisation
8%
EU citizen
23%
Non-
governmental
organisation
(NGO)
15%
Public
authority
8%
Other
23%
85
Figure A2.2: Size of organisations that responded to the questionnaire
Figure A2.3. Country of origin of responses, overall
2. OUTCOME OF REPLIES
2.1. Fragmentation of insolvency frameworks and the need for greater
convergence
Stakeholders indicated that the problems created for the internal market by differences in
Member States’ insolvency frameworks are reasonably serious, and that differences in
national insolvency frameworks deter cross-border investment/lending. According to the
perception of the stakeholders, the fragmentation affects the functioning of the internal
market in particular with regard to 1) avoidance actions; 2) the tracing and recovery of
the assets belonging to the insolvency estate; 3) the duties and liability of directors in the
vicinity of insolvency and 4) how insolvency proceedings are triggered. Consequently,
the overwhelming majority of stakeholders were in favour of an EU action enhancing
0
5
10
15
20
25
30
35
Micro (1-9) Small (10-49) Medium (50-
249)
Large (250+) No answer
0
10
20
30
40
50
60
70
86
convergence in this policy field (either in form of a targeted legislation /37.21%/, as a
recommendation /23.26%/, or as a combination of both /27.13%/).
Figure A2.4 – Assessing the scale of problems posed by differences in insolvency frameworks in the
internal market. Replies in % to “Do differences in corporate (non-bank) insolvency frameworks in EU
Member States pose a problem for the functioning of the internal market?” where 0 means 'no problem'
and 5 means 'extremely significant problems'
The majority of stakeholders were in favour of the introduction of legislation, either
alone or in combination with a recommendation.
2.2. Directors’ liability in the vicinity of insolvency proceedings, disqualification
of directors
There is widespread support (81%) for minimum harmonization at EU level of the
duties and obligations of directors in the event of vicinity of insolvency or when the
0
5
10
15
20
25
30
35
40
0 1 2 3 4 5 No answer
Figure A2.5 – Preferred measures to take at EU level, overall in % of respondents
Targeted
harmonisation
through legislation
Recommendation Combination of both No measures No answer
0%
5%
10%
15%
20%
25%
30%
35%
40%
87
company is insolvent. In particular, the most beneficial aspect of harmonization
would be to impose a duty on the director, once the company is insolvent, to file for
insolvency proceedings (71%).
Figure A2.6 – On the minimum harmonisation of Directors’ duties. Replies to “should there be any minimum
harmonization at EU level on the duties and obligations of directors in the event of vicinity of insolvency or when the
company is insolvent?
2.3. Insolvency practitioners
Overall, a majority of stakeholders felt that the following areas would benefit from
harmonization at EU-level: 1) The licensing and registration of IPs (53%); 2) Their
regulation, supervision and enforcement of professional obligations (51%); 3) The
qualification and training of IPs (56.59%); 4) the appointment system of IPs (50%); 5)
work standards and ethics (54%); and 6) the legal powers and duties of IPs (51%).
There is considerable support for a set of principles190 laying down parameters for
the qualifications of insolvency practitioners/insolvency office holders to guide their
performance of their function, with all proposed principles gaining at least 66%
support. These overlap with the areas named above, but also include the remuneration of
IPs, and that IPs should be subject to a duty to keep all stakeholders regularly informed
of the progress of the insolvency case.
2.4. Ranking of claims
While certain areas of reform were supported in relation to the ranking of claims (i.e.
abolishing the priority status of unpaid taxes), this section saw a higher proportion of
opposition to harmonisation. There was overall opposition to the proposed
harmonisation of carve-out rules and of rules protecting ‘new-financing’. Over one-
third of academics and half of the public authorities felt that no harmonisation of
insolvency law is needed regarding the position of employees in the event of insolvency.
A number of stakeholders felt that the financial position of employees in the context of
insolvency proceedings might be appropriately protected by enhancing the protections
190
[1] See details in University of Leeds, “Study on a new approach to business failure and insolvency“, p.
78. https://op.europa.eu/en/publication-detail/-/publication/3eb2f832-47f3-11e6-9c64-
01aa75ed71a1/language-en
88
available under employment law directives, in particular, by strengthening the safeguards
available under national wage guarantee funds.
Figure A2.7 – Less than 50% support for reform in most aspects of the rules on ranking claims- % of replies to
“According to your opinion, which aspect of the rules on the ranking of claims would benefit most from a
harmonization at EU level?” ˙(Multiple replies were possible.)
Figure A2.8 – On abolishing the priority status of unpaid taxes- % of replies to “Do you agree that the priority status
of unpaid taxes and other public contributions in the context of insolvency proceedings shall be abolished at EU level?
2.5. Avoidance actions
There is support for harmonized rules on avoidance action in relation to the
following transactions: 1) preferences (transactions benefitting one creditor to the
detriment of the general body of creditors); 2) transactions at an undervalue, including
gifts to a creditor or third party; 3) securities created in the ‘suspect period’ in order to
convert a debt from being unsecured or being secured (invalidation of securities); and 4)
transactions to defraud creditors. Support for harmonizing the above transactions was
particularly strong in the business, financial and academic sectors.
All stakeholder groups showed support for all of the proposed subjective criteria to
be used as possible conditions to qualify a transaction as avoidable action (under
0
10
20
30
40
50
60
70
80
90
100
Yes, tax and other
public law claims shall
be put in the category
of general unsecured
claims.
Yes, tax and other
public law claims shall
be treated as claims by
involuntary creditors.
No, it is important that
Member States may
maintain the priority
status of such claims in
insolvency proceedings
No answer
89
“subjective” criteria the questionnaire listed conditions which involved the subjective
knowledge/awareness of the debtor/beneficiary on the real nature of the transaction).
Also, the use of objective criteria was supported. The most popular objective criteria
were that: 1) The transaction happened within the ‘suspect period’ (77%); 2) the
transaction is to the detriment of the general body of creditors (70%); and 3) the
debtor was insolvent at the time of the transaction (53%).
The majority of stakeholders (74%) agree that the ‘suspect period’ should be harmonized
at EU level, as shown below.
Figure A2.9 – On whether the ‘suspect period’ should be harmonised, replies to “Should the time-periods before the
opening of insolvency proceedings in which a transaction must have been entered into for it to be avoidable (the
“suspect period”) be harmonized at EU level?
A majority of stakeholders also support common rules on specific time-limits:
Figure A2.10 –time-limits for suspect period proposed by respondents
Transaction type Length: General Where connected
party involved
Preferences One year One year
Undervalued transactions/gifts One year/Three years Three years
Transactions to defraud creditors Five years Five years
2.6. Harmonising procedural issues concerning formal insolvency proceedings
There is support for a harmonised definition of insolvency, with the notable
exception of public authorities. The most popular proposed definition of insolvency is
based on a liquidity test (see Figure A2.12). There was reasonable overall support for
harmonised rules on how insolvency proceedings are opened, especially amongst
practitioners. All stakeholders were strongly in favour of the idea that such rules provide
creditors with a right to file for insolvency and oblige an insolvent debtor to apply for
insolvency. While all stakeholder groups showed a majority support for harmonising the
national rules on the time limits for creditors to lodge their claims, no clear majority
emerged on a specific time limit.
74%
19%
7%
Yes
No
90
Importantly, stakeholders underlined that the national insolvency registers and the
interconnectivity of national insolvency registers at EU level are not functioning
properly.
71% of stakeholders suggested that there should be harmonised rules on judges’
minimum training requirements or professional qualifications (see Figure A.2.13). In
addition, there was overwhelming support (84%) for Member States to designate
specialised insolvency chambers at the appropriate court instances to increase the
efficiency of insolvency proceedings (see Fig. A2.14).
Figure A2.11: Responses to “Should there be a
harmonised definition of insolvency at EU level?”
Figure A2.12: Responses to “What should the definition of
insolvency be based on?”
Figure A.2.13: Rules concerning judges I: Resposes
to: Should the rules on minimum training
requirements/professional qualifications for judges be
harmonised at the EU level?”
Figure A.2.14: Rules concerning judges II: 9: Responses to
“Would it contribute to the efficiency of insolvency
proceedings if Member States designated specialised
chambers at the appropriate court instances for the handling
of insolvency cases?”
2.7. Preservation, identification and tracing of assets
All stakeholder groups support the harmonization of ipso facto clauses (76% overall
support) to enhance legal certainty and predictability for businesses. Under ipso facto
clauses the questionnaire understood any contractual provision that allows one party to
the contract to terminate or modify the operation of the contract upon the occurrence of a
specified insolvency related event. Support was especially strong amongst academics and
practitioners. Furthermore, 84% of stakeholders favour harmonised rules on
91
assistance (including the interconnectivity of relevant registers) in the cross-border
tracing of assets of the insolvent debtor. Such rules would be most useful in relation to
the following types of assets: real estate (78%), company interest (60%), bank accounts
(75%) and claims (other than arising from bank accounts) (46%).
Stakeholders want insolvency practitioners to have the following powers and duties in
order to trace, secure and recover assets: 1) the power to compel the production of books
and records (including from lawyers, accountants and banks) (75%), 2) the power to
conduct audits (65.%) and 3) the duty to report suspicious transactions to law
enforcement authorities (53%). Almost all stakeholders agree that IPs should have full
access to property and collateral databases.
Figure A2.15 – On giving IPs full access to property and collateral databases- replies in % to “Should Insolvency
Practitioners have full access to property and collateral databases?”
3. VIEWS OF VARIOUS STAKEHOLDER CATEGORIES
This section provides a detailed analysis of the responses given to the public consultation
by group of stakeholder. Since stakeholders’ economic and social interests influence their
views, the 129 stakeholders replies were reattributed to a functional breakdown that is
closer to their economic and social background than above 2, which relies on
stakeholders’ self-classification.
This alternative breakdown makes use of additional information that stakeholders
revealed about themselves when replying to the consultation. For some doubtful cases,
stakeholders’ internet websites were used to guide their attribution to a stakeholder
group. Entities that responded as business and companies or their associations were
distinguished into financial corporations and non-financial corporations, assuming that
the former represent creditors’ interest and the latter debtors’ interest. Among the
financial corporations are a few that specialised in debt collection, i.e. are not in the
business of credit provision, but may have similar interest than for example banks. A
significant number of the non-financial companies that replied to the consultation provide
advisory services to other firms, i.e. consultancy, accounting and auditing. They were
taken as independent third business group since their interest would be different from that
of debtors. Most “EU citizens” and “other respondents” that submitted replies identified
themselves as lawyers, legal experts or active as insolvency practitioners and were
clustered accordingly. Four respondents represent social protection interests. The few
respondents that classified themselves as EU citizens without activity as lawyer or
insolvency practitioners had all academic credentials and were therefore attributed to the
0
20
40
60
80
100
Yes No No answer
Yes No No answer
92
group of researchers. Figure A2.16 shows the breakdown of stakeholders in the revised
breakdown.
Figure A2.16: Functional breakdown of stakeholders Figure A2.17: Stakeholders’ assessment of the existing
rules on a scale 0 to 5 with higher numbers indicating
higher intensity
Respondents had comparable assessments of whether the current insolvency regimes
represents a problem and would require policy measures on a scale between 0 and 5 each
(Figure A2.17). Public authorities were most positive about the functioning of the current
rules. They were the only group that expressed a higher need for policy action than they
considered the current rules as a problem. Insolvency practitioners and lawyers were also
relatively positive on the current status quo and expressed less urgency for policy
measures than other stakeholder groups. Researchers were most critical on the status quo,
followed by the business sector, in which those that represent interest of advisory
services gave the most severe indications. Non-financial corporations gave slightly more
critical marks than financial corporations, which is unexpected. None of the social
protection entities responded to this question.
Figure A2.18 shows the views of the different stakeholders about which areas of
insolvency law they consider the most significant barrier to the single market on a scale 0
to 5. The replies look consistent with the economic and social interest of the different
stakeholder groups. Insolvency practitioners consider avoidance actions and asset tracing
most severe. Financial institutions take most issues with the trigger of the insolvency
process and the ranking of claims whereas non-financial business does so with asset
tracing and the ranking of claims. Firms that provide advisory services flagged the
insolvency definition and trigger, directors’ duties and even the ranking of claims as most
concerning. Researchers’ put their weight on avoidance actions and the ranking of
claims. None of the social protection bodies responded to this question.
93
Figure A2.18: Stakeholders’ assessment to what extent the different elements of insolvency regimes act as a deterrent
to the single market on a scale 0 to 5
Stakeholders had different views with regard to both whether EU measures were
desirable in different areas (Figure A2.19) and how the EU should address the problems
(Figure A2.20). Public authorities gave the least supportive responses, in particular with
regard to the introduction of a common definition and common directors’ duties, while
their backing for asset tracing is not much lower than that of the business sector.
Researchers, insolvency practitioners and legal experts were strongly supportive of EU
measures that target directors’ duties and asset tracing. Financial institutions gave a
larger share of supportive replies to asset tracing and the introduction of a common
insolvency definition. The lion’s share of both financial and non-financial business
supported EU measures in these three areas, with the weakest backing given to directors’
duties, which is however the most important among these three areas when looking at
firms that provide advice to business. Researchers and public authorities represent polar
cases with respect to which instrument the EU should use. The majority of the former is
in favour of a binding legal instrument, the latter group has a preference for a
recommendation. The business sector holds disperse views. Advisory and financial
entities place a large weight on the combination of both, similar to insolvency
practitioners.
Figure A2.19: Share of stakeholders that support EU
measures in three selected areas (Y/N question)
Figure A2.20: Stakeholders’ assessments through which
instrument the EU should act (Y/N question)
Private and public respondents expressed opposite views on the suitability of a common
definition of insolvency along a liquidity criterion (Figure A2.21). Public authorities
favour a combination of a balance-sheet and a liquidity criterion or the possibility to opt
between both. Only a minority of the private stakeholders backs the combination or
optional solution. They dominantly favour a liquidity criterion, though financial and non-
financial corporations were less supportive to a liquidity criterion than the other private
94
stakeholder groups. Hardly any respondent, except a few legal experts favoured a balance
sheet criterion.
Figure A2.21: Stakeholders’ assessment of a suitable
common definition of insolvency (share of respondents
with positive reply, Y/N question, multiple replies
possible)
Figure A2.22: Stakeholders’ assessment of credit claims
that would benefit from common EU rules (share of
respondents with positive reply, Y/N question)
The different views of stakeholder groups about the ranking of claims is also reflected in
the variation of their views when asked which types of credit claims would benefit from
common rules at EU level (Figure A2.22). Researchers are the most positive and public
authorities the most negative stakeholders across the types of claims. Few of the social
protection bodies that participated in the consultation see generally benefits of EU rules,
not even on the claims of unpaid employees. Both financial and non-financial business
express low support for common rules on the subordination of shareholder loans, while
other private respondent groups do. Financial corporations‘ preference for common rules
on new finance is shared by researchers, lawyers and insolvency practitioners. On the
opposite side, non-financial companies have least interest in rules for new finance. More
researchers, legal experts and insolvency practitioners see benefits from common rules
on public claims than the business sector, i.e. financial, non-financial and advisory
stakeholders.
Overall, perceptions of the problems suggested in the questionnaire differ across
stakeholders. When asking stakeholders to what extent they see the lack of harmonised
rules in the various topics of insolvency law as an impediment to the proper functioning
of the internal market, public authorities and respondents belonging to the trade- and
business sector did not perceive this as a significant problem (70% and 60% of the
responses being in the ‘less significant’ range, respectively). In contrast, 69% and 55% of
the insolvency practitioners or from the financial stakeholders who responded to this
question saw this as a significant problem. Interestingly, the low rate of problem
perception was not necessarily followed by a low rate of support for an EU
harmonisation of insolvency laws. For instance, around 80% of the business- and trade
sector respondents supported the idea of an EU harmonisation of the duties and
obligations of directors in the vicinity of insolvency, or agreed with the abolition at EU
level of the priority status of unpaid taxes in the insolvency proceedings. Similarly, more
than 2/3 of them supported harmonisation on the professional regulation of insolvency
practitioners or vis-à-vis avoidance actions.
95
ANNEX 3: WHO IS AFFECTED AND HOW?
1. Practical implications of the initiative
The preferred option will imply the following obligations for companies facing
insolvency and for the Member States.
Obligations for companies facing insolvency:
Companies facing insolvency would have to familiarise themselves with the new rules
and adapt some internal processes to comply. Directors would have to comply with
stricter duties in the vicinity of insolvency (in particular, with the duty to timely file for
insolvency). Distressed MSEs will have the option to follow a more orderly winding up
based on a new simplified liquidation procedure proportionate to their needs. To be able
to use it, MSEs will have to get familiar with this new regime.
Obligations for Member States
Member States would be required to further enhance transparency of the key features of
their respective insolvency rules, by making such information easily accessible to
investors on a public website and in a pre-defined user-friendly format. Member States
would also be expected to ensure that their judicial systems make it possible for MSEs to
benefit from simplified insolvency procedures and for companies to opt for a pre-pack
procedure.
2. Summary of costs and benefits
The tables below summarise expected benefits and costs arising from the implementation
of the preferred option (option 1) as an aggregate. The impacts of various measures can
be considered additive, but not having further synergies (which could also be the case,
but it may not be prudent to assume this). Main impacts summarised in the table and
further information about the assumptions used are further explained below.
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
Approximately EUR 4.9
billion out of which
approximately EUR 1.9
billion are due to legal cost
A 1.42 percentage point increase (Table 8) 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
96
public sector, other non-
financial corporations and
households proportional to
their claims to the debtor
savings from simplification
of insolvency proceedings.
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.
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/A191
N/A N/A
191
As explained in section 8, none of the cost savings indeitified in this table are applicable for the “one in,
one out” committment.
97
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
Familiarisation
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
characteristi
cs of
insolvency
frameworks
: EUR
67,000-
90,000192
Develop-
ment of
online
auction
platforms
and
adjustment
of existing
platforms to
iinsolvency
cases: EUR
185,000-
370,000193
Updating the
factsheets -
negligible costs,
maintenance costs
for online auction
platforms: EUR
324,000 p.a.
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
distressed
companies to
enable due
Higher liability
of directors of
companies may
be reflected in
higher wage
demands, more
difficult
none Potentially more
insolvency cases,
estimated at
approximately
EUR 0.9-2.0
billion194
and
more disputes on
192
See below under “expected costs” for an explanation.
193
See below under “expected costs” for an explanation.
194
See below under “expected costs” and Annex 4, Section 3.2.
98
diligence in
case of pre-
pack sale
(conditional on
company
opting in for a
pre-pack sale,
no estimate
available)
recruitment of
directors,
company
procedures/info
rmation flows
or higher
liability
insurance costs
(no estimate
available).
asset seizures (no
estimate
possible).
Costs related to the ‘one in, one out’ approach
Total
Direct adjustment
costs
none none Familiarisation
with new rules
none
Indirect
adjustment costs
none none none none
Administrative
costs (for
offsetting)
none none none none
Relevant sustainable development goals
III. Overview of relevant Sustainable Development Goals – Preferred Option(s)
Relevant SDG Expected progress towards the Goal Comments
SDG no. 8 - decent work
and economic growth
Contributes to economic growth by fostering
adjustment capacity and productivity. More
predictable outcomes of insolvency procedures
create incentives for entrepreneurs to act
timely in times of economic turmoil, leading
to more stable employment patterns in going
concerns
Contributes directly to Target 8.3 “Promote
development-oriented policies that support
productive activities, decent job creation,
entrepreneurship, creativity and innovation,
and encourage the formalization and growth of
micro-, small- and medium-sized enterprises,
including through access to financial services”
and indirectly to Target 8.2 “Achieve higher
levels of economic productivity through
diversification, technological upgrading and
innovation”
SDG no. 9 – industry,
innovation, and
infrastructure
More efficient insolvency procedures will
improve access to finance. Efficient
insolvency procedures reduce the share of
zombie companies and thus indirectly
contribute to higher rate of innovation and
productivity with a potential positive impact
on accelerated structural change towards more
sustainable production
Contributes indirectly to Target 9.3 “Increase
the access of small-scale industrial and other
enterprises to financial services, including
affordable credit, and their integration into
value chains and markets”
SDG no. 16 – peace,
justice and strong
institutions
Access to public insolvency procedure will be
improved for micro and small enterprises and
thus become fairer.
This contributes to Target 16.3 “Promote the
rule of law at the national and international
levels and ensure equal access to justice for all”
99
The numbers reported above are estimates based on best efforts. They do not rely on the
use of a sophisticated model, but on estimates of partial effects. These estimates use the
combination of financial and macroeconomic data, the Deloitte/Grimaldi survey data and
assumptions which had to be used due to the inherent data limitations. The choice of the
financial and macroeconomic data always had to rely on assumption on which variable is
the best available proxy to the variables estimated. All the estimates are based on
averages that are considered reasonable, but have to be considered as only an
approximation of the individual items. Benefits and costs are expressed in economy-wide
terms given that the proxy variables are mostly economy-wide and their breakdown
across company sizes may not be linear.
Some critical coefficients were taken from the economic literature reviewed in Annex 4.
For other coefficients, there are no means to find an approximation. The assumptions
used are based on internal discussions.
The starting point for the quantitative simulations below are the figures from the EBA
benchmarking exercise on the average costs and length of loan enforcement and the
recovery rate in the EU. These are combined with the average response of insolvency
experts in Deloitte/Grimaldi (2022) about the expected effect of harmonised EU rules on
the costs and length of recovery to produce the estimates.
3. Expected benefits
Direct benefits accrue from option 1 in the form of a higher recovery rate. The lower
judicial costs and faster recovery translate into a 1.42 percentage point higher recovery
rate (Table 7 in section 7.2). The economy-wide benefits result from multiplying the
increase in the recovery rate with the average value of the claim in an insolvency case
and the number of insolvency cases. The number of insolvency cases in the EU-27 varied
between 150,000 in 2019 and 100,000 in 2020. Since public support measures deflated
figures in 2020 and 2021, the 2019 figures can be considered more representative for
future corporate insolvencies. Since there is no data about the average value of claims in
insolvency cases, the specific calculation take the number of 130,000 insolvency cases in
the EU-27 and the average value of claims in Germany (EUR 3.5 million)195
corrected
for the higher GDP per capita in Germany relative to the EU-27 (75%), yielding an
average value of EUR 2,600 million. The German number for the average amount was
used, because it was the only number that could be identified in official statistics.
Multiplying the higher recovery rate with the average value and the number of corporate
insolvencies yields economy wide benefits in terms of higher recovery value from
insolvency of around EUR 4.9 billion per annum.
The calculations depend on the assumptions applied. Using 100,000 or 150,000
insolvency cases and a 10% lower or higher average value of claims as alternative
assumptions would produce a range for the direct economic benefits of EUR 3.4 to 6.2
billion. It appears, however, not possible to attach probabilities to the lower and higher
range.
195
Projected amount of claims divided by the number of corporate insolvency cases in 2021, German
Statistical office.
100
Part of the higher recovery value is due to the reduction in judicial costs by 40%. EBA
(2020) reports a benchmark for judicial costs of corporate loans of 1.4% of their recovery
value. Taking these costs separately to obtain a number of legal costs that can be saved,
yields a value of EUR 1.9 billion admin cost savings per annum, for the 130,000
insolvency cases and taking the average value of a claim as described above. Applying
the alternative set of assumptions described in the previous paragraph would lead to cost
savings of EUR 1.3 as lower and 2.4 billion as upper value.
The point estimate may however represent already an underestimation of the cost savings
because judicial costs are higher for SME loans at 3.5% relative to corporate loans at
1.4% and although very few Member States publish statistics about the size breakdown
of insolvent firms, the available numbers suggest that they could be in the range of
90%.196
If one assumes that the 40% cost savings apply to only 10% of the insolvent
corporations and 90% of the insolvent corporations are MSEs with 3.5% judicial costs
and 12% cost savings as the result of the introduction of an MSE insolvency regime as
suggested by the survey responses in Deloitte/Grimaldi (2022), legal cost savings would
amount to EUR 4.5 billion. These calculations demonstrate that the outcome of
numerical estimates does not only depend on the underlying assumptions, but also on the
degree of granularity at which the calculations are carried out.
The beneficiary of a higher recovery values would be first of all creditors, i.e. the
financial sector, the public sector, other non-financial corporations and households
proportional to their claims to the debtor. While the share of the recovery value will be
depend on the specific situation of each insolvent corporation, the financial sector will on
average be one of the the main beneficiaries given its role as credit provider to the
economy. While not representative of the claims against insolvent corporations, the
figure below shows how important the different institutional sectors are as creditor to the
economy. The interest of the public sector is larger than the figure suggests because of
two effects. First, public banks are part of the financial corporations. Secondly, tax
claims are not counted as financial assets. The largest credit provider is the sector of non-
financial corporations due to the important role of trade credit and other types of
interfirm credit in an interlinked economy. The debtors themselves would benefit in the
rare case that the lower legal costs lead the corporations to be rescued. Since corporations
that have chance of being rescued should enter pre-insolvency restrucuturing procedures
and not insolvency procedures, this outcome is expected to be an exceptional.
196
The share of MSE insolvency was 91% in Germany, 95% in France and 80% in Spain.
101
Figure A3.1: Holdings of NFC credit liabilities by institutional sector, average of 11 Member States, 2020
Note: Calculated as sum of loans, debt securities and other accounts, non-consolidated.
Average of the 11 Member States for which data is available: BG, EE, EL, FR, LV, LT,
LU, HU, MT, AT, FI.
Source: FISMA calculations with Eurostat data
The public sector will be a primary beneficiary of lower legal costs, with benefits
materialising in the form of lower costs for judges and court administration from more
efficient and shorter proceedings. More efficient proceedings should then also translate
into lower costs that are paid for insolvency practitioners, lawyers and other consultants
that accompany the process and deducted from the recovered capital that is returned to
creditors. The breakdown between the benefits for the public sector and these professions
will be different across Member States, depending on how the judicial system is
organised.
While owners of MSEs would benefit from a dedicated simplified insolvency procedure
which imply cost savings for those who would otherwise use ordinary (established)
insolvency procedures, these cost savings relate to simplification of national rules and not
to administrative obligations under EU legislation. They can therefore not be counted
under the Commission’s One-In-One-Out commitment.
Indirect benefits could accrue as a result of creditors pricing in the higher expected
recovery value in their demands for the interest rate they charge on debt, implying a
lower interest rate, ceteris paribus. A lower interest rate means lower capital costs for the
corporate sector. The magnitude of this effect is difficult to assess, but the literature
surveyed in Annex 4 points to some plausible ranges. The estimates in IMF (2019)
suggest that the cross-country difference in capital costs could decline by 1 basis point
for a 1 percentage point higher recovery rate. AFME (2016) suggests a 3.7 base point
improvement in bond spreads as consequence of a similar increase in the recovery rate.
The 1 to 100 ratio looks conservative since it implies a low probability of a corporate
becoming insolvent. It is also consistent with the long-term response of coefficient in the
estimates in Table A4.16. Given an outstanding volume of loans by NFCs of EUR 9.6
billion and of debt securities of EUR 1.855 billion according to Eurostat’s most recent
102
national account data, a 1.42% increase in the recovery rate in combination with the 1 to
100 translation into yields could lead to a decline of capital costs by 1.6 billion per
annum.
The reallocation of capital could lead to high indirect benefits, but these can be quantified
only with the help of assumptions. The OECD research presented in Annex 4 concluded
that the market exit of zombie firms to the lowest share observed in a country in a sector
could boost productivity growth by 0.5 percentage point. If one conservatively assumes
the reform to insolvency regime contributes 10% to the market exit of zombie firms and
applies this to the EU-27 GDP in 2021 productivity gains of an approximate magnitude
around EUR 7 billion would be possible. If the insolvency reform contributed only 5%,
the productivity gain would halve to EUR 3.5 billion and likewise if its contribution were
stronger. It is, however, not possible to attach probabilities to alternative assumptions.
It was not possible to estimate the magnitude of the indirect benefits from more capital
market integration due to insolvency reform and this would highly depend on the overall
state of the economy. The estimates in IMF (2019a) show that cross-country risk sharing
and the magnitude of cross-border assets would increase in response to an increase in
recovery rates. The model simulations in Deloitte/Grimaldi suggest also a positive effect.
It seems, however, not possible to produce a number for the welfare benefits in monetary
terms nor to establish a number for the lower costs for information and learning.
There are further expected benefits that could not be quantified. These relate to the
benefits of simplified insolvency procedures for micro and small enterprises (direct
benefit), better coordination among creditors, in particular for cross-border creditors
(direct benefit) and higher chances of timely selling going concern parts of a distressed
business (indirect benefits). These are explained in the table above.
4. Expected costs
Additional judicial costs can arise as an indirect cost from an expected rise in insolvency
cases, for example if the MSE insolvency regime leads to formal procedures for MSEs
that were otherwise unwound. 9% of micro companies (with 0 or 1 employee) exit the
market each year, but it is not known, how many of them would enter an insolvency
proceeding, what their debt is and how many of them would have so few assets that their
recovery value will be below the judicial costs of the proceeding. The estimation of
possible costs needs to rely on a number of assumptions.
 The EBA (2020) benchmark points to judicial costs for SMEs are 3.5% of the
notional value. Those of MSEs may be higher, but there is no information by how
much. The 3.5% is therefore used as benchmark.
 The insolvency experts surveyed in Deloitte/Survey suggest that an MSE regime
would reduce judicial costs by 12%. The introduction of an MSE regime in
France aims to reduce judicial time by more than 50%. For the calculations, 50%
is taken for the optimistic scenario and 12% for the pessimistic one. The latter is
considered conservative because other cost saving effects are not taken into
account, i.e. MSEs would not benefit from the 40% legal cost savings that other
corporates may.
 There is no statistics about the average claims on insolvent MSEs, but an
approximation of their debt can be obtained by using the share of small bank
103
loans to NFCs, i.e. with a volume below EUR 250,000, to total bank loans in the
euro area in the ECB bank interest rate statistics as a proxy for the share of MSEs
in the economy’s corporate debt and multiplying this share of 12% by the
outstanding loan liabilities of NFCs. The assumptions here are that MSEs have no
debt in the form of debt securities and that there is no difference between them
and larger firms in the proportion of loans from banks relative to non-banks.
 There is no reliable data on the share of MSE firms that enter into insolvency
among those that exit the market, hence the calculation relies on an
assumption.197
IMF (2022) estimates that 9% of MSEs could become bankrupt
following, which is consistent with Eurostat data showing that 8.8% of MSEs
exited the market in 2019. The actual data of market exits is taken as a maximum
value. The large discrepancy between market exit and insolvency declaration
suggests that not all corporations that exit the market are insolvent. For a lower
bound, it is therefore assumed that 2/3 of the exiting firms will use insolvency
proceedings, which seems a conservative estimate given that actual insolvency
numbers are less than 10% of market exits.
 There is data from Germany and Austria about the share of corporations that were
rejected access to insolvency proceedings because their assets were projected not
sufficient to pay for the expenses of the procedure. These two observations point
to a share of about one third. It is also known from a few other Member States
that the practice of rejecting insolvency applications is applied. For the EU
aggregate, it is assumed that all Member States had applied this practice and
would be exposed to higher costs for the judicial system from the introduction of
an MSE regime that grants access to an insolvency procedure for asset-less
MSEs.
Table A4.14 in Annex 4 summarises the details of the calculations and provides numbers
for those Member States for which it is known that they reject applications from asset-
less insolvent corporations. If all Member States applied this practice, higher costs for the
judicial system would amount to between EUR 0.9 and 2 billion. The sum of the five
Member States that either reject applications or immediately close proceedings for
assetless corporations would be in the range EUR 0.6 to 1 billion. These calculations do
not include other benefits and countervailing effects detailed in Annex 4 that are not
quantifiable, but expected to lead to significant cost reductions in the judicial system.
The public sector would face costs for the creation of harmonised information on
insolvency rules, which are expected to be limited and mainly of one-off nature. An IT
platform that would be used already exists with e-Justice. The main cost component is
therefore the production of the information. Since it concerns general rules, it should not
require a legal expert not more than two weeks to produce this information. Since all 27
Member States would need to produce this information, it would take broadly one FTE
per year for the EU-27. The cost figures are based on Eurostat Structure of earnings
survey and Labour Force Survey data for non-wage labour costs, assuming 25%
overheads. Since the precise category of lawyers was not available, the calculations work
with hourly tariffs for professionals (35.6 EUR per hour) in case of lower bound and
197
Businesses can also closed without being insolvent, for example as part of a merger, if the business
purpose is fulfilled, or if the owner takes on another job.
104
hourly tariffs for legislators, senior officials and managers (47.8 EUR per hour) for an
upper bound. It is further assumed that the average work week is 36.4 hours, obtained as
the latest available EU average from Eurostat. This translates to approximately EUR
67,000-90,000 for the transparency tool.
The simplified insolvency procedures for MSEs could use electronic platforms for
auctions of assets belonging to the insolvent micro enterprise. 14 Member States already
have such platforms in place for online judicial auctions, but only three seem to use them
for insolvency cases.198
Member States that want to set up such a platform would need to
spend resources on the development and maintenance. According to IT experts, the
amounts could be EUR 5,000 -10,000 one off developments costs for a medium complex
platform, plus 12,000 maintenance costs per annum. There was no information to
estimate the additional costs for the specificity of using such platforms for insolvency
cases. As conservative assumption, the adjustment costs could be as high as the
development costs. Using these data, development cost for all those Member States that
do not have a judicial platform and adjustment costs for all those that are not using it for
insolvency cases would sum up to EUR 185,000 to 370,000. All 27 Member States’
maintenance costs would be EUR 324,000.
Further, the higher liability placed on directors may have its own economic cost, as it
might be reflected in e.g. higher wage demands, more difficult recruitment of directors or
higher liability insurance costs, enhanced internal information flows. The magnitude of
this indirect cost impact could be dependent on a range of factors such as labour market
conditions and hence it was not possible to estimate it reliably. Further internal
procedures and an information flows to enable due diligence would be needed in case the
company opts-in for a pre-pack sale. This cost is considered indirect as it depends on a
company’s decision to find a buyer on a going concern basis. Lastly, businesses and
creditors are expected to bear some costs related to becoming more familiar with new
rules.
198
According to the information of the e-justice portal..
105
ANNEX 4: ECONOMIC ANALYSIS
Although numerous researchers in academics and international bodies have established
numerical metrics of insolvency rules and despite the successful use of many of these
indicators in empirical research, their application in a study of how targeted changes to
insolvency rules in the EU could impact on the outcome of insolvency proceedings and
broader economic performance has turned out challenging. This text reviews the
available indicators and presents a best-effort analysis to quantify the impact the
discussed changes to insolvency rules could have.
For this purpose, the first section presents data on the number of corporate insolvencies
and business death, complemented by various indicators that can be used as
approximations for the share of cross-border insolvency cases in the absence of proper
statistics on this phenomenon. The second section presents available indicators on
recovery values and time. It sketches their methodological shortcomings, ultimately
justifying why the World Bank and EBA data is used for the analysis. The third section
translates indications from a survey among insolvency experts into changes in the
recovery value of an insolvency case and establishes scenarios about magnitudes of
impacts. The fourth section reports how changes to recovery rates could affect financial
and macroeconomic parameters, using estimates from the empirical literature and new
statistical analysis.
The combination of two empirical results allow to conclude that changes to elements of
insolvency proceedings have a significant impact on cross-border investment. First,
estimates for cost and time savings from the harmonisation of elements of insolvency
proceedings can be derived from the indications of insolvency experts in a survey. These
changes in cost and time savings can be translated into changes to recovery rates.
Second, economic studies used recovery rates as indicators of insolvency rates and
detected their significant impact on credit volumes, credit costs, cross-border asset
holdings and risk sharing in cross-country or panel estimates. This analysis complements
qualitative analysis on the impact the discussed targeted changes to insolvency rules can
have on incentives of the stakeholders involved.
1. Corporate insolvencies and cross-border credit exposure
1.1 Corporate bankruptcies and market exits
Statistics of business exists and bankruptcies since 2020 are strongly influenced by the
Covid-19 induced economic slowdown. Data before 2020 appear to be therefore more
meaningful to inform about underlying magnitudes and trends.
Differences in national definitions prevent Eurostat from publishing absolute numbers of
bankruptcies in the EU.199
CEPEJ (2022) contains absolute numbers of insolvency cases
sourced from Member States for the years 2012-2020, but without a breakdown between
corporate and consumer insolvencies. A private consultancy firm reported a number of
120,000 corporate insolvencies in Western European economies in 2020 down from
199
In particular, the legal forms which can declare bankruptcy are different, which makes the absolute
figures of the countries non-comparable.
106
170,000 in 2016 and a private credit insurer estimated that about 160,000 businesses
might have become bankrupt in the EU Member States in 2021.200
See the table below
for numbers of corporate insolvency across the EU Member States from various
sources.201
Eurostat official statistics show that the trend in the declaration of bankruptcies202
was
stable between 2015 and 2019, with a considerable drop in Q1 and Q2 of 2020, and
subsequent fluctuation, as it is shown in Figure A4.1 below. The decrease in
bankruptcies, observed in many Member States in the first two quarters of 2020 and the
subsequent fluctuation, can be explained by the government measures supporting
businesses during the beginning of the COVID-19 crisis, which allowed the businesses to
avoid declaring bankruptcy.
Figure A4.1 – Business bankruptcies in the EU-27
Source: Eurostat.
Figure A4.2: Business deaths in the EU-27
Business economy except holding companies.
Source: Eurostat.
The number of deaths of EU enterprises was stable between 2014 and 2017 as it is shown
in Figure A4.2, with around 1.8 million deaths per year on average. Since 2018 however,
there is an increasing trend on business deaths, reaching 2.1 million in 2019. These
numbers compare to a population of active enterprises in the EU of 25.9 million in 2019,
which increased by around 1.5% per annum on average since 2014203
. Almost 80% of the
firms that exited in the EU in 2018204
were firms without employees and almost 20% had
1 to 4 employees. In the EU-27, 25,000 firms with 5-9 employees exited in 2018 and
11,000 in 2017. More recent data is currently available for several Member States (see
Table below).
200
Credit Reform (Microsoft Word - 2021-05-20_AY_OE_Analyse_EU-2020_englisch.docx (creditreform.cz)) and
Euler Hermes (reference Statista, Global insolvency outlook, December 2020).
201
The CEPEJ data is not included because it also covers consumer insolvency. The number is therefore much higher
than corporate insolvencies, i.e. 450,000 cases in 2019 and 257,000 cases in 2020 of 23 Member States reporting.
These numbers overestimate the decline from 2019 to 2020 since there are no numbers for Germany in 2020 and none
for Sweden 2019. There is also no data for the Netherlands, Cyprus, Greece in 2019 and 2020.
202
Bankruptcies is an early indicator to measure situation in business environment. Even if an enterprise has declared
for bankruptcy, it does not always mean that it ceases all activity when it enters into bankruptcy procedure. In order to
be recorded as enterprise death in annual business demography typically all production factors have been dissolved /
terminated. There are several methodological differences between the concepts of bankruptcies and enterprise deaths.
There may also be significant differences between countries with respect to bankruptcy laws. The proportion of
bankruptcy procedures that finally end up as an enterprise death varies therefore across countries depending on the
bankruptcy laws. In general, bankruptcies represent only a fraction of all enterprise deaths but they cannot be directly
compared with annual business demography data on deaths of enterprises.
203
An active enterprise is an enterprise that had either turnover or employment at any time during
the reference period.
204
The latest year for which aggregated data for the EU are presently available.
107
The comparison of about 150,000 corporate insolvencies with almost 2 million
companies that cease to exist in the EU each year suggests that a substantial number of
companies are wound down without recourse to public procedures. Since the latter
number stems from business registers, it is not comparable with the number of
insolvency cases. Yet, it shows that the use of insolvency procedures is not the standard
exit route for firms. One reason is that not all firms that exit are insolvent.205
For
example, they can be acquired by or merged with other companies. The observation that
1.6 million out of 2 million or almost 80% of business deaths in the EU are companies
without employees suggests that many were likely closed down because the self-
employed took a job. It is also possible that companies are set up for a specific purpose
and close when the company has fulfilled its purpose.206
Long term data from about the number of bankruptcies is available from the OECD
covering the years 2005-2020 for a selected group of EU Member States. Like Eurostat,
the OECD did not report absolute numbers, but an index equal to 100 in 2007.
Figure A4.3 Bankruptcy trends (index 2007 = 100)
Source: OECD.
While several countries have put in place short-term insolvency and insolvency-related
measures to help ensure companies and consumers have breathing space during the
crisis,207
delaying the necessary economic adjustment is not equal of solving it. Factors
such as lower sales, higher unemployment, and the transition challenge towards a greener
and digital economy, point to a likely increase in the number of business insolvency
filings in the near future. Last but not at least, evidence from previous crises suggest that
a build-up in non-performing loans (NPL), which is related to insolvencies208
, is likely to
205
Data from the German statistical office can illustrate the magnitude. It reported that 13,993 firms
applied for an insolvency proceeding in 2021. 4.161 of them were rejected, i.e. almost 30%. This compares
to more than 340,000 enterprises that exited in 2019, the latest number available in Eurostat.
206
There is a high correlation between the birth rate and the exit rate across the EU Member States. The
correlation is highest between the death rate in a year and the birth rate two years before.
207
See Menezes and Muro (2020).
208
See for instance Uttamachandi et al. (2021).
108
follow in the coming years (as NPL accumulation induced by crises usually takes several
quarters to peak).
In summary, the development of corporate insolvencies in Europe in the very recent past
does not reflect the true economic situation of many sectors and companies. Eventually,
after crisis reaction measures cease to have effect insolvency rules will again apply with
full force in all EU countries, with an expected sharp increase of cases, and the full
impact of the COVID-19 related distortions will probably only become apparent in the
years to come.
109
Table A4.1: Number of corporate insolvencies and business exits across the EU Member States
Number of corporate insolvencies
Business exits
2019
2019 2020 2021
national
sources EH CR
national
sources OECD EH CR
national
sources OECD all firms
firms with
5 or more
employees
BE 10598 10598 10598 7203 7203 11000 9878 6533 6533 25309 206
BG 506 520 103063 771
CZ 28149 8620 24903 9300 81930 342
DK 2590 2590 8474 2221 5614 3000 7155 2175 8339 27509 108
DE 18749 18749 18830 15841 15840 19500 19410 13993 13993 340535 7663
EE 148 260 103 9778 422
IE 1001.9 568 568 1054 660 767 571 #N/A #N/A
EL 63 75 107 57 35 80 84 27 24832 #N/A
ES 4630 4162 4464 4789 4630 5000 4131 266395 7734
FR 51145 51396 51201 31259 31253 53600 53887 27639 27540 195525 2353
HR 4796 8815 22525 351
IT 11110 11000 14228 7594 13000 13695 296917 2893
CY 2374 2497 2511 3406 19
LV 221 557 516 660 838 9648 333
LT 1610 1500 49818 251
LU 1232 1445 1263 1174 1700 1195 1173 2528 132
HU 10226 5176 5850 49154 1257
MT 1776 #N/A
NL 3209 3792 3209 2703 3177 4900 3145 1536 1817 79063 315
AT 5018 5018 5235 3034 5520 5224 3034 20156 986
PL 578 977 528 1100 376 205935 3375
PT 2188 2560 5071 2216 3340 5888 1967 117677 1564
RO 6524 6524 5694 6800 6144 72364 1409
SI 1294 10125 1016 9485 71
SK 238 2447 162 2994 2994 55556 615
FI 2623 2990 2597 2135 2135 3550 2534 2472 2473 21137 298
SE
7358 7358 7296 7296 7695 8200 7599 6463 6901
44553 1174
EU* 171118.9 148866 133141 134633 77582 162034 134592 87308 67726 2136574 34642
Note: national sources are mainly statistical offices. Data for some Member States were sourced from Statista, some were
traced via INSOL Europe. EH = Euler Hermes, CR = CreditReform. Data on Business exits are from Eurostat. * sum of
available Member States.
1.2 The magnitude of cross border credit
The level of cross-border investment is considered as an important indication of the
degree of integration of EU capital markets: although cross-border investment has
increased over time as some barriers to cross-border investment have been removed,
there still remains a large home bias in the EU (85% on equity investment and 69% on
debt investment, see Figures A4.27 and 28). This large home bias is widely regarded as
the consequence of the underdevelopment of the EU single market. Stakeholders,
110
researchers and institutions argue that this is to a large degree due to cross-country
differences in insolvency procedures.
It is presently not possible to report a comprehensive number for the share of cross-
border creditors in EU corporations.209
Nevertheless, if such number existed, it would not
show the importance of insolvency proceedings for cross-border investors since it would
suffer from the same home bias. That means, it would only reflect the current situation,
which is impaired by cross-border obstacles, including those on divergent and inefficient
insolvency regimes.
The scale of insolvency proceedings with cross-border elements may be estimated from
the proportion of outstanding foreing debt claims of MSE companies in the EU.
According to the Flash Eurobarometer survey carried out in June 2016 among small and
medium sized enterprises in the then 28 EU Member States, on average, 17% of those
companies had debt claims against foreign debtors over 2015 fiscal year. However, in
some countries this situation was much more frequent: 49% in Luxembourg, 45% in
Slovenia, 31% in Austria. Half of the companies with foreign debt claims say foreign
debt claims represented at least 6% in their 2015 turnover.210
Under the assumption that the share of cross-border bankruptcy cases is proportional to
the foreign financial exposure of firms, a number of indicators allow for an
approximation of the possible share of cross-border insolvencies. Overall, they suggest
foreign exposures in the range of 10-20% of total credit or activity, consistent with the
17% suggested by the 2016 Eurobarometer survey (See also Figure A3.1).
The table below gives averages for the EU Member States for which data on cross-border
credit exposure is available based on the latest period for which the data exists. The
charts below inform about the shares for those Member States for which such ratios
could be calculated. They required the combination of data from different sources, for
example of NFCs liabilities in the national accounts and foreign exposure in the
international investment position or of the number of enterprises in trade statistics and
structural business statistics. They therefore represent an approximation.
Table A4.2: Indicators to measure cross-border credit exposure
Share Indicator (average of available EU Member
States)
Source, comment, caveat
14% Share of foreign debt in non-financial
corporations, 2020
International investment position and
sectoral national accounts, based on data
from 20 MS
8.4% Share of equity holdings by non-domestic
holders, 2020
International investment position and
sectoral national accounts, based on data
from 22 MS
55% Share of bonds issued by non-financial
corporations held by non-domestic counterparts,
2020
Sectoral national accounts by counterpart,
covers 11 Member States.
210
Flash Eurobarometer, Report Insolvency, no. 442, 2016, para 1 and 2. The survey data was used in the
Commission Impact Assessment Accompanying the Proposal for a Directive on preventive restructuring
frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and
discharge procedures, SWD (2016) 357 final, p. 45.
111
26% Share of non-financial corporations; loan
liabilities owed to non-domestic counterparts,
2020
Sectoral national accounts by counterpart,
covers 11 Member States.
19% Non-financial corporations’ share of loans from
banks in other Member States in total bank loans,
2022Q1
ECB data, covers only euro area Member
States and banks in other euro area Member
States
10% Banks’ share of loans to non-financial
corporations in other Member States in total bank
loans to non-financial corporations, 2022Q1
ECB data, covers only euro area Member
States and banks in other euro area Member
States
15% Firms that are importers of goods or services from
other EU Member States in 2019
Eurostat export and business statistics use
different coverage of enterprises
64% Firms with more than 50 employees that are
importers of goods or services from other EU
Member States in 2019
Eurostat export and business statistics use
different coverage of enterprises
17% Firms reporting to have claims against foreign
creditors, 2016
Eurobarometer survey
Figure A4.4: Share of NFC cross-border liabilities, in %
of total debt liabilities, 2020
Source: FISMA calculation with Eurostat data.
Figure A4.5: Share of cross-border debt liabilities in % of
total liabilities, 2020
Source: FISMA calculation with Eurostat data.
Figure A4.6: Cross-border bank loans to NFCs, % of
total loans to NFCs/from banks, 2021
Source: FISMA calculation with ECB data.
Figure A4.7: Share of enterprises that import, in % of all
enterprises*, 2019
*) large enterprises are those with more than 250
employees. Their share is above 100% because of a
different definition of entities in the export and the
structural business statistics.
Source: FISMA calculation with Eurostat data.
2. Empirical measures of insolvency
The development of proper statistical data on the outcome of corporate insolvency is still
in the infancy. A first comprehensive exercise towards this end by the European Banking
Authority has produced numbers for the EU and its Member States. This data is not
considered representative enough for cross-country analysis. Existing insolvency
indicators largely build on expert views obtained from replies to surveys that largely
112
focus on how institutional parameters of insolvency regimes compare across countries.
This holds for indicators established by the World Bank, OECD and European
Commission with a varying coverage of countries.
Independent of whether these numerical metrics cover the institutional design of
insolvency rules (input-oriented) or the outcome of insolvency proceedings, these
indicators have been successfully used in the economic literature. That means they stand
in a statistically reliable relationship to other financial and economic variables, which
adds credibility to the notion that the underlying expert views are a good replacement in
view of the absence of hard statistical data. Their lack of granularity, however,
complicates their application for the questions analysed here. Moreover, none of them is
not free from methodological caveats.
2.1 Input-oriented insolvency indicators: best-practices
institutional features
Several institutions, including the World Bank, OECD, European Commission and most
recently the EBRD built indicators that reflect the design of the insolvency regime in
different Member States. Simply said, the input-oriented approach is based on the
identification of whether best practices in insolvency law are available in a country. The
more of the best practices exist in a country, the higher the indicator. The best practices
and the country scores are usually established with the help of insolvency experts, either
from public bodies or private entities. In most cases, the aggregate insolvency indicator
reflects the count of these practices.211
Their economic justification would be that the
closer a national system to the best practices, the more efficient. The design of an input
indicator as sum of desirable feature of an insolvency system assumes that
interdependency between the individual feature does not matter, that improvement in
individual features lead do an overall improvement in the insolvency system, without the
changing being outbalanced by adverse effects in other areas or tilting the overall balance
between creditors or debtors that the insolvency system in its entirety targets.
There is no space in this approach to measure the similarity of insolvency regimes across
countries. This perspective is covered in empirical studies through a dummy variable that
reflects the origin of the legal system, usually broken down into Anglo-Saxon, Germanic,
Francophone and Nordic.212
There is, however, also scope to make use of the indicators
for a cross-country perspective when assuming that foreign investors have a preference
for efficiency. That is, if cross-border investors judge the best practices as ideal
insolvency system, they would be more cautious, spend more into information on the
investment risk and ask for a higher risk premium the more element from the best
practice are missing. Difference in best-practice elements between two countries might
particularly discourage investors from a higher ranking jurisdiction as the lack of element
means that these investors miss factors they are familiar with and for which they can
know from domestic experiences how they work. Since the underlying policy initiative
strives for convergence of insolvency proceedings towards the most efficient outcome
211
The exception was EC (2013), which determined the weight of different components via a principal
component analysis.
212
See La Porta et al. (2008).
113
rather than for convergence towards a mean, there is a justification for using this
approach.
Since the analysis needs to touch on elements that are much more granular than the best
practices, the aggregate scores are not particular meaningful. Rather it is required to
identify whether sub-components are present that cover the policy options and in a
further step check whether they exist in the various Member States. The OECD indicator
consists of 13 sub-component, its World Bank Doing Business (WB_DB) pendant 16 and
a comparable exercise by the University of Cambridge (CBC) 4 respectively 19
subcomponents on insolvency. The European Commission conducted a similar exercise
in 2018/19, asking Member States 108 questions. Although not all questions were linked
to corporate insolvency, the survey led to information on whether 39 institutional features
were present in their corporate insolvency system, broadly equal split between individual
enforcement and insolvency proceedings. The table below shows that the elements and
structures used by the four bodies presented here differ substantially. The table also
reveals that many of the sub-indicators are rather remote to the issues analysed here.
These are for example, those relating to individual enforcement in the EC study, those
relating to restructuring by the OECD or those obtained from the latest survey carried out
by the EBRD on restructuring procedures.213
All these data sets are publicly available except the European Commission one because it
was obtained under confidentiality arrangements with Member States. While this has
prevented its use by academics for empirical analysis, EBA (2020) found that some of
the subcomponent are significant determinants of recovery rate and recovery time. The
World Bank data set has been extensively used in the economic literature and acquired
some authority. The detection of data irregularities however led to a suspension of their
publication in 2020.214
The World Bank is now engaged in a follow up project to
establish new indicators.
Table A4.3: Best practices used in institutional insolvency indicators, number of sub-components in (brackets), binary
except those in [square brackets show number of possibilities]
WB_DB CBC OECD EC 2013 EC 2019
129 countries,
2004-2019
5 countries 1995-
2005
39 countries,
2010 and 2015
EU Member States
2014
EU Member States
2019
Commencement of
proceedings (3)
Entry in
proceedings [3]
Ease/availability
(*)
Triggers (5)
Management of
debtors’ assets (6)
Treatment of
failed
entrepreneur (3)
Continuation of
operations(*)
Management of
debtors' assets (6)
Stay of secured
creditors, Ranking
of claims [3 and 4]
Direct and indirect
costs(*)
Ranking of claims
(5)
213
EBRD 2022 structured the assessment along five dimensions: 1. General Approach to Corporate
Reorganisation. 2. Planning and Initial Stage of the Reorganisation, 3. The Reorganisation Plan, 4. The
Reorganisation Approval Phase, 5. Other Relevant Aspects.
214
The irregularities in reporting information to the World Bank were found in relation to four countries,
namely Azerbaijan, Saudi Arabia, United Arab Emirates and China. The review process did not identify
any further specific data irregularities beyond those affecting these four countries.
114
Creditor
participation (4)
Creditor
participation [3]
Lodgement of claims
(4)
Restructuring (3) Restructuring (5) Debt
restructuring(*)
Other (3) Court capacity (6
[partly numerical])
Court capacity (4)
Prevention and
SMEs (3)
(*) 12 institutional parameters with weights to the components allocated via principal component analysis
WB:= World Bank doing business strength of insolvency regimes, CBC:= University of Cambridge,
published in Armour et al (2009), OECD indicators published in McGowan and Andrews (2018), EC 2013
is Carcea et al. (2018), EC 2019 are the indicators in Steffek (2019).
Most of the exercises yielded one-off results, which implies a limited number of
observations for empirical analysis. The OECD survey was carried out in 2016 for 39
countries, the European Commission’s in 2018/19 for the EU Member States. The CBC
and World Bank investigations yielded time series, the CBC data ranges 1970 to 2005 for
five countries with 19215
insolvency components and 1995 to 2005 for 25 countries, the
World Bank’s data from 2004-2020. After the detection of data irregularities, the World
Bank decided to first interrupt and later suspend updating its indicator, which means the
most encompassing indicator set was discontinued in 2020.
Figure A4.8: Breakdown of institutional features of insolvency regimes in the World Bank doing business indicator
2020
Note: a higher number indicates presence of more institutional features.
Source: FISMA with World Bank data.
215
From 1970 for 5 countries (Germany, France, United Kingdom, United State of America and India).
115
Figure A4.9: Breakdown of institutional features of insolvency regimes in the OECD insolvency indicators 2016
Note: a higher number indicates presence of institutional features that delay the commencement and
resolution of insolvency proceedings. Others relate to court involvement, distinction between honest and
fraudulent bankruptcies and rights of employees.
Source: FISMA with OECD data.
The CMU context suggests a focus in the analysis on the position of foreign investors,
which suggests that if specific measures of investors’ information costs were available
and these could be related to insolvency indicators, it would be possible to derive
estimates how the different policy options would reduce information costs.
Unfortunately, these gauges are not available and it has not been possible to identify
other indicators to replace them. Yield differences between comparable financial
instruments could be candidates. In practice, yield differences are usually found
determined by differences in risk and liquidity premia. While the economic literature
identified information costs as major reason for the home bias,216
information costs are
measured indirectly, i.e. through geographical distance, common language, common
legal tradition, telecommunication costs etc.217
Since the home bias is determined by
other factors than information costs, it seems not suitable to use measures of home bias
as proxy for information costs.
2.2 Output-oriented indicators: Recovery rates
The World Bank Doing Business indicator on insolvency was spearheaded by a group of
academics that created an indicator based on the outcome of insolvency proceedings. The
most important one is recovery rate that a creditor can expect to receive as return when
the underlying company defaults.218
The aggregate World Bank insolvency indicator
combined such recovery rate with the institutional approach, both weighing half in the
aggregate score. The recovery rate reflects the value or price of a company that enters the
insolvency proceeding. When deciding on the investment, the creditor could use the
216
See for example the literature reviewed and empirical analysis in Roque Cortez (2014).
217
See for example, Portes and Rey (2005), Aggarwal et al. (2012).
218
See Djankov et al. (2008).
116
expected recovery rate in combination with the likelihood of insolvency to establish the
risk of the investment, and accordingly the risk premium requested. The standard formula
for the recovery rate consists of three parameters. First, the loss of value or recovery
value. This will generally be much smaller than 100%, but must not be zero because even
if the borrower is insolvent, there may still be cases with a positive value. Second, the
costs of insolvency proceedings, which are at least the costs for the court and
administration of the insolvency. Third, the time until the recovery value is paid. The
formula below shows the recovery rate RR as the present value of a payment that
depends on the recovery value RV, the judicial costs C, the interest rate r and the time t
until the payment is received.
𝑅𝑅 =
𝑅𝑉 − 𝐶
(1 + 𝑟)𝑡
The recovery value RV is not a fixed, exogenously determined amount, it tends to
decline the longer the duration of the process (“melting ice cube” phenomenon). Beyond
the depreciation of physical assets over time, their value deteriorates if they are not used.
Business lines that may still be viable on their own become less valuable if business
relationships are interrupted.
RV will generally be smaller than 100%, but it is often not zero because, even if the
borrower is insolvent, there may still be assets with a positive value. RV declines the
longer t (so called, “melting ice cube”). The time t until the recovery value is paid,
discounted by the interest rate r. The longer t, the lower RV and higher C. The costs of
insolvency proceedings C are at least the costs for the court and administration of the
insolvency. They also include information and legal costs for creditors.
The World Bank used this formula to calculate recovery rates for most countries of the
world. It requested insolvency experts to establish for their jurisdiction what they expect
these three parameters to be. Hence, the World Bank compiled data on the recovery
value, the time to recovery and the costs of proceedings. To accomplish internationally
comparable numbers, the insolvency experts were asked to assume a standard scenario,
consisting of a hotel that went into insolvency and that creditors had secured their claim
with the hotel and its interior as collateral. For the recovery value, two scenarios were
assumed. Either the hotel was restructured. In this case, the recovery value would be
100% minus the depreciation of the assets times the time the insolvency procedures
takes. For the calculation of the depreciation, it was assumed that the assets consisted of
the furniture, with a value of 25% of the assets and that they depreciated by 20% per
annum.219
If the hotel was liquidated, the recovery value had to be estimated and could
not be larger than 70%. The calculations for most EU Member States assume the hotel is
restructured. The scenario of a liquidated company is used in ten smaller Member States,
yielding recovery rates between 38 and 60% in the last release 2020.220
The main
criticism on the recovery rates related to the fact that the assumed scenario of a hotel was
not representative for other corporations. The methodology came also under criticism
when it appeared that calculations for some countries were politically influenced, which
led to the suspension of the Doing Business indicators. That said the Doing Business
219
When introduced into the formula RV would be 100-25*20%*t in case of restructuring.
220
These were BG, EL, EE, HR, MT, HU, LV, LT, LU, RO and until 2015 SI.
117
recovery rates performed well when academics or staff from international organisations
used them in empirical analysis.
Credit rating agencies and banks collect information about actual recovery rates from
their daily business, with credit rating agencies having their strengths in corporate bonds
and banks in corporate loans. Although the business model of credit rating agencies
consists in assessing the likelihood and consequences of default, their information base is
limited. For example, the data base of a major credit rating agency analysed for this
exercise reported about 110 cases of default per year on average 2017-2021, of which 21
from European entities. The information from this credit rating agency points to recovery
rates being volatile over time and depending on the type of financial securities. For
example, recovery rates of secured senior bonds221
varied between 50 and 70% in the
period 2017-2021, those of unsecured bonds between 30 and 50%. These numbers relate
to global markets. When looking at US markets, the recovery rate of secured loans varied
between 50 and 82% in the period 2017-2021. The difference in the recovery rate of
these loans to unsecured bonds moved in the range between 0 and 25%. The variation
seems rather large compared to what one would expect if the only influential factor were
the business cycle. This suggests the composition of the panel has also an important
influence.
It would be possible to calculate statistics on the expected recovery rate as a function of
the yield difference of a corporate bond or credit default swap to the safe interest rate and
the expected likelihood of default. While such formulas are readily available, the
calculations would require abstracting from risk aversion, liquidity premia and other
market specific factors that could weigh on the arbitrage assumptions underlying such
calculations. Apart from reservations of whether arbitrage conditions on financial
markets hold as theory suggests, the close interdependence of the two unknown, namely
the likelihood of default and the recovery value, casts doubts on the usefulness of such
calculations. It would also be possible only for those corporations hat issued a bond or
for whose debt there is a credit default swap.
The most granular source of information on recovery rates and recovery time is a study
carried out by the European Banking Authority (EBA) in 2019/20. Prior to this exercise,
the Commission had tasked an external contractor tasked to collect such data, but
suspended the work in 2017 because it turned out that it was not feasible to obtain
recovery rates at sufficient depth and representativeness. As follow up to this failed
endeavour, the EBA carried out a benchmark study. It collected data from banks in the
EU Member States on gross replacement rates, net replacement rates, i.e. after judicial
costs, time for recovery and judicial costs. It performed three rounds of verification of
data to ensure high quality and robustness of data.
The breakdown is consistent with that used by the World Bank, with the notable
expectation of the recovery rate. The EBA term recovery rate is equivalent to the
recovery value in the World Bank. The EBA recovery rate is the amount the bank
recovered relative to the notional amount of the debt at the time of default, i.e. includes
possible depreciation of the value but does not discount for the time of waiting. The gross
recovery rate is derived from the amount before any deduction of any costs and the net
221
First lien bonds.
118
recovery rate after deduction of costs. Numbers were collected for corporate credit, SME
credit and also on other forms of credit that are less relevant for this impact assessment
(i.e. commercial and residential real estate loans, credit cards, other consumer loans). 55
banks provided data on more than 4000 corporate loans and 105 banks on more than
150000 SME loans.
The table below shows the results for corporate credit, also demonstrating that the
number of observations was low for many Member States and the bank populations not
representative. The EBA exercise revealed that banks are using very different data
standard to monitor loans defaults and recovery, which complicates the compilation of
statistical data. The Commission is currently investigating with ECB and EBA possible
ways forwards, including through the use of AnaCredit data.
119
Table A4.4: EU Benchmarks, Gross Recovery rate (%) per EU Member State - corporate
Country of
the formal
enforcement
Number of
observations
Number of
banks
Simple
average
Weighted
average
Standard
deviation
1st quartile Median 3rd quartile
AT 38 3 34.9 41.3 40 1.7 16 76.3
BE* *Not shown - - - - - - -
BG 252 3 67.9 53.6 39.3 23.6 97.1 100
CY 57 2 17.6 18 28.1 0 2 18.5
CZ 38 2 6.9 5 11.5 0 0 17.5
DE[1] 10 3 33.3 26.9 15.5 15 41.1 41.3
DK 17 3 95.2 97.7 11.3 99.1 100 100
EE 27 1 56.6 54.7 33.4 46.3 57.3 80.6
ES 332 6 42.2 54.6 43.8 0 25 100
FI NA - - - - - - -
FR 85 3 35.6 48.6 36.6 2.9 16.2 60.6
GR 353 2 10.9 10.7 28 0 0 0
HR 726 1 30.2 60 41.2 0 2.3 74.9
HU NA - - - - - - -
IE[2] NA - - - - - - -
IT 878 11 32.3 29.4 37.5 0 14.3 60.1
LT NA - - - - - - -
LU* *Not shown - - - - - - -
LV NA - - - - - - -
MT* *Not shown - - - - - - -
NL 180 2 67.5 42.9 35 49.5 70 100
PL 321 4 6.9 5 21.2 0 0 0
PT 403 5 35 21.1 41.2 0 8.4 82.3
RO 68 3 69.3 55.7 37.1 35.8 91.5 100
SE 14 3 92 100 20.5 100 100 100
SK 458 1 94.7 93.2 17.9 99.9 100 100
SK 14 2 28.6 24.8 40 0 3.1 28.2
EU27 4,277 55 40.4 26.2 43.4 0 16.2 100
NO NA - - - - - - -
Note: * not shown when the number of observations is below five. The EU27 include not shown observations.
[1] Based on a very low volume of observed data and, therefore, making generalisations about the whole banking sector can be
misleading.
[2] Where non-judicial debt settlement (i.e., voluntary sale/surrender of property) are prominent features of workout in national financial
systems distressed debt workout, judicial enforcement benchmarks will not reflect work out recovery rates, costs, or duration.
[3] For Corporate, SI shows a high number of loans with negative recovery amounts (46% of the total number of loans for the sample in
the country). In case these loans were considered, the net recovery rate and gross recovery rate would be 50.4% and 50.8%, respectively.
Source: EBA (2020).
120
There is little information about the actual costs of insolvency procedures. Franks and
Loranth (2014) in an analysis of bankruptcy cases in Hungary found that legal costs and
fees accounted for 6 to 14% of the asset value on average. Costs are higher in going
concern compared to immediate closures. This compares to 18% in the UK and 4.5% in
Sweden, which however date back from sources in 2000 and 2005. The insolvency
experts that populate the World Bank Doing Business index with their estimate of
judicial costs produced numbers of 14.5% for Hungary and 10% for Sweden. Difference
are due to different approaches and experiences. The table below reveals that the
empirical study by Franks and Loranth builds on around 100 cases. The EBA collected
data on judicial costs of loan enforcement from banks in its benchmark report (EBA
2020). The EU average was 2.1% of the outstanding value for corporate loans and 8.1%
for SME loans. The EBA reported that foreign banks indicated higher judicial costs than
domestic banks. When taken at face value, the average judicial costs for corporate loans
are highest in Estonia, Romania and Bulgaria, those for SME loans in Greece, Portugal
and France. The substantial difference that emerges in the country ranking when the
weighted average instead of the simple average is taken suggests that the share of judicial
costs is strongly determined by the magnitude of the underlying loan.
Table A4.5: Bankruptcy costs for Hungarian companies in Franks and Loranth (2014)
Table A4.6: Judicial costs in EBA (2020, in % of nominal outstanding amount)
Corporate loans SME loans
Country of
the formal
enforcement
Number of
observations
Simple
average
Weighted
average
Number of
observations
Simple
average
Weighted
average
AT 37 0.3 0.6 4,462 2.4 1
BE NA – – 61 2.2 2.1
BG 245 6.7 4.6 2,617 11.3 5.9
CY 61 0.6 0.3 893 3.5 0.9
CZ 38 2.3 0.1 8,696 2 0.2
DE – – – 925 2.3 1.3
121
DK 16 0 0 61 0.1 0.1
EE 24 21.2 0.5 14 1.5 0.7
ES 339 2.1 0.7 10,054 3.9 2
FI NA – – 66 0.1 0
FR 11 0.1 0.1 1,480 13.5 2
EL* *Not shown 387 19 7.1
HR 703 0.2 0 850 0.7 0
HU NA – – 20,224 0.1 0.3
IE NA – – 684 2.6 0.1
IT 1,088 1.1 0.2 18,863 1.7 0.7
LT NA – – 371 0.4 0.1
LU 16 0.7 0.5 550 0.6 0.2
LV NA – – 218 0.9 0.8
MT 35 4.9 2.3 60 5.1 2.1
NL 118 0.5 0 16,395 1.7 1.4
PL 331 0.4 0 14,938 0.3 0.1
PT 457 0.4 0.1 30,710 9 1.1
RO 61 13.8 13 7,701 2.4 5
SE 14 0 0 1,693 7.1 0.6
SI 830 0.6 0.6 5,381 0.7 0.6
SK 10 0.1 0.1 589 9.3 4.6
EU27 4,448 1.4 0.5 148,943 3.5 1.2
Source: EBA (2020)
2.3 Implications for the use of indicators in the analysis
The information on recovery values, times and judicial information from the EBA
benchmarking exercise is important input for the analysis. While they are not considered
representative for many Member States, the EU aggregate should be sufficiently
representative for scenario analysis at EU level. Its reliability is demonstrated by the
findings in EBA (2020) of relationships between institutional features of insolvency
regimes and the recovery rate of bank loans obtained from its benchmarking exercise. Its
empirical analysis looked into the institutional variables from EC (2019) as determinants
of recovery rates and recovery time, finding significant coefficients for several of the
institutional variables, especially of collateral arrangements and creditor rankings.
Academic researchers used either the recovery rates or the institutional scores or the
World Banks’ aggregate of both in their studies. Given the good performance of the
World Bank data in empirical research, their broad coverage and assuming that the
reasons for their discontinuity are not found in observations for the EU Member States,
the World Bank indicators are used in the analysis below that requires cross-country
comparisons. Their shortcomings should however be duly noted.
The presence of best practices institutional features should have a positive impact on
recovery rates. Since the World Bank Doing Business data includes also both input and
output indicators, the chart below plots how they compare for the EU Member States in
122
2020. When expanded to all years and countries in the data set, there is a positive, but not
high correlation between recovery rates and the “best practice” institutional approach,
amounting to 0.22 for the EU Member States and 0.57 in all 211 countries covered.
Figure A4.10: Recovery rates and the strength of insolvency frameworks as measured through an institutional
indicator, 2020
Note: The recovery rate is an indicator of the outcome of insolvency proceedings, the institutional index
counts how many of 16 desirable features are present in a country’s insolvency regime. See Table A4.3 for
a breakdown of the desirable features in the World Bank doing business indicator used here.
Source: FISMA with World Bank doing business data.
Further statistical analysis with the World Bank data for the EU Member States 2012-
2020 shows that the variation in the insolvency score explains only a small part of the
cross-country differences in recovery rates. The R2 as measure of the share of variation
explained by the estimate reported in the table below is very small in the simplest type of
estimation. They become higher if GDP per capita is added as additional control variable
(estimates 5 and 8).222
If fixed effects are added (estimates 2-4 and 7), the R2 rises, but at
the expense of declining coefficient and degree of significance of the insolvency index.
This is not fully surprising since institutional parameters of insolvency regimes do not
change a lot over time and are therefore similar to a country fixed effect. In most
specifications, the coefficient ß is significant at the 5% level223
and suggests that a 1
222
A positive correlation between insolvency indicators and GDP or GDP growth is not uncommon in the
literature. They appear in Djankov et al (2008), Smrncka (2015) and Becker and Ivashina (2021), albeit are
interpreted as reverse causation. That is, richer countries are endowed with a better legal system, which
also shows up in a more efficient treatment of corporate bankruptcies.
223
The coefficient is significant provided that country-fixed effects are not used, which reflects that scores
are relatively stable in Member States over time, i.e. are correlated with a fixed effect. Neither the
coefficient nor the level of significance depends on whether GDP per capita is controlled for in the estimate
or not.
123
point higher institutional score improves the recovery rate by 0.5-2.0%pts. This range can
be used to translate changes to institutional scores caused by the policy options into
changes to recovery rates.
Table A4.7: Regression results: insolvency outcome and institutional insolvency indicators
Recovery rateij = Constant + ß * insolvency indexij + γ * GDP per capitaij+ μij
(1) (2) (3) (4) (5) (6) (7) (8)
C 35.5 37.5 41.4 56.5 39.4 36.3 54.0 42.1
ß 2.1 1.9 1.5 0.2 1.4 2.2 0.6 1.3
SE of
ß
0.41*** 0.42*** 0.29*** 0.32* 0.41 0.55*** 0.55 0.55***
γ 8.8E-6 8.5E-6
SE of
γ
1.5E-6*** 1.8E-6***
R2 0.05 0.07 0.87 0.89 0.13 0.06 0.93 0.14
period 2004-2020 (unbalanced) 2012-2020 (balanced)
Fixed
effects
none time country Time
and
country
None none country none
443 and 243 observations, respectively. EU Member States, * significant at 10% level, *** significant at
1% level; i, j per country i and year j.
3. Numerical estimates of the impact of policy options on recovery rates and
institutional insolvency indicators
Quantitative analysis of how the introduction of the measures discussed in the impact
assessment would improve insolvency indicators relies on a number of assumption. This
section presents such analysis and the underlying assumptions. The first section uses the
replies of the results of the Deloitte/Grimaldi survey with insolvency experts presented
above and translates them into estimates about how targeted changes in insolvency
regimes could translate into changes in recovery rates. The second section reviews maps
how the targeted changes in insolvency regimes could improve the institutional
insolvency indicators. This will be the basis to formulate scenario analysis of the
different policy options. The value of these two sections will be apparent in the
subsequent section, which reports estimates of what changes in either recovery rates or
aggregate institutional insolvency indicators imply for monetary and economic variables.
3.1 Survey responses and recovery rates
A new data source is a survey carried out by Deloitte/Grimaldi in 2021/2022 for this
impact assessment. Deloitte/Grimaldi has been tasked to gather insolvency experts’
views on what targeted changes in insolvency regimes would mean for the efficiency of
the insolvency regime, changes to the costs and changes to the recovery time. They asked
120 insolvency experts from 24 EU Member States about their assessment of the impact
of harmonisation of targeted areas in insolvency rules on the determinants of the recovery
rate, i.e. the time of recovery, costs involved or the recovery value. About 38% of the
surveyed experts were legal experts and practitioners or insolvency lawyers, 24%
regulated insolvency practitioners, 12% each judges in commercial courts or from
financial institutions, 9% persons in public administrating handling insolvencies. The
survey asked for estimates how introduction of rules at EU level across various elements
would translate into changes in costs and time of cross-border insolvency cases. Experts
124
were also asked about their assessment of the efficiency of measures across the different
elements.
Figure A4.11: geographical breakdown of respondents to the survey by Deloitte/Grimaldi (2022)
Source: Deloitte/Grimaldi (2022).
125
Figure A4.12: Breakdown by type of respondent in the survey by Deloitte/Grimaldi (2022)
Source: Deloitte/Grimaldi (2022).
Overall, the experts estimate that costs would fall by a double digit percentage
points from measures in most areas. There is no area where more than 25% of the
experts expect that costs would increase. The most optimistic 25% expects cost
reductions of above 20% in most areas. Indications about time savings are highly
correlated with those of cost reductions. In the absence of statistical data, reliance on
expert views is common for all types of indicators in the area of insolvency. Their
average assessment can be considered similar to a “market perspective” where each
opinion might be biased but the aggregation of independent opinions forms an accurate
description of the expected value. Although the experts did not receive guidance on how
effective the measure will be, the context of a survey done on behalf of the Commission
suggests that they assumed a fairly ambitious measure.
Table A4.8: Estimated change of costs from introduction of rules at EU level, distribution of indications from
insolvency experts, in %
Pre-
packs
Avoidance
actions MSE
Asset
tracing
Ranking
of claims
Pari
passu+
Directors'
duties
Creditor
committees
N/A 5.0% 1.7% 2.5% 5.0% 4.2% 3.3% 5.8% #N/A
< - 40% 10.8% 7.5% 10.0% 10.8% 5.0% 2.5% 3.3% #N/A
< - 30% 10.0% 8.3% 11.7% 19.2% 5.8% 6.7% 9.2% #N/A
< - 20% 20.8% 18.3% 15.0% 14.2% 7.5% 3.3% 13.3% #N/A
< - 10% 16.7% 23.3% 15.8% 15.8% 10.0% 12.5% 21.7% #N/A
>-10 and
< 10 20.8% 22.5% 31.7% 12.5% 46.7% 54.2% 36.7% #N/A
> 10% 4.2% 7.5% 5.8% 5.0% 9.2% 6.7% 2.5% #N/A
> 20% 6.7% 5.0% 3.3% 10.0% 8.3% 6.7% 5.0% #N/A
> 30% 4.2% 4.2% 2.5% 5.8% 2.5% 3.3% 2.5% #N/A
> 40% 0.8% 1.7% 1.7% 1.7% 0.8% 0.8% #N/A
Average
cost
change*) 13.5 10.0 11.9 13.4 3.2 2.0 9.3 #N/A**
Average change in time in %
126
12.6 16.1 12.5 16.1 3.9 -0.6 9.4 1.4
+ At least pari passu treatment of certain unsecured creditors (tax authorities, employees etc.).
*) weighted average, used are mid-ranges for each interval. + and -50 for the greater 40 indications.
**) the survey asked only for the reduction in time yielded by harmonisation of rules on creditors’
committees. The average of replies was minus 1.4%.
Since the survey specified numerical ranges for the latter two determinants of recovery
rates, it is possible to transform the experts’ replies into quantitative estimates of the
impact of the targeted changes on recovery rates. The table below reports the results
transformed into the median (50%), lowest and highest quarter (25%). Since expert were
asked to indicate a range, the centre of each range was used to calculate the average.224
Table A4.9: Summary indications of insolvency experts in the Deloitte/Grimaldi survey
Pre-pack
Avoidance
actions
MSE
Asset
tracing
Ranking
of
secured
claims
Pari passu
Directors'
duties
Creditors’
committes
Cost reductions
Approval
rate 58.3% 57.4% 52.5% 60.0% 28.3% 25.0% 47.5%
NA
average 13.5 10.0 11.9 13.4 3.2 9.3 NA
median
10-20 10-20 10-20 10-20
-10 -
+10
-10 -
+10
-10 - +10 NA
Time savings
Approval
rate 67.5% 54.1% 52.6% 65.1% 32.5% 15.8% 46.7% 37.5%
average 12.6 16.1 12.5 16.1 3.9 -0.6 9.4 1.4
median
20-30 -10 - +10 10-20 10-20
-10 -
+10
-10 -
+10 -10 - +10 -10 - +10
The approval rate is the share of insolvency experts that indicated that the measure will lead to a reduction
in costs and time, respectively.
The subsequent table uses the average reduction in judicial costs and time from the
Deloitte/Grimaldi survey and combines it with the simple averages for corporate loans in
the EU from the EBA study about recovery values, recovery time and judicial costs
(40.4, 3.4 and 1.4%, respectively), and the ECB cost of borrowing to non-financial
corporations of 1.36% in December 2021. When using this information to calculate the
recovery rate, the introduction of an MSE insolvency regime would increase the recovery
rate from 37.2 to 37.7%. The impact of other measures on the recovery rate is in a similar
ballpark. The extent of the decline depends on the starting assumption. If the weighted
average instead of the simple average from the EBA study is taken, the impact would
decline by about 1.25% on average, and if the median is taken by 0.4%. This reflects that
small loans have a lower recovery value and higher judicial costs.
224
French respondents are overrepresented in the sample. They were underrepresented in the interim
version of the report, which reported answers from 44 respondents. Averages have remained broadly stable
from the interim to the final report, suggesting that the French overrepresentation has no marked effect on
the average. Exceptions were limited to indications on the time of recovery, where the final sample was
much more optimistic on the time savings from transaction avoidance and less optimistic on the time
savings from pre-packs and creditor committees.
127
Table A4.10: Estimated increase in the recovery rate from the introduction of rules at EU level
Asset recovery Procedural efficiency Distribution of assets Sum
Option 2
Costs in % -39 -12 -3 -49
Time in % -44 -13 -5 -54
recovery
rate (%pts) 1.56 0.38 0.13 2.07
Option 1
Costs in % -28 -12 0 -36
Time in % -31 -13 -1 -40
recovery
rate (%pts) 1.02 0.38 0.02 1.42
Note: Assumptions are a recovery value of 40.4%, recovery time 3.4 years, judicial costs 1.4%, interest
rate 1.36%. Changes in costs and time as average indicated by insolvency experts in the previous table. It is
furthermore assumed that the measure on transaction avoidance under option 1 yields 2/3 of the effect as in
option 2, that of cross-border asset tracing 1/3, that on directors’ duties 2/3.The aggregate effect (sum) is
calculated as the product of the individual effects.
Insolvency experts were not asked how the measure will be implemented. They may
have assumed that the measures they were interviewed about would be transformed
in the most effective manner. Hence, their estimates could be read as the expected
outcome of the most ambitious policy option. Regarding the options on pre-packs, MSEs,
ranking of secured claims and creditor committees, the policy options are ambitious and
therefore their indications were taken as basis for the estimate of the impact of their
realisation on the recovery rate. On avoidance actions, it is conceivable that more
elements than suggested could be harmonised and that in particular the opportunities to
seize assets carries a potential to increase recovery values. The replies by insolvency
experts in Deloitte Grimaldi on the questions of asset tracing and Since the measure
includes the core elements, an estimate that the measure yields 2/3 of the indicated effect
seems conservative. Since cross-border asset tracing is a preparation to asset seizure, it is
assumed that the effectiveness of asset tracing without asset seizure in option 1 yields
only 1/3 of the effect. Regarding directors’ duties, option 2 is encompassing, while the
absence of a change in the direction of their interest from shareholders to creditors should
lead to a discount. It is assumed that the obligation to file for insolvency accounts for 2/3
of the impact on the recovery rate.
The survey asked for an assessment of the effectiveness of various means to facilitate the
treatment of cross-border asset recovery. More insolvency experts expect a significant
increase in efficiency from the cross-border access to registries for asset tracing than
from more powers for IPs to trace and recover assets. While fewer experts expect a
significant increase from asset tracing and asset recovery than from the cross-border
access to registries for the purpose of asset tracing, overall 70% expect a more than
minor increase in the efficiency from the latter. Regarding better cross-border access to
different kinds of registers, for asset tracing, of business actors, and of initiated
insolvency procedures, experts’ assessments are very similar. More than 75% expect a
more than minor increase in efficiency.
128
Figure A4.13: Share of insolvency experts expecting a
change in the efficiency in cross-border insolvency cases
Figure A4.14: Share of insolvency experts expecting a
change in the efficiency in cross-border insolvency cases
from acces to registries
Source: FISMA with Deloitte survey data. Source: FISMA with Deloitte survey data.
The insolvency experts were not asked about cost and time savings of the transparency
enhancing measures. These measures can also not be expected to lead to a direct
reduction in time and costs, but to the already impossible to measure information and
learning costs. The insolvency experts were however asked about the impact on the
effectiveness on cross-border investors of certain types of transparency enhancing
measures. Their assessment of the effectiveness is comparable to that of the other
measures. For example, they rated a glossary of insolvency terms as efficient as common
rules on the treatment of senior creditors and a standard ontology as comparable to the
pre-pack.
Table A4.11: Assessment of insolvency experts of measures to increase the increase transparency in insolvency cases
for foreign creditors (distribution of views).
Impact on the
effectiveness
for the creditor
Development
of a glossary
of insolvency
terms and of
the equivalent
professional
figures in
different
jurisdictions to
aid translation
of claims
filing.
Standard
ontologies (A
set of concepts
and categories
in the
insolvency
subject area
and domain
showing their
properties and
the relations
between them)
Standardised
models for
filing claims
Insolvency-
dedicated
automated
translation
tools for
documents,
inscriptions
into registries,
insolvency
proceedings
Authentication
and validation
of claimants to
ensure
legitimacy of
access and
claims filing
Decrease 0.0% 0.0% 2.4% 0.0% 0.0%
No change 9.5% 22% 7.1% 9.3% 9.8%
Minor increase 26.2% 24.40% 26.2% 25.6% 29.3%
Increase 38.1% 41.50% 38.1% 44.2% 39%
Significant
increase
26.2% 12.20% 26.2% 20.9% 22%
Score 1.06 0.88 1.07 1.07 0.99
Note: The score is calculated by weighing “no change with 0, an increase with 1, a minor increase with 0.5
and a significant increase with 2 and likewise for negative values.
Source: Deloitte/Grimaldi 2022 and FISMA calculations.
Table A4.12: Assessment of insolvency experts of measures to increase the efficiency in insolvency cases for foreign
creditors (distribution of views).
Impact on the
effectiveness
for the creditor pre-pack
avoidance
actions MSE
Ranking of senior
creditors
creditor
committee
Significant 2.4% 2.3% 4.7% 4.8%
129
decrease
Decrease 2.4% 4.5% 2.3% 4.8%
No change 11.6%
Minor increase 21.4% 11.4% 27.9% 7.1% 33.3%
Increase 23.8% 36.4% 20.9% 23.8% 26.2%
Significant
increase 33.3% 34.1% 25.6% 47.6% 28.6%
Score* 0.62 0.78 0.47 0.99 0.33
*) The score is defined as 0 indicating no efficiency gains, 0.5 marginal gains, 1 gains and 2 significant
gains and likewise for negative values. It is calculated by multiplying the % shares with these weights.
3.2 Changes to aggregate insolvency indicators
This section derives estimates of the impact of the various policy options on institutional
indicators of insolvency regimes. This served as robustness check of the validity of the
survey responses. It also adds information on those policy options that were not covered
in the Deloitte/Grimaldi survey. A third motivation for this step is that some academic
studies use these institutional indicators as input for their empirical analysis of
insolvency regimes on economic variables. Simulating what the policy options would
mean for the institutional indicators would therefore allow using the results of these
studies in the subsequent section.
Insolvency triggers
While the consequences of an insolvency trigger should be positive for the recovery time
and the recovery value, there are no means to quantify the effect. The specification of the
insolvency trigger is covered through three features in the World Bank Doing Business
insolvency indicator. Convergence to the best practices would lift the insolvency index
by 0.5 in the 14 Member States that have not yet reached the maximum. This would yield
a 3% point improvement in their overall insolvency score.
The following charts shows an experiment of how the information from the institutional
indicators can be used. It seems plausible to assume that foreign investors will prefer to
invest in countries with a similar insolvency regime everything else equal. The more
geographical dispersed their investment is, the more do investors face variations in
insolvency regimes, suggesting that investment into Member States should be more
clustered the more different and inefficient their procedures. A measure of clustering is
the Herfindal-Hirschleifer index of market concentration applied on intra EU portfolio
investment flows. The left hand chart shows that intra-area portfolio investment is much
more concentrated in countries that score 2.5 in the World Bank sub-indicator of
commencement of proceedings, compared to those that score 3. The comparison of the
concentration225
measure with the best practices in an EC sub-index of commencement of
procedures in the right hand chart below yields a less conclusive picture.
225
A Hirschleifer-Herfindal index over the market share of 83 countries’ portfolio debt investment in the
EU Member States was calculated with FinFlow data for 2020 from the EC Joint Research Centre.
130
Figure A4.15: Intra-EU concentration of capital flows
(Herfindal index versus World bank subindex of
commencement of procedures)
Figure A4.16: Intra-EU concentraton of capital flows
(Herfindal index versus EC 2019 sub-indicator on
commencement of procedures)
Source: FISMA with World Bank and JRC data. Source: FISMA with Steffek (2019) and JRC data.
Creditor committees and ranking of claims
Representation in creditor committees is more costly for foreign investors and bargaining
with other foreign creditors more difficult for them. The empirical estimates in the
economic literature about the impact of insolvency rules on recovery rates and domestic
financing costs226
therefore look equally important for foreign investors and may
represent a lower bound for them.
The introduction of effective creditor committees would lift the World Bank’s
institutional indicators of insolvency. The World Bank indicator defines four conditions
for creditor participation and allocates one score for each of these conditions, which
means that the fulfilment of an extra condition increases the insolvency-strength score by
6%.227
Only one Member State was awarded the full score of 4 out of 4 in 2020 for the
creditor participation index. Applying the coefficient from the relationship between the
recovery rate and institutional features shown in the estimates above, implementation of
one additional feature would increase the recovery rate by between 2.5 and 3.5
percentage points. This compares to the 1.7 percentage points from the scenario results
based on the Deloitte/Grimaldi Survey.
The OECD insolvency indicator would rises if creditor participation became more
effective and a regime for MSEs were introduced. Regarding creditor participation, the
OECD indicator increases by 1 score, representing an increase by 7.5%, if dissenting
investors cannot be crammed down. Only 1 Member State received this score and several
others were attributed half the score for the case that creditors can be crammed down in a
restructuring, but the dissenting creditors do not receive more than in a liquidation case.
Introduction of special procedures for SMEs would improve the aggregate OECD
226
See for example IMF (2019), AFME (2016) and the literature reviewed in Kliatskova and Savatier
(2020).
227
These are “ (i) whether creditors appoint the insolvency representative or approve, ratify or reject the
appointment of the insolvency representative; (ii) Whether creditors are required to approve the sale of
substantial assets of the debtor in the course of insolvency proceedings; (iii) Whether an individual creditor
has the right to access financial information about the debtor during insolvency proceedings; and (iv)
Whether an individual creditor can object to a decision of the court or of the insolvency representative to
approve or reject claims against the debtor brought by the creditor itself and by other creditors.”
131
insolvency by 7.5%pts, which the OECD indicated as missing in 8 Member States. This
might give an idea on the importance of procedures for MSEs.
The estimates in EBA reveal that both the ranking of claims and creditor committees
have a significant impact on recovery rates. When taken at face value, the estimates
suggest that the absence of preferential treatment is associated with a 1.5% higher
recovery value and a 1.3% shorter time to recovery. The size of the coefficients is
independent from whether the public sector or employees as preferred creditor group is
looked at. The EBA (2020) estimates suggest that the possibility for creditors to
influence the proceedings through creditor committees increases the recovery value of
corporate loans by 6 %pts and reduce the time to recovery by 2.5%. This is a much
higher impact than what the insolvency experts interviewed by Deloitte/Grimaldi
indicated.
Judicial capacity
Differences in Member States’ judicial capacity may be the reason why there is no
stronger relationship between institutional indicators of insolvency as “input to the
insolvency process” and the recovery rates as outcome of the insolvency proceedings as
shown in figure A4.10 and Table A.4.6 above. The strong contribution of country-fixed
effects in Table A4.6 underpints the notion that judicial capacity could play indeed a
role.228
An analysis of judicial capacity in the context of insolvency proceedings is useful for two
reasons.
 First, by demonstrating that constrained judicial capacity is a source of low
recovery rates, it could establish a motivation for Member States to improve non-
legal framework conditions. Measures in the competence of Member States, that
they undertake individually, could, for example, relate to setting up specialised
courts (or court chambers), dedicated exclusively to insolvency proceedings, or
better training of insolvency judges. In addition, there could also be additional
measures that Member States can take building on recent EU law setting out rules
for insolvency practitioners (e.g. on conflict of interest).
 Second, the analysis of judicial capacity can sheds a light on the indirect effects
of legal changes to insolvency proceedings on the capacity of courts to deal with
them. Some measures discussed in this impact assessment would directly improve
the efficiency and effectiveness of national judicial systems in dealing with
insolvency proceedings. For example, an earlier start of proceedings (due to
enhanced duties for directors to file for insolvency) as well as better means to
avoid asset misuse, and better means to trace the already misused assets, should
facilitate (and expedite) the work of courts and insolvency practitioners. The
introduction of an MSE regime may lead to a higher workload of courts and
whereas it is not possible to quantify any of the cost savings stemming from the
measure, it can be reasonably assumed that they will outweigh at least partly (if
not entirely) the costs of the new MSE regime.
228
See the high R2s in columns 3, 4 and 7 compared to those in columns without country-fixed effects.
132
There is little literature on the effect on judicial capacity on the outcome of insolvency
procedures.
 Iverson (2018) carried out ann empirical analysis on how judicial capacity
impacts on recovery rates and the likelihood of whether companies are
restructured or liquidated case load with US data. He found restructuring more
frequent and that the recovery value was significantly lower in busier courts.
 EC (2019) retrieved information about judicial capacity through four questions of
which two were numerical: The court cases per capita, the ratio of incoming over
resolved cases, whether there are specialised courts for insolvency cases and
whether it is possible to communicate electronically with courts and insolvency
administrators. Many Member States did not give indications on the numerical
questions. Those that did said that the clearance rate was close to 90%. 20
Member States indicated there were courts specialised in insolvency cases.
 EBA (2020) did not report court capacity a significant determinant of recovery
rates or time.
 The left-hand chart below suggests a weak positive correlation between judicial
costs and recovery time. The right-hand chart below reveals that the notion of a
linear positive relationship between judicial costs and judicial capacity does not
appear when numbers from the EC benchmarking exercise are used instead of the
Figure A4.17: Recovery time and legal costs in the World
Bank insolvency indicators, 2020
Figure A4.18: Judical capacity and recovery
performance for SME loans in the EC insolvency
benchmarking exercise
Source: FISMA with World Bank Doing Business data. Source: FISMA with data from EBA (2020) and Steffek
(2019).
The number of about 150,000 corporate insolvency cases per annum in Table A4.1
compares to about 40 million cases brought to court in the EU Member States each year,
i.e. less than 0.4%.229
This low aggregate number hides substantial differences across
Member States. Using the ratio of both, the proportion of insolvency cases is on average
1.4% across the EU Member States. There are two Member States where the proportion
is much higher: Cyprus at about 12% and Luxembourg at 9%. Both Member States are
known to the the domicile to numerous holding companies, often of multinational
229
40 million court cases is a broad approximation based on the numbers of criminal, civil, commercial,
administrative and other cases reported to Eurostat. Not all Member States report and data is not complete
over time and types of court cases. It covers only first instances. A second data source is the EC Justice
Scoreboard, which builds on data delivered by Member States to CEPEJ (2022). It does not cover criminal
cases, lacks some Member States and shows different data than Eurostat for some Member States.
133
character, which may be wound up more often than other enterprises.230
The average of
the EU Member States without those two would be 1.1%.
Insolvency cases seem to last much longer and therefore be costlier than other cases.
Although direct data on the costs or length of corporate insolvency cases is not available,
the EBA data on the time to recovery indicates an average length of about 3 years across
EU Member States, the World Bank recovery time is about 2.5 years among those EU
Member States where the data is derived for the case of a wound up corporation.231
This
compares to an average of 0.71 years in the time to resolve a non-criminal in the first
instance according to the EC Justice Scorebard.232
The EC Justice Scoreboard even
reports numbers for the length of insolvency cases for a number of Member States. These
data, however, refer to total insolvency cases, i.e. personal and corporate. The average
was 514 days in 2020 in the reporting 18 Member States.233
This disposition time was
longest in Malta (3407 days), Czechia (1460) and Spain (1187). If one accepts the length
of proceedings as an indicator for the cost of a judicial process, insolvency procedures
are about two times more expensive than other non-criminal court procedures.
As second metric for the efficiency of a judicial system, CEPEJ (2022) uses clearance
rates as the ratio between closed and incoming cases. This metric is available for non-
criminal cases and – for a limited subset of Member States – for insolvency cases. It
shows that the average clearance rate of insolvency cases across the EU Member States
was 108.6% in 2020, up from 105.3% in 2019.234
The clearance rates were close to or
above 100% in most Member States in 2020, with the exceptions of Bulgaria (89.2%)
Malta (42.9%) and Spain (78.9%). These three Member States had also higher than
average judicial costs in EBA 2020 (see Table above). Overall, the magnitude of judicial
costs and time to recovery appear related. More efficient organisation of judicial
processes could bring down both and seem to be particularly valulabe for those few
Member States with low clearance rate to reduce their backlog.
The table below summarises these different indicators of judicial efficiency at Member
State level in order to identify where judicial systems are more stretched in general, more
stretched from insolvency cases in particular and where therefore changes to corporate
insolvency regimes may led to bottlenecks. The colour code signals that an indicator is
below a certain threshold considered as warranted, i.e. a clearance rate below 100%
means the court system was not able to cope with the incoming cases in a year and a
more than average disposition time unveils that cases take longer than in other Member
States. The indicators stem from the EC JUST scoreboard and the CEPEJ (2022) study
230
The Luxembourgish statistics show that holding companies and fonds account for about 30% of the
corporate insolvency cases.
231
These were BG, EE, EL, HR, LV, LT, LU, HU and RO.
232
There is no natural benchmark for the length of a court process at EU level. There is no 2019 data for
six Member States, including DE. The length varies between 19 days in DK and 882 days in CY. The
number of 0.71 years (equal 260 days) was derived as the population weighted average of all Member
States that reported data for 2019. The simple average was 175 days. The weighted average is higher
because the two largest Member States in the panel had above-average disposition times Data for 2020 are
higher, due to the Covid crisis.
233
See CEPEJ (2022), Table 3.5.1. The 382 days disposition time for insolvency cases compares to 365 for
employment dismissal cases and 188 for litigious divorce cases in 2019.
234
Not all Member States contributed data.
134
underpinning it. Since the CEPEJ study documents wide differences in how numbers are
reported, the cross-country comparision needs to be treated with caution. It provides an
illustration and starting point for more detailed research. Obervations are missing for
some Member States (DE, EL, PT) The Covid crisis may furthermore distort the
information from the 2020 observations, which are the most recent available to date. That
said, the simple benchmarking exercise undertaken with the table below already suggests
numerous valuable insights.
Markedly low clearance rates in Cyprus, Ireland and Spain suggest that the general court
system faces a tighter work load relative to other EU Member States. In most Member
States the clearance rate was above 100% in 2020 or slightly below. In some of them,
however, the rate decline relative to one below 100 in the year before, suggesting a rising
backlog: France, Malta, the Netherlands. In Cyprus, France, and Malta, the low clearance
rate coincides with a longer duration of court cases.
The clearance rate of insolvency cases was on higher average than for other non-criminal
cases. In Ireland and Spain it was still very low in line with the hypothesis of tight court
capacity in general. While there is no data for Cyprus, the very high recovery time for
corporate and SME loans in the EBA benchmarking exercise suggest the situation is
similar in that Member State. The clearance rate for insolvency proceedings was also low
in Belgium, Bulgaria and Malta, whereas the low rate in Hungary in 2019 contrasts with
a very high rate in 2020.235
The low insolvency clearance rate in Malta is consistent with
longer duration of insolvency proceedings. The indications are less clear cut for Belgium
and Bulgaria.
Based on these two metrics, Cyprus, Ireland, Spain and Malta were identified as the
Member States that would potentially be the most exposed to a possible negative
consequence from the MSE regime on their respective court capacity. Spain has,
however, just introduced a special shortened insolvency procedure for micro-companies
which is already available also for microcompanies with no assets. The EU MSE regime
is therefore unlikely to lead to a further significant impact (beyond that from the
implementation of the national regime) on their judicial capacity.
235
The absolute number of Hungarian insolvency cases reported in CEPEJ (2022) is much lower than the
number of corporate insolvency cases in Hungarian statistical office.
135
Table A4.13 Metrics of judicial capacity to deal with insolvency cases in the EU Member States
Non-criminal cases Insolvency cases Time to Recovery
Clearance rate Disposition time Clearance rate Disposition time Corp. SME
2019 2020 2019 2020 2019 2020 2019 2020 2019 2019
AT 100.4 99.7 58.6 63.2 100.5 120.4 144 149 1278 840
BE 100.8 98.1 NA 29 NA NA NA 1059
BG 99.1 100.9 93.2 107.5 100.2 89.2 237 281 1497 1424
HR 92.8 103.6 130.3 119.5 131.2 141.5 276 328 876 110
CY 97.9 88.3 882.4 1086.7 NA NA NA NA 803 1497
CZ 100.8 98.2 157.5 170.4 104 103.2 1201 1460 1862 1570
DK 100.6 100.8 18.8 17.3 99.9 128.1 345 296 621 1095
EE 100.0 101.3 31.5 24.8 98.7 97.3 96 54 402 730
FI 94.8 105.1 105.3 97.5 98.7 121.6 253 198 913 511
FR 99.4 93.6 387.8 554.4 105.6 147.5 NA NA 1825 1351
DE NA NA NA NA NA NA NA NA 2117 621
EL NA NA NA NA NA NA NA NA 475 548
HU 100.7 98.3 69.2 80.5 84.6 147.6 112 8 NA 657
IE 75.4 62.0 NA NA 84.1 105 NA NA 2373 2227
IT 103.3 102.6 367.2 471.5 101.4 101.2 111 143 1935 2336
LV 100.0 99.0 25.4 27.8 121.3 141.5 573 502 NA 803
LT 101.2 96.7 51.5 67.8 120.5 140.9 262 255 NA 1168
LU 92.6 95.2 NA 158.2 100 100 NA NA 511 694
MT 91.3 90.9 343.9 413.5 121.4 42.9 1031 3407 2081 1935
NL 99.6 98.5 79.7 91.0 NA NA NA NA 511 657
PL 90.2 104.3 111.2 109.9 94.6 99 130 105 73 438
PT NA NA NA NA 101.2 99.2 47 59 1132 1205
RO 100.2 96.7 151.7 185.5 115 112.8 331 399 1424 1387
SK 91.1 113.0 134.9 86.8 101.6 103.4 33 36 1387 913
SI 101.8 98.9 55.9 69.4 140.7 138.1 545 589 2555 1460
ES 93.6 89.8 274.3 348.8 86.1 78.9 1146 1187 840 1205
SE 100.4 102.2 138.4 123.3 NA 109.7 NA 305 657 219
AVG 97.0 97.4 174.7 203.4 105.3 108.6 381.8 513.7 1132 1132
BM 100 101 174.7 203.4 105.3 108.6 381.8 513.7 1132 1132
CBM 90 90 350.0 406.9 210.6 217.2 763.7 1027.5 2263 2263
Data in italics and smaller font considered not representative (DE and IE), insolvency cases cover corporate and personal
insolvency, the recovery time relates to corporate (corp.) and SME loans. Clearance rate in % (concluded to incoming cases),
disposition time and time to recovery in days, AVG = average, BM = benchmark (100% or average), CBM critical
benchmark (90% or two times average). Observations weaker than benchmark in yellow and if weaker than critical
benchmark in red.
Source: CEPEJ (2022) for non-criminal and insolvency cases, EBA (2020) for time to recovery
Nevertheless, it needs to be stressed that the heterogeneity of court systems across
Member States and the existence idiosyncratic factors prevent strong conclusions from
the exercise above. Two idiosynractic factors are worth highlighting.
136
First, some Member States do not open an insolvency proceeding if the available assets
are lower than the cost of the proceedings. This practice reduces judicial burden.
Respondents to the public consultation pointed at Belgium, Germany, Spain, Greece and
Italy and Austria as examples. While there is no encompassing data overview, the
German data demonstrate the magnitude of this phenomenon: The German statistical
office published detailed data about the distribution of insolvency cases across corporates
in 2021, revealing inter alia that the majority of cases concern assets worth EUR 50,000
to 250, 000, followed by those in the range 5000 to 50,000. The average claim per case
was EUR 3.5 million in that year. Almost 30% of the insolvency applications were
rejected, most often for those with claims below EUR 5,000. Between 5 and 10% of the
applications were rejected even for claims above EUR 250,000.236
Figure A4.19: Distribution of corporate insolvency
applications in dependence of predicted claims in
Germany 2021
Figure A4.20: Share of rejected corporate insolvency
applications in dependence of predicted claims in
Germany 2021, in %
Source: FISMA calculations with Destatis data. Source: FISMA calculations with Destatis data.
Second, Member States may have different approaches how they allocate court capacity
to different types of cases. Societal preferences, political and economic needs may have
an impact. France introduced a special simplified insolvency procedure for MSEs in
2019. The coincidence of a low clearance rate for non-criminal cases and a high one for
insolvenc cases may reflect that France allocated more court capacity to deal with
insolvency cases to make the new MSE regime work. The profound improvements in the
insolvency clearance rates in Hungary and Ireland between 2019 and 2020 may also be
caused by a reallocation of resources to insolvency cases, albeit it is also possible that
lower insolvenc cases during the Covid crisis contributed too. Apart from these two
Member States and France, a strong increase in insolvency clearing rates, coinciding with
a weakening of total clearance rate can be observed for Austria, Latvia and Lithuania.
MSE loans
Mirco and small firms are the backbone of the EU economy. The available data suggests
they face two adverse effects. First, outcomes from insolvency proceedings tend to be
poorer for smaller than for larger corporations. Second, in the Member States that
practice the rejection of credit applications because the costs for the judicial outweigh the
estimated revenues, small firms are more likely to find their application rejected. The
236
The share of rejected applications was even higher at 32% in Austria in 2021 according to KSV1870
(2022). The average expected claim of all applications was EUR 540,000 in 2021 and 1 million in 2020.
137
benchmarking study by EBA (2020) documents evidence of the first effect: Non-
performing SME loans were more frequent than corporate loans in. Banks reported more
than 150,000 SME loans and 4500 corporate loans that were non-performing. The study
found that the benchmark recovery value of SME loans was about 5 percentage points
lower than that of corporate loans for the EU average, but higher in 7 of the 18 Member
States for which both numbers could be established.The recovery time was broadly
similar, with shorter time in 15 out of 26 Member States. Since the wind-down of a larger
corporate than of a micro enterprise is more complex, one would expect that it takes
longer. A longer recovery time for SME than for corporate loans could therefore indicate
efficiency potentials from simpler procedures for small firms. Among the Member States
for which this is the case are Member States with tight court capacity: Cyprus and Spain.
Also Italy, Portugal and Luxembourg could have such efficiency potential. Judicial costs
– measured in % of the recover value are 2.5 times higher for SME loans than for
corporate loans (1.4 vs 3.5%) in relative terms for the EU aggregate, but not in all
Member States.
The previous section already presented the issue that corporations find their application
for insolvency rejected, which leads their creditors to retract to individual enforcement
procedures and increases the uncertainty for the debtor when he will be granted a second
chance. Germany and the France follow different practices and both publish granular data
to allow for a comparision.
 In Germany, corporations with up to 10 employees accounted for 87.8% of all
firms, 92% of the insolvency applications and 31% of the rejected credit
applications. In total numbers: 4036 micro firms found their credit application
rejected in 2021, out of a total of 9500 total corporate insolvency applications.
The smaller the firm, the higher the ratio of rejection.
 France introduced a new insolvency regime for MSEs in May 2019. A standard
winding-up procedure lasts on average 2 and a half years while the simplified
court-supervised winding-up procedure should lasts overall 1 year.237
Micro firms
amount for 96% of the firm population and 94% of the insolvency cases. Their
share in total insolvency cases did not increase with the introduction of an MSE
regime, the slight decline since then started in the months before the Covid crisis
and accelerated during this crisis. In the months up to the end-2019, the share of
insolvent firms relative to exiting firms also declined. One could have expected
that access to a simpler insolvency regime could increase this share.
 Data is patchy for other Member States. Greece introduced an MSE regime in
June 2021. There is not data yet to monitor the effect. 79% of the insolvent firms
had fewer than 10 employees in Spain 2018-2020. In Austria, 32% of credit
applications were rejected in 2021.238
237
The completion of a simplified procedure takes between 6 to 9 months for a MSE with a single
employee and a net turnover of less than or equal to EUR 300 000.
238
See KSV1870 (2022).
138
Figure A4.21: Corporate insolvencies in Germany by
number of employees, 2021
Figure A4.22: Share of corporate insolvencies of micro
firms (less than 10 employees) in France
Source: FISMA calculations with Destatis data Source: FISMA calculations with Banque de France data
Granting all insolvent corporations access to insolvency proceedings could pressurise
judicial capacity since the recovered assets would in many cases not be sufficient to
cover the judicial costs. Any quantification of the effect would rely on strong
assumptions and the combination of data from different sources. the best that can be done
is to be transparent on the data and assumptions.
 One of the assumptions can be derived from the indications of insolvency experts
in the survey by Deloitte/Grimaldi (2022). They point to time respectively cost
savings of about 12% from the introduction of an MSE regime. This is still
substantially below the shortening that the French MSE regime aims for, i.e. from
2 to 1 year.
 The EBA (2020) benchmarking exercise revealed judicial costs of 3.5% of SME’s
nominal amount of outstanding debt.
 The EBA does not report the outstanding debt of SMEs and the average amount
of insolvency cases in Germany of EUR 3.5 million looks not representative for
small firms. Eurostat’s national accounts show that the total about of NFC debt
liabilities in the EU is EUR 18324 billion.239
A possibility to estimate the share of
small firms consists in using the 12% share that small coporate loans ( < EUR
250k) represent in total bank loans to NFC in the euro area according to the ECB
MIR statistics. MSEs could therefore have outstanding debt of EUR 2200 billion.
 According to the scenario analysis in IMF (2022), insolvent SMEs could account
for up to 9% of overall SME debt. This number is consistent with the 8.8% share
of MSEs (0 to 10 employees) that exited on average in the EU Member States
2019, using Eurostat data. The large discrepancy between the number of
bankruptcy declarations and the number of market exits (100,000-150,000 versus
2 million) however, suggests that not all firms that exit the market are insolvent.
The large number of corporations without employees or single employees that
exit even suggests that a large share of the firms that exit the market do so
239
NFC loan liabilities EU-27, 2020, non-consolidated. The sum of EUR 12,839 billion loan liabilities and
5,486 other payables. Debt securities are not added because they are hardly used by very small firms.
139
because the owner found employment or that the firm had fulfilled the purpose.
Although it is speculative how many of the exiting firms are insolvent and how
many not, it seems a conservative estimate that at least one third of the exiting
firms will not enter an insolvency procedure.
 Under current conditions, one can assume that one third of the firms is rejected an
insolvency proceeding, akin the share observed in Germany and Austria and that
the remaining two third of the firms the judicial costs will be covered by the
recovered value.
Using the Deloitte/Grimaldi estimate of cost savings and the IMF estimate of exiting
firms for the upper bound and the French 50% reduction and the actual share of
exiting micro firms for the lower bound, an increase in the case load by one third
from the introduction of an MSE regime could lead to higher costs for the public
sector between EUR 900 million and 2000 million. This number is for the EU overall
and represents an overestimation since not all Member States practice the rejection of
insolvency applications. A prominent example is France. The table below shows the
calculation for those Member States highlighted in Deloitte/Grimaldi (2022) as using
this practice. They would encounter a rising case load and when taken together face
additional costs between EUR 550 milion and 970 million. Since there is no data
about the number of rejected applications, except for Austria and Germany, the share
of those two Member States is used for all Member States. Greece introduced an
MSE regime in 2021 and once data becomes available it should be possible to refine
the estimate.
Table A4.14: Assumptions and estimates for the impact of resolving asset-less MSEs in a simplified insolvency
procedure
EU AT BE DE ES EL IT
1 NFC debt
liabilities1)
18324.9 397.6 862.8 3463.8 1499.1 121.0 1674.1
2 share of small
loans 2)
0.12 0.0 0.1 0.1 0.3 0.1 0.2
3 Judicial costs 3)
0.035 0.024 0.022 0.023 0.039 0.19 0.017
4a Share of
exiting MSEs 4)
0.09 0.09 0.05 0.04 0.14 0.09 0.07
4b lower bound 5)
0.06 0.03 0.03 0.09 0.06 0.05 0.06
5 share insolvent
assetless MSEs
6)
0.33 0.33 0.33 0.33 0.33 0.33 0.33
6a cost savings
from MSE
regime 7)
0.12 0.12 0.12 0.12 0.12 0.12 0.12
6b Higher bound 8)
0.5 0.5 0.5 0.5 0.5 0.5 0.5
[1]*[2]*[3]*[4] *[5]*(1-[6])
8 lower bound9)
0.914 0.003 0.011 0.166 0.270 0.019 0.082
9 upper bound9)
2.012 0.004 0.019 0.292 0.475 0.034 0.145
1)
Loans and other payables, Estat sectoral national accounts in EUR billion, 2)
ECB MIR, loans
smaller EUR 250,000 to total loans, 12/2020 except EL (04/2021), 3)
EBA(2020), simple average
2019; 4)
Estat for firms with less than 10 employeees, 2019, except EL 2016, consistent with IMF
(2022) projection, 5)
two third of the previous column as ad hoc assumption 6)
assumption based on
data in DE and AT, 7)
assumption based on insolvency experts in Delotte/Grimaldi (2022), 8)
assumption based on the reduction in France from 2 years to 1 year. 9)
in EUR billion.
140
This calculation assumes that there is no cross-subsidisation of corporate insolvency
cases. It also assumes that the judicial costs reported in EBA (2020) are sufficient to
cover the cost of the insolvent proceedings for firms that were accepted for insolvency
procedures, i.e. that the public sector does neither carry additional costs for the running
of insolvency proceedings financed by tax payers. It also implies that the public sector
will use the cost savings from the introduction of a simpler MSE insolvency regime to
boost its revenues.
While the costs of an MSE regime can be substantial, it is, however, not certain whether
these costs would not be outweighed by newly gained efficiencies of a more streamlined
regime. These cost savings would accrue for at least there reasons. First, MSEs that
already have insolvency proceedings opened (or will open them in the future) before the
court under the ordinary procedure would now be able to switch to a more alleviated and
quicker one, saving the costs of judicial review. Secondly, the new regime may allow for
a possibility for MSEs to have a full debt discharge in an out-of-court setting, e.g. before
competent administrative authorities, with faster and cheaper procedures. Thirdly and
finally, the fact that currently insolvency proceedings are often not opened against MSEs
does not mean they do not represent today a burden for courts and authorities. If there is
no insolvency procedure, courts often have to deal with claims by creditors against that
business, sometimes with multiple proceedings instead of one concentrated and
simplified insolvency procedure.
4. The impact of changes in insolvency metrics on financial and economic variables
This section analyses how changes to recovery rates will feed through in financial and
economic developments, applying estimates from the economic literature on the policy
options at hand. The first section looks at the evidence on how the likelihood of business
exits is affected since a change to insolvency regimes is expected to have an immediate
effect on the number of insolvencies. The second section reviews how changes in
insolvency regimes would impact the availability of credit. The empirical literature
identified that better insolvency regimes improve corporates’ access to finance, but this
result has been found with cross-country estimates that cover a large set of countries and
must not necessarily hold for the group of EU Member States.
The academic literature used legal indicators including variables that cover insolvency
regimes and has consistently been able to explain them as determinant of financial and
economic developments. Especially the creation of legal variables by the World Bank has
initiated empirical research in this area and a number of researchers also used insolvency
variables, largely in cross-country comparisons. Kliastkova and Savatier (2020) provide a
survey of this literature, Closset et al (2019) also report case studies at country level.
Although the World Bank Doing Business data has been discontinued, it still represents
the most comprehensive data source. It covers all Member States and contains
observations ranging 2004-2020 for almost all EU Member States.240
The EBA recovery
rates used in the previous section cover only one year and observations for several
Member States are not representative. Hence, when doing further analysis with a panel of
240
A panel with all EU Member States is complete for the years 2012-2020. Observations are missing for
Luxembourg until 2006, Cyprus until 2008 and Malta until 2011.
141
EU Member States and recognition of the time dimesion, there is no alternative yet to
using the World Bank data.
4.1 Business exits and economic adjustment capacity
The seminal study on legal structures as determinant of the occurrence of bankruptcies
found that bankruptcies are higher the more efficient the judicial system and the more
market oriented the financial system.241
The number of bankruptcies are lower if the legal
system combines a more efficient judicial system with stronger creditor rights. The more
costly and lengthy the insolvency procedures, the stronger is the incentive for both
debtors and creditors to keep a defaulting company afloat.242
Empirical analysis with EU
data suggests that a more efficient insolvency regime as measured by a higher recovery
rate is not correlated with a higher rate of business exit or more jobs lost through
business exits. If companies are in distress, however, a more efficient insolvency regime
leads to a higher likelihood that they file for bankruptcy.
This first results stems from the estimates reported below that tried to determine whether
World Banks’ recovery rates can explain the variation of business birth rates, death rates
and persons employed in exiting companies at the level of EU Member States 2004-
2019. The dependent variables are Eurostat numbers of companies entering and exiting
the market, and persons employed in exiting companies, relative to the number
respectively employment in active companies.243
. The estimate explains only a small
share of the variation in business exits across EU Member States and time. Yet, the
recovery rate is significant at 5% level with a negative sign, indicating that an increase in
the recovery rate may even reduce the exit rate of companies. The magnitude of the
coefficient suggests the effect is small, but at least not positive. The World Bank
aggregate institutional indicator did not turn up significant when taken instead for the
recovery rate in the estimate.
241
See Claessens and Klapper (2005).
242
See Jorda et al. (2020).
243
The population are all firms except holding companies. This applies for the years 2007 to 2019, which is
the latest observation currently covered in the Eurostat statistics. For the years 2004-2007, the data
excludes holding firms, public administration and community services; activities of households and extra-
territorial organizations. Control variables are GDP per capita, GDP growth, consumer price inflation, bank
lending rates and dummies for the legal origin (Anglo-Saxon, French, Scandinavian).
142
Table A4.15: Regression results – number of business exits and outcome of insolvency procedures
Business Exitij = Constant + ß1 * Recovery rateij + ß2 * Business exitij-1 + ß3 * Bank lending rate + μij
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Dependent
variable
Number of exiting to active
companyie
Share of exiting companies
with more than 10
employees
Share of employment in
exiting companies
ß1 -0.019 -0.019 -0.019 -0.003 -0.004 -0.005 -0.003 -0.003 -0.005
SE of ß1 0.008** 0.008** 0.008** 0.002 0.002* 0.002** 0.002 0.002 0.002**
Fixed
effects none time time none time time none time time
R2 0.621 0.635 0.681 0.650 0.662 0.600 0.725 0.788 0.823
Period 2005-
2019
2005-
2019
2012-
2019
2005-
2019
2005-
2019
2012-
2019
2005-
2019
2005-
2019
2012-
2019
observations 340 340 200 268 268 192 330 330 195
* significant at 10% level, ** significant at 5% level *** significant at 1% level; i, j per country i and year
j.
The result that companies in distress are more likely to file for bankruptcy the more
efficient the insolvency regime stems from new analysis by the European Commission’s
Joint Research Centre (JRC).244
The study uses a large panel of companies from the EU
Member States 2007-2018 with almost 50 million observations. It analyses in a first stage
macroeconomic and company-specific determinants of companies’ bankruptcy and in a
second stage whether insolvency indicators have an impact on the likelihood that a
company is bankrupt. 245
Two insolvency indicators were used, the World Bank recovery
rate and the World Bank time of insolvency proceedings, both yielding consistent results.
For companies that are not in financial distress, the coefficient suggests a 10% pt higher
recovery rate reduces the likelihood of failure by 0.004%, a 1 yeart faster recovery by
0.048%. Although the magnitude is small, the coefficients are significant at 5% level and
despite the estimate controls for the sector specific bankruptcy rate and other
determinants of corporat default. For companies in distress, i.e. with negative equity in
the previous year, relative to healthier firms, the JRC estimates suggest that the
probability of default in the short-run is larger the higher the judicial efficiency of
insolvency regimes. Quantitatively, the estimated coefficients indicate that, for firms in
distress, a 10% pt higher recovery rate increases the likelihood of failure by 0.5% pt
relative to companies not in distress, and 1 year faster recovery time increases the relative
probability of bankruptcy by 1.4% pt. Furthermore, the descriptive analysis shows that
firms operating in countries with more efficient insolvency regimes are larger and more
profitable, suggesting that the short run increase in bankruptcy ultimately improves
resource allocation and productivity over the medium term..
The context of historically high corporate debt levels and a substantial share of EU
companies with low or negative profitability led to research on how the efficiency of
insolvency regimes affects economic adjustment. A more efficient insolvency regime
speeds up economic recovery after recessions in Jorda et al (2020), which they link to
244
See Fatica et al. (2022).
245
Firms are considered bankrupt if their activity status is given as ”dissolved”, ”in liquidation”, ”inactive”
or ”bankruptcy” or ”insolvency proceedings. They are considered as in distress when showing a negative
equity.
143
fewer zombie companies holding back productivity growth in countries with more
efficient insolvency procedures.246
Similarly, Becker and Ivashina (2021) find evidence
that the number bankruptcies is higher in years with negative GDP growth when the
insolvency regime ranks higher whereas such cleansing of the economy is absent in
countries with weaker insolvency scores. Empirical analysis by OECD staff find a crucial
role of zombie companies in weakening the adjustment process. Capital blocked in
zombie companies is higher the weaker the insolvency regime, which slows down capital
reallocation and ultimately the diffusion of technical progress and productivity growth.247
Their scenario analysis finds that market exit of zombie firms would boost total factor
productivity by 0.7% and 1% in Italy and Spain and up to 0.5% in other countries. The
important role of insolvency regimes on the adjustment capacity of the economy is also
supported by the empirical findings that insolvency regimes encourage entrepreneurship,
the rate of new company entry and different proxies of economic adjustment.248
4.2 Credit volumes
Banks are the most common type of lenders to companies and often enjoy a privileged
treatment in insolvency as senior creditors. Nevertheless, the share of other financial
investors and inter-company loans in total credit provision to NFCs has been increasing
over the last years.249
The recovery value of the insolvent company’s assets in an
insolvency case is hence critical not only for banks, but also for an increasing number of
other (alternative) providers of equity and debt financing. Furthermore, value recovery
could also be relevant for other companies such as suppliers, including many SMEs.
They expect to receive payments from other companies and count on providing services
to them. They often suffer from their trade partner becoming insolvent, what is known
the insolvency domino effect). SME are disproportionately vulnerable to this effect.
Since a more efficient insolvency increases the value a creditor receives in case of an
insolvency, reduces the time it takes until the creditor receives this value, and/or reduces
the legal costs of the proceedings, the strengthening of insolvency efficiency should
foster credit provision. This factor should not be undermined by the higher likelihood
that distressed companies enter into bankruptcy found in the JRC study quoted above if
the shorter and more efficient insolvency process leads to a higher recovery rate. The
seminal evidence that higher recovery rates would foster credit provision to the economy
goes back to Djankov et al. (2008) in a panel of 84 countries. Their estimate showed a
positive relationship between recovery rates and the provision of private credit,
246
See Andrew and Petroulakis (2019) or Djankov and Zhang (2021), see also Ben Hassinem et al. (2019)
for an analysis of zombie firms and insolvency procedures in France, and Gouveia and Osterhod (2018)
and Nieto Carillo e al. (2022) for an analysis with Portuguese firms.
247
Adalet McGowan, Andrews and Millot (2017a and 2017b). See also Andrews and Petroulakis (2019)
and Gouveia and Osterhold (2018) for research pointing to the result that insolvency frameworks are crucal
for the exit of zombie firms and productivity growth in the economy. Acharyia et al (2009) find empirical
evidence that leveraged firms innovate less.
248
See Carcera et al. (2015) for the effect on entrepreneurship, Lee et al. (2011) on firm entry and Box A1
in McGowan and Andrews (2018) for an analysis of economic adjustment.
249
The share of bank loans to non-financial corporations in the euro area declined from above 50% of
corporate loan liabilities in 2003-2012 to 43% in 2020. The share of intra-firms loans measured as the
difference between consolidated and non-consolidated loans in the sectoral accounts increased from below
20% in 2003-2012 to 25%.
144
controlling for the influence of GDP, GDP growth, inflation, legal origin and a variable
that measures the quality of the legal system.250
The estimate suggests a 1 point increase
in the recovery rate could translate into a 0.5 to 0.6 higher private credit to GDP ratio.
Consistent with the results of Djankov et al, World Bank researchers recently produced
the left-hand chart below, which shows a high correlation between recovery rates and
credit provision to the private sector.251
The chart on the right hand-side reproduces the World Bank chart, but with data for the
EU Member States and using the debt of non-financial corporations (NFCs) instead of
private credit. The focus on NFCs is more relevant for the case of this impact assessment
than that of private credit because the focus of this initiative is on corporate insolvency.
Moreover, the EU data allows a broader perspective than bank credit. 252
The picture is
less conclusive than by the World Bank researchers. It reveals that the signs of positive
correlation are clouded by the outlying observations of Malta and Luxembourg. A re-
estimation of the approach by Djankov et al. (2008) with annual corporate debt flows for
the EU Member States 2004-2020 also shows no clear pattern that could be used for
numerical scenarios.
Figure A4.23: Recovery rate and domestic credit to
private sector
Figure A4.24: Recovery rate and debt of NFCs in EU
Member States 2020
Source: Uttamachandani et al. (2021). Source: FISMA with World Bank and Eurostat data.
Causality tests undertaken in Deakin et al (2017) yielded that legal variables are
impacting on the credit volume and not vice versa. Their estimates show that the
direction of the impact on private credit volumes depends on whether legal reforms
reduce the likelihood of default or improve creditors’ right in case of a default. The
former weaken shareholders position vis-a-vis the creditors and lead to higher private
credit. The latter undermine the willingness of managers to provide collateral and lead to
lower private credit. The researchers ran three different types of dynamic models,
finding, however, that the insolvency variable is not significant in the superior type of
model. Hence, they caution that the results are not definite.
250
Days of contract enforcement.
251
See Uttamachandani et al. (2021).
252
Debt is calculated as loans, debt securities (bonds) and trade credit as liabilities on NFC balance sheet.
Loan liabilities include loans from other counterpart than loans, for example inter-firm loans. Data taken
from Eurostat’s sectoral financial accounts.
145
Various factors suggest that there may not be a simple relationship between the
efficiency of insolvency regimes and credit volumes. Already in 2008, an economic
study suggest that weak credit protection induces creditors to look for compensating
measures, in particular to request higher collateral.253
The observation that newer data
does not confirm the initial findings by Djankov et al (2008) of a positive relationship
between the efficiency of insolvency and credit volumes might also be linked to the
concerns that corporate indebtedness has reached non-optimal levels.254
The high ratio of
non-performing bank loans in the past years suggests that actual credit levels might be
higher than optimal in some Member States. While more efficient insolvency regimes
should support a higher sustainable level of corporate debt, it is not possible to determine
the optimal level in the various Member States.
4.3 Capital costs
While the evidence that more efficient insolvency regimes increase credit supply is not
conclusive, evidence that a higher recovery rates reduce corporations’ costs of capital
seems more robust. It is economically intuitive that a higher recovery rate reduces the
risk of an investment and therewith the risk premium imbedded in the capital costs. Two
investigations provide empirical support and their estimates provide indications for the
magnitude of the effect.
First, AFME (2016) found a significant relationship between the recovery rate and the
corporate bond spread. When taken at face value, a 1% increase in the recovery rate
would reduce the bond spread by 3.7 basis points. Even when country-specific fixed
effects are controlled for, the estimates suggest the effect would still be positively
significant, but only half that strong.255
Second, IMF researchers identified that insolvency procedures are a main reason why
debt funding costs of companies vary widely in background notes for the IMF (2019a, b)
exploration of CMU. Differences in recovery rates explain a quarter of the observed
differences in the interest expenses in a panel of companies from 22 EU Member
States.256
In an estimate that controls for capital market developments and bank lending
rates, the insolvency indicator has a larger explanatory power for the remaining
differences in corporate funding rates than other obstacles analysed. Differences in the
recover rate explain 6% of the dispersion in funding rates for unlisted firms and 2% for
listed firms. The scenario analysis of a convergence of recovery rates to the best
performers yielded that funding costs would decline proportionally. A 1 percentage point
increase in the variation of recovery rates translates into about 1 basis point reduction in
the variation of debt interest costs.
An inverse relationship between recovery rate and bank lending rates is also visible in the
chart below across the EU Member States in 2020. More detailed statistical estimates
yielded a significant relationship between the recovery rate and the bank lending rate to
253
See Davydenko and Franks (2008).
254
See Jorda et al. (2020).
255
Further estimates in AFME (2016) with the World Banks’ aggregate insolvency score show a 1
percentage point increase in score is associated with a 27 basis points lower bond spread.
256
The IMF researchers used interest expenses relative to debt as shown in corporate balance sheets’ in a
sample of almost 16000 EU firms.
146
corporates (1 to 5 years maturity) with a coefficient similar to the IMF estimations: A 1
percent increase in the recovery rate would reduce the bank lending rate by 1 to 1.5 basis
points if a number of macroeconomic variables is controlled for. The effect on the bank
lending rate is more pronounced for the recovery time than for the recovery rate.257
Figure A4.25: Bank lending rate and outcome of insolvency proceedings across EU Member States, 2020
Source: FISMA with ECB and World Bank data.
The estimates in the table below show a marginal immediate impact of the recovery rate
and recovery time on the bank lending rate, using World Bank indicators for the EU
Member States 2012-2020. The impact increases to 1 to 1.5 basis points of the recovery
value when the long-term effect is considered.
Table A4.16 Regression results: interest rates and outcome of insolvency proceedings
Bank lending rate ij = Constant + ß * Insolvency ij +γ1 * government bond yield ij + γ2 * bank lending rate ij-1
+ μij,
Recovery rate Recovery rate Recovery time Recovery time
C 0.467 0.506 0.181 0.218
SE of C 0.135*** 0.141*** 0.070** 0.071***
ß -0.002 -0.003 0.059 0.065
SE of ß 0.001* 0.0015* 0.031* 0.031**
γ1 0.042 0.045
SE of γ1 0.014*** 0.014***
γ2 0.820 0.781 0.820 0.779
SE of γ2 0.017** 0.022*** 0.017 0.022***
R2 0.92 0.92 0.92 0.93
observations 243 235 243 235
The estimates cover the period 2012-2020, other macroeconomic control variables (GDP growth, inflation,
output gap) did not turn out significant and have been dropped. The lagged endogenous variable was added
to address autocorrelation of residuals.
257
The coefficient turns insignificant when both country and year-fixed effects are controlled for.
147
The difference in the magnitude between the AFME and IMF estimates on the impact of
changes to recovery rates on corporate funding costs could be due to different reactions
on corporate bond and bank lending markets. Becker and Josephson (2016) find that
higher recovery rates are associated with a higher share of bond relative to bank funding.
The share of bonds in companies debt funding increases by 5%-pts when the recovery
rate increases by 1 standard deviation in their sample, which translates into a rise of the
bond share by 0.25 %-pts for a 1 percentage point increase in the recovery rate. In a new
paper, Becker and Ivashina (20121) show that better insolvency fosters the development
of private debt markets.
Figure A4.26: Market funding and recovery rates across EU Member States, 2020
Source: FISMA with World Bank doing business and Eurostat data.
In view of the important role of bank credit for the financing of the European economy,
the impact of insolvency regimes on bank lending appears to be an important
transmission channel for the adjustment effect. In addition to the impact of insolvency on
credit supply, insolvency regimes have an effect on banks’ exposure to non-performing
loans. Experience from EU countries in the past decade revealed that countries with
weaker insolvency indicators witnessed a higher increase in non-performing loans during
the sovereign debt crisis (Cucinelli et al 2018) and a more sluggish reduction after the
crisis. The reason for the former is likely that banks have an interest to evergreen non-
performing loans when the outcome of the insolvency process is uncertain and lengthy.258
The latter effect was found by studies done by IMF, ECB and Commission staff.259
Since
high NPLs burden banks’ balance sheet, it is intuitive that they reduce bank’s capacity to
lend.260
258
Andrews and Petroulakis (2019) argue that the insolvency framework affects corporate restructuring
also when banks are healthy because they have fewer incentives to start the process of liquidation or
restructuring if insolvency procedures are cumbersome.
259
See Consolo et al (2018), Carcera et al (2015), and Aiyar et al. (2015).
260
In addition to their capacity to move NPLs off-balance sheets through securitisation.
148
4.4 Cross-border investment and risk sharing
The effects of insolvency regimes on cross border investment should be comparable to
those of other institutional determinants such as investor protection, accounting standards
or corporate governance for which the empirical literature established a significant link to
the strength of cross-border investment.261
Legal uncertainty acts as the main
transmission channel to discourage foreign investment.
The more dissimilar the insolvency system abroad is from that in the home country, the
less can domestic experiences and those made in other jurisdictions be used to assess the
expected return on a cross-border investment if the debtor becomes insolvent. The
consistent finding in empirical studies is that geographical distance and clusters of legal
traditions262
are important determinants of cross-border investments. This confirms the
notion that familiarity matters, suggesting that the more similar the rules, the lower the
threshold to engage and undertake the necessary due diligence.263
Greater differences in
substantive insolvency laws make it more costly to assess the risks of cross-border
investments compared to those realised in a home Member State. High information
barriers with respect to claim procedures increase the costs of legal advice.264
The magnitude of information and learning costs that cross-border creditors face can
however be approximated through the substantial home bias in investment, i.e. the under-
proportional investment in cross-border equity and debt. Home bias is evidenced in a
large body of empirical research, which attributes an important role of informational
frictions and uncertainty avoidance in explaining it.265
261
See for example Giofre (20014), Poshakwalea and Thapa (2011), Ferreira and Miguel (2011). The
legitimacy of using the results of these studies is supported by the finding in Jack (2018) that the World
Banks’ legal rights index is correlated with recovery rates.
262
This is covered by a dummy variable if the home or destination country follows an Anglo-Saxon,
Nordic, Latin or Germanic tradition or a dummy variable measuring a common legal origin.
263
While familiarity appears as a factor separate from information costs in Roque Cortez et al. (2014),
empirical studies tend to cover them with similar variables.
264
On top of other costs and risks, such as language support, translating terms, general standardisation of
tools, access to information. For more, please see the interviews with insolvency experts conducted by in
the study conducted by Deloitte/Grimaldi (2022) on behalf of the Commission (Annex 4, Section 3).
265
See for example, Portes and Rey (2005), Aggarwal et al. (2012). Measures of home bias of debt and
equity holdings are part of the CMU indicators.
149
Figure A4.27: Intra EU home bias in equity Figure A4.28: Intra EU home bias in debt securities
A declining home bias denotes improved market integration. Despite its decline 2015 to 2020, the home bias in equity
remains substantial and much higher than for debt securities. The bars show the bottom and top 25% of the EU-27
Member States. JRC calculations. For an explanation, see European Commission, Monitoring progress towards a
Capital Markets Union: a toolkit of indicators, SWD(2021) 544.
Source: FISMA with JRC data.
Different insolvency regimes are not only an obstacle for intra EU capital flows. Non-EU
investors are equally facing a fragmented insolvency regime when they intend to invest
in the EU, which creates incentives for them to concentrate on larger national markets
where they can realise scale effects. The fragmentation of insolvency systems
disadvantages the catch up process of smaller local capital markets. Apart from limiting
the pool of capital available in the economy, underrepresentation of cross-border
creditors reduces the competitive pressure on domestic market actors, with adverse
consequence for the efficiency of capital allocation and funding costs.
Two recent empirical studies find evidence that insolvency regimes have a significant
effect on the magnitude of cross-border investment.266
According to the results in IMF
(2019), the better the insolvency regime in destination countries, the higher are cross-
border asset holdings in debt and total portfolio investment. The effect is sizeable,
illustrated by the finding that cross-border portfolio assets would increase by 25% if the
Italian insolvency score were to increase to the German one, i.e. by about one standard
deviation. The figure blow shows that an increase of recovery rates by 25% could lead to
an increase of intra-EU cross-border portfolio asset holdings by 24%.
More efficient insolvency regimes in destination countries are equally a significant
determinant of cross-border asset holdings in Kliatskova and Savatier (2020). Their
analysis suggests that the causality runs from insolvency to cross-border investment.
Different from the IMF study are the effects stronger for equity than for debt holdings
and differ across the institutional sectors holding the assets. A one standard deviation
improvement in the insolvency indicator would yield 38% and 31% higher cross-border
266
A third study is Jack (2018), who report insolvency to matter also for foreign direct investments, though
without providing an empirical estimate.
150
assets holdings of banks and households, respectively.267
That both studies use different
data sources for measuring insolvency as well as cross border investment adds trust that
the effect is material.268
While these two studies provide empirical evidence that insolency rules are an obstacle to
capital market integration and that convergence towards more efficient insolvency
proceedings would foster cross-border investments, an assessment of the importance of
insolvency necessitates a comparison with other investment barriers. The main challenge
for such comparisons is the need to find suitable numerical indicators for other
investment barriers. It is moreover questionable how comparable an improvement in for
example 1 standard deviation in the recovery rate is to a 1 standard deviation
improvement in the time of law enforcement or in the tax rate or any other variable that
covers obstacles to cross-border investment. The studies below endeavoured such
exercise, concluding consistently that insolvency regimes are one of the most material
obstacles to cross border investment.
The analysis in IMF (2019a) shows that improvements in regulatory quality have an even
larger impact on cross-border capital holdings than higher recovery rates.269
According to
the scenario results, the combination of changes to insolvency rules, regulatory quality
and taxation would almost double the amount of cross-border asset holdings in the euro
area (180% over the baseline in Figure A4.29).
267
The coefficient did not turn out significant for non-financial corporations and institutional investors’
debt holdings. It was significant for all four sectors foreign equity holdings.
268
IMF (2019) uses the World Bank insolvency recovery rates and the IMF Coordinated International
Investment Portfolio Survey, Kliatskova and Savatier (2020) the OECD insolvency data and the ECB
Security Holdings Statistics.
269
The indicator of regulatory quality used is from the Worldwide Governance Indicators database
(http://info.worldbank.org/governance/wgi/#home). This database synthesises the views of various other
bodies about the quality of regulation, rule of law and other governance factors, without however a specific
focus on financial regulation.
151
Figure A4.29: Average bilateral portfolio asset holdings after lowering obstacles in destination countries by 1
standard deviation (USD millions).
Notes: IMF staff estimates. For the insolvency indicator, 1 standard deviation equals 23.5 percentage points
of the recovery rate.
Source: IMF (2019a).
Similar to Kliatskova and Savatier (2020) and consistent with IMF (2019a), Bremus and
Kliatskova (2020) identify bilateral portfolio debt holdings are smaller if differences in
insolvency recovery rates are larger. The estimated coefficient is significant for banks
and other financial corporations as holders of portfolio debt securities, but not for non-
financial actors.270
The coefficient is also not signficiant for equity holdings. Control
variables that are typically used in a gravity model such as size, distance, common legal
origna etc turned out significant. Additional indicators of obstacles to cross-border
investment are also significant, suggesting that they matter too. These are cross-country
differences in the time to enforce a contract, coverage of credit registries and time to pay
taxes. Differences in the strength of investor protection did not turn out significant. The
magnitude of the effects of differences in the recovery rate and differences in contract
enforcement are broadly equal, suggesting that insolvency and legal enforcement are
broadly equally important obstacles to cross-border investment.
A further exercise that attempts to inform about the the relative strength of various
obstacle of cross-border investment is covered in IMF (2019a). As complement to the
analysis of cross-border asset holdings as a measure of capital market integration, the
second analysis focuses on the impact of institutional determinants of macroeconomic
risk sharing. Macroeconomic risk sharing is a consequence of capital market integration
and other factors. It describes to what extent a decline in income in a country feeds
through into lower private consumption. If there is no risk sharing, GDP and private
consumption will grow in tandem. A number of intervening factors may however
270
See Table 6 in Bremus and Kliatskova (2020).
152
smoothen the impact of a shock to GDP on consumption.271
The standard economic
parameter to do so is the exchange rate, which is however not available in a currency
union such as the euro area. The literature on risk sharing demonstrated that the
proportion of risks that are shared across Member States is much smaller in the euro area
than across the states of the US.272
It also shows that the difference between the euro area
and the US is due to a higher contributions of cross-border capital income and – to a
smaller extent –of cross-border fiscal transfers and credit markets in the US than in the
euro area.
The analysis in IMF (2019a) identified a baseline for the euro area in which 75% of a
negative shock to a country’s GDP is not shared, i.e. a shock leads to a strong decline in
consumption. Only 12% of the shock is smoothed through a higher savings (credit
channel, domestic investment, credit from abroad and revenues from sales of foreign
assets) and capital income from abroad (capital market channel, income from profits and
earnings abroad). A comparable improvement in different institutional indicators leads to
different contributions of the risk sharing channels and reductions in the share of the risk
that is not shared.273
An improvement in the recovery rate as insolvency indicator reduces
the proportion of unshared risk more than other institutional reforms. It has in particular a
strong effect on the credit channel, which contributes to risk smoothing through
investment and lending abroad. These both factors have an intuitive relationship to the
efficiency of insolvency rules
ECB staff performed similar estimates to substantiate the findings in the 2018 ECB’s
Financial integration report.274
The results show a low degree of risk sharing in the euro
area and small contributions of the credit and capital channel in line with the IMF
estimates. Further analysis identified determinants for the strength of both channels:
foreign bank penetration, financial literacy and trust for the credit channel; more cross-
border investment by investment funds, private pensions and life insurance schemes for
the capital channel. The empirical analysis identified a further determinant that is
common to both channels: “More efficient insolvency frameworks appear to be
associated with higher risk sharing via both the capital and the credit channels which
persist at the European level.”275
ECB (2018) concludes “This empirical research finding
shows that it is important to address the major shortcomings and divergence between
insolvency frameworks which persist at the European level. This would require taking
measures beyond the draft Directive on Insolvency, Restructuring and Second Chance
271
The difference between GDP and gross national income represents the investment or capital income
channel, that between gross national income and gross domestic income the fiscal channel, that between
gross domestic national income and consumption the savings or credit channel.
272
See for example, European Commission (2018), ECB (2018).
273
The scenario assumes a decline in the z-score of different institutional indicators. The z score describes
the observation of a country relative to the mean of all countries, with the scale defined through the
standard deviation. The effect of a standard deviation in the z indicator of the insolvency indicator
(recovery rate) can then be compared to a one standard-deviation change in z score of other institutional
indicators.
274
See ECB (2018) and Hartmann (2018).
275
ECB (2018), p. 17.
153
proposed by the European Commission in the context of the capital markets union
agenda”.276
Figure A.4. 30: Relative strength of barriers in influencing risk sharing
Note: IMF staff estimates. The figure shows the impact of a 1 standard deviation reduction of five barriers
to capital market integration on three channels of risk sharing in the euro area. The red field indicates the
share of risk that would remain unshared across Member States. Recovery rates are the indicators used to
cover insolvency regimes.
Source:IMF (2019a).
IMF (2019a) complemented the empirical research by the results of a survey sent to
financial market participants and national European market regulators to get views about
capital market developments and deterrents to cross-border investment. Respondents
were invited to score types of obstacles across Member States. The results shown in the
figure below reveal that insolvency frameworks, next to data and regulatory quality was
considered one of the most pressing challenge for the realisation of the Capital Market
Union.
276
ECB (2018), p. 17. See also Draghi (2018): “ECB analysis finds that where insolvency and judicial
frameworks are more efficient, risk-sharing through both capital and credit markets is higher.”
154
Figure A4.31: Results of the CMU survey conducted by the IMF
Source: IMF 2019a
Table A4.17: Economic literature with empirical estimates using insolvency indicators.
Source Used
insolvency
variable
Financial or
macro variable
Sample Numerical result
Djankov et al.
2008
Recovery rate
(efficiency)
Debt to GDP ratio,
controls for other
doing business
variables, inflation,
GDP and GDP/c
growth, and legal
origin
84 countries,
average 1999-2003
A 10-point increase in efficiency is
associated with a 5–6-point higher ratio
of debt to GDP
Deakin et al 2017 CBC credit
protection and
insolvency index
Credit and bank
credit
4 countries 1970-
2005
Direction depends on whether legal
system strengthens creditors’ rights vis-
à-vis shareholders or managers”
Closset et al. 2021 Dummy for
restructuring
reform
Cost of debt finance 15 EU Member
States 2009-2014
50 bps higher costs of debt funding.
Leads to cut in investment and
employees pay by about 2%
AFME et al.
(2016)
World Bank
recovery rate and
strength of
insolvency
framework (0-16)
Corporate bond
spread
Bonds from 12
countries, 2004-
2015
a 10% increase in the expected
recovery rate can reduce corporate
bond spreads by 37 bps (half in
estimate with country dummies), a 1pt
rise in insolvency score reduces the
bond spread by 27 bps
IMF 2019 World Bank
recovery rates
Dispersion in
interest expenses in
% of outstanding
debt
Companys in 22 EU
Member States
2015
Differences in recovery rate explain
24% of the variation in debt funding
costs. An increase in the recovery rate
to the UK level would reduce funding
costs by 5 bps in DE, 11 bps in FR, 17
in ES, 25 in IT, 53 in EL
Becker and
Josephson (2016)
Recovery rate
and time from WB
Ratio of bond to
bank loans in
corporate funding,
World bank bond
market index
Companys from 44
countries 2000-
2011
Coefficient of 20-25 %pt. a one-
standard-deviation increase in
bankruptcy recovery (22.6) corresponds
to increased bond issuance by 5.6% of
assets
Consolo et al.
2018
synthetic index
(simple average
of getting credits;
Annual change in
NFC debt
40 countries 2003-
2016
Countries with better insolvency
frameworks deleverage faster and are
able to adjust their NPL more rapidly
155
recovery of debt
in insolvency; (3)
cost of enforcing
contracts and (4)
time of enforcing
contracts from
World Bank.
than countries with weaker regimes
A 1% increase in the recovery rate
reduces the change in corporate debt by
0.0028 (= 0.28 %pts)
IMF 2019 Recovery rate
2004-2017 Z
value of
insolv_v13
Cross border portfolio assets, i.e. ln of
portfolio debt and ln of portfolio equity and
total (sum of both).
1 standard deviation improvement in
destination (IT to DE, or 23 ppts) yields
1.25 times increase in asset flow.
Coefficient 0.0116 for ln(portfolio debt)
and 00902 for ln(total)
Smrncka et al
(2015)
Recovery rate GDP per capita Assumes reverse correlation; The
recovery rate is 54+ 0.6 GDP/c implying
a 1% higher recovery rate corresponds
to 1.7% higher GDP/c, largely driven by
countries with lower GDP
McGowan,
Andrews, Millot
(2017)
OECD indicator reduce the share of capital sunk in zombie
companies, and facilitate technological
diffusion.
0.5% higher total factor productivity
growth from the reduction of congestion
with zombie firms to the lowest level per
industry
Becker and
Ivashina (2021)
WB aggregate
insolvency index
# of private debt
deals
EU Member States,
UK and USA 2004-
2020
a 1-point difference in insolvency
restructuring score leads to 7.4 to 9.9
private deals difference
Lee et al. (2011) WB recovery time
and judicial costs,
dummies for
institutional
characteristics
Entry of new
companies
29 countries 1990-
2008
A reduction in recovery time by 1
standard deviation is associated with a
10% increase in new company entry,
that of 1 1 standard deviation in
recovery cost with 11.3%.
Carcera et al
(2015)
EC 2015 survey Self-employment
Change in non-
performing loans
Corporate
deleveraging
EU Member States
2003-2010 and
2007-2012
A 1 %pt higher insolvency score is
associated with a 0.75%pt higher self-
employment rate
The negative impact of corporate
deleveraging on GDP growth is
significantly lower in countries with
superior insolvency scores
Acharya et al 2009 WB institutional
indices
Patents 85 countries Stronger creditor rights reduce
innovative activity in companys
El Ghoul et al
(2021)
WB institutional
indices
Share of zombie
firms
79 countries 20015-
2016
The better the insolvency score the
lower the share of zombie firms.
156
ANNEX 5: DETAILED DESCRIPTION OF INSOLVENCY BUILDING BLOCKS
1. Introduction
Insolvency law is considered to be a cross-cutting area of civil law that always has to
strike a delicate balance between the legitimate interests of creditors and debtors, as well
as between those of different types of creditors. An efficient insolvency law should help
to speedily and efficiently liquidate non-viable firms and restructure (within insolvency
proceedings) those that can be led back to viability and thus enable them to continue
operating.
Insolvency rules should also preserve the value that can be received by creditors,
shareholders, employees, tax authorities and other parties concerned, whilst ensuring an
adequate balance of interests of different stakeholders. A good insolvency framework is a
crucial pre-condition of credit, not only when the insolvency occurs, but also in relation
to incentivizing investors to enter into a credit/debt contract. At the same time, a good
insolvency framework leads to a more efficient allocation of capital within and across
Member States and facilitates cross-border investments and flows of market-based
finance.
This primary economic efficiency objective is complemented by specific "redistributive"
goals which result from cultural and social value patterns of a given society. The
insolvency legislation therefore sets out conditions for initiating insolvency procedures,
outlines creditors’ and debtors’ rights and obligations, describes the role of courts, and
the steps and the timeframe to be followed once the procedure starts.
In a cross-border context, each of the States involved has an interest in regulating
insolvency of an entrepreneur whose activities or assets are located at its territory. This
brings an additional source of problems of competing national interests which cannot be
resolved solely by determining the applicable law and jurisdiction277
. In reality, in a non-
negligible number of situations more than one law and jurisdiction will have a
competence to handle the cross-border insolvency in question: in such a case of
multiplicity of laws applicable to a cross-border insolvency case, the differences between
those overlapping laws will stand as a barrier to an effective solution of the cross-border
insolvency case.
However, the current EU law does not harmonise any of the core features of insolvency
proceedings, which remain vastly different and represent a material obstacle to the single
market for creation of the Capital Markets Union. Despite these differences, insolvency
frameworks in EU Member States are composed of similar building blocks. These
building blocks comprise different sub-components and provide for varying solutions or
rules to individual issues.
277
Such as in the cases of Croatian Agrokor and/or Italian Parmalat examples.
157
Table A5.1: General description of insolvency frameworks in the EU Member States
General insolvency framework
AT Austrian insolvency law is not confined to entrepreneurs. Capacity for insolvency is in fact defined
as a part of legal capacity under private law. Indeed, any person who can hold rights and obligations
has capacity for insolvency. There is only one type of standard insolvency proceedings under
Austrian law. Insolvency proceedings are known as bankruptcy proceedings, if no restructuring plan
is available when the proceedings are opened. Insolvency proceedings are termed reorganisation
proceedings if a restructuring plan already exists when the proceedings are opened.
BE According to Art. 2 of the Book XX ‘Insolvency of undertakings’ of the Belgian Code of Economic
Law (BCEL), insolvency proceedings are ‘a procedure for judicial reorganization by mutual
agreement or by collective agreement or by transfer under judicial authority or bankruptcy.’
BG Insolvency and over-indebtedness are objective factual conditions, which have legal definitions in
the Bulgarian Commerce Act (BCA).
HR Under the Croatian Bankruptcy Law (CBL), there are two general regimes for debtors that are
insolvent: the pre-bankruptcy settlement procedure, and bankruptcy procedure (ordinary and
shortened).
CY There are two types of insolvency proceedings: Bankruptcy and Winding-up (by the court, by
creditors, under the court’s supervision, receivership, arrangement or settlement or restructuring
and examinership).
CZ The individual types of insolvency proceedings (bankruptcy, reorganisation, debt relief) differ from
each other in terms of the entities they are intended for. Insolvency proceedings are judicial
proceedings that address a debtor’s insolvency or impending insolvency and how to deal with it.
The basic premise is therefore the existence of a state of insolvency or impending insolvency.
DK Bankruptcies and restructurings (reorganisations) are governed by the Danish Bankruptcy Act
(DBA), which provides for the following regimes: Restructuring; Bankruptcy; Rescheduling of
debt. The restructuring and bankruptcy regime is available to insolvent individuals as well as legal
entities (companies), whereas the rescheduling of debt regime is only available to individuals.
EE Estonian legislation prescribes three different insolvency proceedings: bankruptcy proceedings,
reorganisation proceedings and debt restructuring proceedings. Bankruptcy proceedings are
governed by the Bankruptcy Act (BA), the rules covering reorganisation are set out in the
Reorganisation Act (RA) and the debt restructuring rules are set out in the Debt Restructuring and
Debt Protection Act (DPA).
FI In Finland, insolvency laws regulate: corporate restructuring; bankruptcy; distraint; and
restructuring of private debts. For companies, Finnish law recognises two statutory forms of
insolvency proceedings, corporate restructuring (i.e. company administration) and bankruptcy (i.e.
compulsory winding-up).
FR Any person exercising a commercial or craft activity, any farmer, any other natural person
exercising a self-employed activity, including a liberal profession, and any private law entity may be
the subject of safeguard, judicial reorganisation or judicial liquidation proceedings. Safeguard
proceedings are opened if the debtor is experiencing insurmountable difficulties but has not yet
reached the stage of cessation of payments.
DE Insolvency proceedings are opened only on application, and not automatically by any public body.
The application can be submitted by the debtor or by a creditor. The Insolvency Code does not
provide for separate types of proceedings for reorganisation and winding up. In addition to the
‘standard procedure’, the Code opens up the possibility of an insolvency plan as a path to winding
up or as a path to reorganisation.
EL Greece has a single, unified legal framework for efficient preventive restructuring, pre-insolvency
and insolvency resolution proceedings. The newly enacted Greek Law titled ‘Debt Settlement and
Facilitation of a Second Chance’ (Law No. 4738/2020) (the Greek Insolvency Kaw - GIL) comes
into effect on 1 January 2021. An early warning electronic mechanism which classifies debtors in
three (3) insolvency risk levels, low-medium-high and is supervised by the Special Secretariat for
Private Debt Administration, is introduced for natural and legal persons. This tool will be able to
identify circumstances that could make the debtor insolvent.
The procedures under GIL are: Out-of-Court debt settlement process (Articles 5–30) GIC
Under the new Out-of-Court Debt Settlement mechanism (which replaces the procedure of existing
Greek Law No. 4469/2017), individuals or legal entities, eligible to be declared insolvent, may apply
for extrajudicial settlement of their monetary liabilities to the Greek State or financial and social
158
security institutions provided they do not fall under certain exemptions (e.g. 90% of a debtor’s
liabilities being owed to a single institution). The process may also be initiated by creditors with an
invitation to debtors to apply within 45 days. Out-of-court settlement applications will be filed
digitally to the Special Secretariat for the Administration of Private Debt through an electronic
platform. Insolvency resolution process (Individuals & Legal Entities) (Articles 75–196)
HU In Hungary, the following insolvency proceedings are available as main proceedings:
bankruptcy proceedings; liquidation proceeding; and reorganization proceeding.
Bankruptcy proceeding is regulated by Act XLIX of 1991 on bankruptcy and liquidation
proceedings (the Bankruptcy Act). Bankruptcy is a voluntary procedure which can be initiated by the
Hungarian debtor (company) by applying to the court for a moratorium over its payment obligations
in order to reach a composition agreement (bankruptcy agreement) with its creditors and to
continue as a going concern. If a composition agreement is reached in the bankruptcy proceedings,
the liabilities of the debtor may, in theory, be discharged as provided for in the bankruptcy
agreement. However, in practice, this is very rarely the case. The debtor is not required to prove that
it is insolvent or over-indebted to apply for bankruptcy proceeding.
Reorganization proceeding is regulated by Government Decree 345/2021. (VI. 18.).The
reorganization procedure is a civil nonlitigation proceeding. It is a temporary option for the
companies, since application for reorganization proceedings may be filed with the court until
December 31, 2022. In terms of its purpose, the reorganization procedure is similar to bankruptcy
proceedings, given that the main purpose of both institutions is to reorganize a debtor company
having difficulty with payment of its debts, i.e., to restore its solvency. Regarding its material scope,
reorganization may only be initiated by business organizations registered in Hungary.
IE Insolvency proceedings are governed by the Personal Insolvency Act (PIA) and comprise the
following three arrangements: Debt Relief Notice (DRN): for debts of up to €35,000 for people with
virtually no assets and very low income; Debt Settlement Arrangement (DSA): for the agreed
settlement of unlimited unsecured debts over a period of up to five years (extendable to six years in
certain circumstances); Personal Insolvency Arrangement (PIA): for the agreed settlement or
restructuring of secured debt of up to €3 million (which can be increased by creditor agreement) and
unlimited unsecured debt over a period of up to six years (extendable to seven years in certain
circumstances).
Bankruptcy is an option for debtors who, due to their circumstances, do not meet the eligibility
criteria for the abovementioned three debt solutions, or have previously entered into one of the debt
solutions but the arrangement with the creditors proved to be unsustainable. As soon as a debtor is
made bankrupt their unsecured debts are written off in full, however, all of their assets become the
property of the Official Assignee in Bankruptcy, who is the High Court appointed administrator of
the bankruptcy estate.
IT The objective prerequisite for the declaration of bankruptcy is the state of insolvency provided for in
Art. 5 of the Italian Bankruptcy Law (IBL), which establishes that a person is in a state of insolvency
if he is unable to regularly meet his obligations. Insolvency can be manifested by defaults or other
external facts (e.g. the escape of the entrepreneur or the closure of the premises in which he
exercised the activity), which demonstrate that the debtor is no longer able to meet his obligations.
An entrepreneur who can only partially pay his debts is considered insolvent, as is an entrepreneur
who can fulfil his obligations, but only after they have expired, or in an irregular manner (e.g. an
entrepreneur who is forced to sell real estate to satisfy the company's creditors).
LV The insolvency proceedings of a natural person may be applied to a natural person who has been the
Republic of Latvia for the last six months and who has financial difficulties (signs of insolvency).
LT Company insolvency is understood to be a state where a company is unable to meet its obligations
(does not pay debts, does not perform work paid for in advance, etc.) and the overdue obligations of
the company (debts, overdue work, etc.) exceed one half of the book value of its assets.
LU The Grand Duchy of Luxembourg has eight types of insolvency proceedings: Three apply only to
traders (natural and legal persons): Bankruptcy proceeding; Composition with creditors to prevent
bankruptcy; Administration proceedings. In addition to these proceedings, Luxembourg law (Article
593 et seq. of the Commercial Code) provides for a procedure whereby traders can obtain the
suspension of payments under certain conditions. A fourth procedure is open only to natural persons
who are not traders: this is the over-indebtedness procedure.
MT Insolvency Proceedings (Companies) is governed by Article 214(2)(a)(ii) of Chapter 386 of the
Companies Act (MCA) et seq.
NL A debtor who is in a situation where he has stopped to pay his due and demandable debts shall be
159
declared bankrupt by court order, rendered either upon his own request or upon the request of one or
more of his creditors. Moreover, the bankruptcy order may also be rendered for reasons of public
interest or upon the request of the Public Prosecution Service.
PL The Bankruptcy Law identifies two independent grounds for the existence of a state of the debtor’s
insolvency, known as the liquidity test and the balance-sheet test.
PT Insolvency is a factual situation of insufficiency of assets of any legal subject (insufficiency which
translates into the impossibility to comply with its due obligations) described by the Insolvency and
Recovery Code (Código da Insolvência e da Recuperação de Empresas
- CIRE), from which may derive the adoption of a recovery measure (in the case where the insolvent
party is a company).
RO Insolvency procedure is initiated by submitting an insolvency petition in the insolvency court (the
Tribunal where the debtor has its headquarter). The petition may be filed either by the debtor
through its representatives, or by any interested creditor meeting the legal conditions.
SK Insolvency means that the debtor has excessive debt or is cash-flow insolvent.
SI Insolvency is defined as a situation where the debtor has been insolvent for a lengthy period of time.
ES The law lays down certain subjective and objective prerequisites to be met in order to open
insolvency proceedings.
SE Insolvency is defined as a situation where the debtor is not able to duly pay his debts, and this
inability is not of a temporary nature
Source: Deloitte/Grimaldi (2022).
2. Material elements of insolvency
2.1 Transaction avoidance
Transaction avoidance is a standard part of all insolvency regimes. Transaction
avoidance aims at protecting the insolvency estate by clawing back on different grounds
assets, that were alienated in the vicinity of insolvency. Transaction avoidance rules are
aimed at the rescission of, or the compensation for, transactions that are detrimental to
creditors and have been performed prior to the opening of insolvency proceedings, often
in an unethical/fraudulent context.
In the run-up to insolvency, transactions might happen that are done with the intention to
save certain assets from being auctioned off in insolvency. Prior to the opening of the
insolvency procedure, the debtor can attribute preferential treatment to some creditors.
This can lead to transactions with parties close to the owner or manager of a business,
e.g. a spouse or an individual creditor with whom the business owner hopes to cooperate
for a fresh start after liquidation of the business. It can also lead to transactions with
undervalued prices. In order to ensure that all the debtor’s assets remain available to
satisfy the creditors’ claims, national laws provide for avoidance actions.
The general aim of the avoidance rules is to protect the collective scheme from
illegitimate alienation in the vicinity of insolvency.278
They aim to protect the insolvent
estate by providing for rescinding or offsetting transactions that were made prior to the
opening of insolvency proceedings with a fraudulent intent. They define the powers
granted to the insolvency practitioners to trace, freeze, confiscate and repatriate assets
belonging to the insolvency estate. Transaction avoidance laws are a standard part in
insolvency regimes and seek to enforce the principle of equal treatment of creditors by
enabling the insolvency practitioner to challenge preferential treatment given to a creditor
278
M Bridge, ‘Collectivity, Management of Estates and Pari Passu in Winding up’ in J Armour and H
Bennett (eds), Vulnerable Transactions in Corporate Insolvency (Hart 2003) 18.
160
in a specific period prior to the application for, or opening of, insolvency proceedings.
Hence, the scope of the principle of equality is extended to include a period prior to the
opening of insolvency proceedings.
Avoidance rules can be categorised into279
:
(a) legal acts compromising the estate of the debtor, further distinguishing between
transactions at an undervalue and transactions not an undervalue but detrimental
to creditors;
(b) legal acts in which the counterparty is already a creditor, distinguishing between
payments of undue debts and payments of a debt due at the time and in the
manner already agreed; and
(c) legal acts with the parties closely related to the debtors, including shareholders in
view of the privileged position they have and closely related party.
The landscape in Member States is very differentiated, in all aspects of the conditions
allowing for the avoidance of transactions:
(i) the legal acts to be considered (types of avoidable transactions),
(ii) the legal conditions (objective - subjective),
(iii) the length and calculation of the “suspect periods", i.e. period within which such
acts can be challenged (“limitation periods”), and the consequences vary from
Member State to Member State.
To date, EU legislation refers the regulation of such procedures to the national law of
each individual Member State. Legal doctrine provides for multiple and different
recommendations for the possible harmonisation of transaction avoidance280
. Based on
research carried out, the most promising approach appears a principle-based approach
and, more specifically an approach based on the principles of equal treatment of
creditors, and protection of trust281
. An option would be to introduce harmonized rules at
EU level on transaction avoidance. This full harmonisation option would not allow for
deviations at national legislation for example with respect to the exemptions from the
scope of legal acts concerned or the time periods It would deal with a widely known
feature of insolvency law, where divergences between Member States seem to be
manageable.
279
Rolef de Weijs, Towards an objective European rule on transaction avoidance in insolvencies, cit.
280
Ex multis. Keay, A. Harmonisation of Avoidance Rules in European Union Insolvencies: The Critical
Elements in Formulating a Scheme. Northern Ireland Legal Quarterly, 69 (2). pp. 85-106. ISSN 0029-
3105, (2018). M Bridge, ‘Collectivity, Management of Estates and Pari Passu in Winding up’ in J Armour
and H Bennett (eds), Vulnerable Transactions in Corporate Insolvency (Hart 2003) 18; Rolef de Weijs,
Towards an objective European rule on transaction avoidance in insolvencies,
Centre for the Study of European Contract Law Working Paper Series No. 2011/06.
281
Approach adopted in the following studies: REPORT ON TRANSACTIONS AVOIDANCE LAWS
(CERIL REPORT 2017/1), 26 September 2017, Rebecca Parry in Rebecca Parry/James Ayliffe/Sharif
Shivji (eds.), Transaction Avoidance in Insolvencies, Oxford University Press, 2nd edn., Oxford 2011,
para. 2.20.
161
While honest debtors would not undertake measures to hide assets or divert the
company’s at the brink of insolvency, such opportunistic behaviour at the expense of
creditors cannot be excluded in individual cases and has been observed in practice. Since
this behaviour is considered dishonest, other stakeholders and the general public would
also value if rules on transaction avoidance were efficient. Business partners of the
defaulting company would also benefit in their role as creditors, though they may face
reputational costs if their financial relationships to the company become subject of
scrutiny by courts or insolvency practitioners.
Since the difference of rules on transaction avoidance make it costly for creditors to find
out about the respective rules in other jurisdictions and to assess the prospects for claw-
back, lower diversity of these rules laws foster cross-border business, insolvency
proceedings, and restructuring efforts. Stakeholders signal that the enforcement of
particular cross-border assets and the detailed rules applied across Member States have
led to differences in the amount that can be recovered and the time it takes to claw back
assets. While insolvency practitioners are experienced in their own insolvency law, they
normally have no detailed knowledge about the transactions avoidance law of the law of
another Member State, which is applicable under certain circumstances to the transaction.
They therefore have to commission legal opinions and to pay significant solicitor’s fees
when preparing the decision to start litigation against the opponent.
The harmonisation of transaction avoidance rules would be considered sensitive because
of the relatedness to more fundamental principles of insolvency law. Such links exist
with respect to the ranking of claims, as privileged ordinary creditors, such as tax
authorities, are in some Member States exempted from transaction avoidance, too.
Modifications of transaction avoidance impacts legal certainty in civil transactions since
counterparts risk that a transaction with a company is under a certain risk being unwound
when that company is liquidated. If the transaction has taken place under very favourable
conditions, the counterpart risks facing reputation effects if a court reviews whether it
was engineered to the detriment of the creditors of the liquidated company.
The principles of predictability or legal certainty and optimal realisation of the debtor’s
assets can conflict and must be weighed against each other. There are limits to the extent
the design and application of transaction rules can be based on objective criteria. While
for example, an objective criterion may be designed for the consideration of payments of
an undue debt, subjective criteria are needed in many instances both to protect competing
interests and to properly consider acts intentionally prejudicing creditors’ rights.
Important is also the interaction of avoidance actions with restructuring of the company.
Restructuring efforts may be thwarted, since the parties involved must take into account
that, if the restructuring fails, insolvency proceedings ensue and legal actions which were
part of the restructuring plan are subject to claw back provisions282
. In most Member
States, “safe harbour” provisions for restructuring measures are available, yet again,
282
This statement is only valid to restructurings which are concluded outside the context of the preventive
restructuring framework introduced by Title II of the Directive on Restructuring and Insolvency.
162
these “restructuring privileges” differ widely and still leave room for significant legal
uncertainty283
.
Table A5.2: Transaction avoidance rules in EU Member States
Transaction avoidance
AT Certain legal acts which have been undertaken before the insolvency proceedings were opened and
which are detrimental to creditors are voidable (Sec 27 et seq. AIA).
The prerequisite for a successful challenge is for the legal transaction to be detrimental to the
insolvency creditors. This is the case if the legal act caused a loss of satisfaction for the other
creditors, for instance by reducing the assets or increasing the liabilities. A further condition for a
successful challenge is that, as a result of the challenge, the prospects for satisfaction of the creditors
are improved.
Among the types of acts that can be subject to transaction avoidance are:
voidability on account of intention to disadvantage creditors (Sec 28, numbers 1-3, AIA);
voidability on account of squandering of assets (Sec 28, number 4, AIA);
voidability on account of disposals free of charge (Sec 29 AIA);
voidability on account of preferential treatment (Sec 30 AIA);
voidability on account of knowledge of insolvency (Sec 31 AIA)
BE Insolvency occurs from the time of the declaratory judgment of bankruptcy. The judge may advance
this date by six months, if serious and objective circumstances show that the payments have already
ceased before the judgment. This is called the ‘suspect period’. The trustee in bankruptcy will be
able to call into question transactions that occurred within this time limit and that caused any
damage to the mass. The penalty consists of the transactions not being enforceable against the mass
in bankruptcy. If the judge considers, at the request of the curator, that certain acts are ‘suspicious’
and are therefore not opposable to the mass, the person who has received the goods or has acquired
them at a derisory price must return them to the mass.
BG BCA provides for a number of safeguards that protect creditors of the insolvency estate against
actions taken and transactions entered into by the debtor with a view to depleting the insolvency
estate and harming creditors’ interests. The law introduces the concept of a ‘suspect period’ — an
irrefutable presumption that creditors’ interests have been harmed, if certain actions have been taken
or certain transactions have been entered into during this period. The suspect period commences
from the date of insolvency or over indebtedness, but not earlier than one year before the petition for
opening insolvency proceedings was filed, and ends on the date of the ruling opening insolvency
proceedings. In other cases, it can extend to three years.
A number of transactions become automatically void under article 646 BCA (e.g. settlement of a
debt incurred before the ruling opening insolvency proceedings, pledge or mortgage created on a
right or an asset of personal property from the insolvency estate). Other transactions can be
invalidated by the court (e.g. transactions for no consideration, transactions at undervalue etc.).
HR General: Legal acts undertaken prior to the opening of the bankruptcy proceedings that disrupt the
uniform settlement of bankruptcy creditors (causing harm to creditors) or that favour certain
creditors over others (preferential treatment of creditors) may be contested by the liquidator on
behalf of the debtor, and the creditors in bankruptcy.
There are several types of transaction avoidance:
Congruent settlement;
Non-congruent settlement;
Legal actions by which creditors are directly damaged;
Intentional damage;
Legal action free of charge or with an insignificant fee;
A loan which replaces capital;
Secret company.
Congruent settlement: Legal acts adopted in the last three months prior to the filing of a motion for
283
A mapping of the situation in the laws of the Member States can be found in the ’Study on a new
approach to business failure and insolvency, Comparative legal analysis of the Member States’ relevant
provisions and practices’, University of Leeds, 2016, pp. 178. The Study was ordered by the Commission,
hereafter: Leeds Study.
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opening of the bankruptcy proceedings / after the filing of the proposal to open bankruptcy
proceedings, which provides or allows a creditor security or satisfaction in a manner and at a time
that is congruent with the substance of their rights, may be challenged if, at the time of the act, the
debtor was insolvent, and the creditor knew of this insolvency / knew of the insolvency or of the
proposal for bankruptcy.
Non-congruent settlement: A legal act that provides or allow security or satisfaction to a creditor that
did not have the right to make a claim, or had no right to make a claim in that manner or at that time,
may be contested:
if it was undertaken within the last month prior to the filing of the proposal to open bankruptcy
proceedings or after the
proposal had been filed, or ;
if it was undertaken within the third or second month prior to the filing of the proposal to open
bankruptcy proceedings and
the debtor was insolvent at the time, or;
if the act was undertaken within the third or second month prior to the filing of the proposal to open
bankruptcy proceedings and the creditor knew at the time the act was undertaken that it would cause
harm to the bankruptcy creditors.
Legal actions by which creditors are directly damaged
A legal act of the debtor that directly results in harm to the creditors may be contested:
if it was undertaken within three months prior to the filing of the proposal to open bankruptcy
proceedings, if the debtor was insolvent at the time of the act and if the other party knew of the
insolvency, or;
if it was undertaken after the proposal to open bankruptcy proceedings had been filed and if the
other person knew, or ought to have known, at the time of the legal act, of the insolvency or of the
proposal to open bankruptcy proceedings.
Intentional damage: A legal act undertaken by the debtor during the last ten years prior to the filing
of the proposal to open bankruptcy proceedings, or
thereafter, with the intention of causing harm to creditors, may be contested if the other party knew
of the debtor’s intent at the time of the act.
Legal action free of charge or with an insignificant fee:
A legal act of the debtor without compensation or with insignificant compensation may be contested
unless it was undertaken four years prior to the filing of the proposal to open bankruptcy
proceedings. In the case of an occasional gift of insignificant value, the act may not be contested.
A loan which replaces capital A legal act by which a member of the company makes a claim for
repayment of loan used for substituting capital, or some similar claim is void:
if it provides security and if the act was undertaken within the last five years prior to the filing of
the proposal to open bankruptcy proceedings or thereafter;
if it guarantees the settlement and if the act was undertaken in the last year prior to the filing of the
proposal to open bankruptcy proceedings or thereafter.
Secret company: The return of the stake of the silent partner in a company, in full or in part, or the
waiving of their share of the incurred loss, in full or in part, may be subject to challenge, if the
contract on which such an act is based was concluded during the last year prior to the filing of the
proposal to open bankruptcy proceedings against the company or thereafter. The same applies if the
silent partner is wound up in accordance with the contract.
CY There are a number of provisions that may invalidate a charge granted by a company or any other
disposition it has made, for example:
A charge that has not been properly registered is void against the liquidator and any creditor of the
company (Sec 90(1), CCL) ;
Any act relating to property made or done by or against a company within six months before the
commencement of its winding up may be deemed a fraudulent preference if any such charge or
delivery or conveyance or assignment or otherwise is a fraudulent preference of one of its creditors
and such act will be invalid (Sec 301, CCL);
Any gift, sale, pledge, mortgage or other transfer or disposal of any movable or immovable property
made by any person with the intent to hinder or delay his/her creditors from recovering from
him/her. Under these circumstances, the debts will be deemed to be fraudulent, and will be invalid
and the property purported to be transferred or otherwise dealt with may be seized and sold in
satisfaction of any judgment debt due (Fraudulent Transfers Avoidance Law, Cap 62);
Where any part of the property of a company which is being wound up consists of immovable
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property burdened with onerous covenants, of shares or stock in companies, of unprofitable
contracts, or of any other property that is unsaleable, or not readily saleable, by reason of its binding
the company to the performance of any onerous act or to the payment of any sum of money, the
liquidator may disclaim the property (Sec 304, CCL).
CZ Legal acts by the debtor to reduce the chances that creditors will be satisfied or to favour certain
creditors over others are unenforceable. Any omission by the debtor in this respect is also treated as
a legal act. There are three categories of such unenforceable acts:
legal acts without adequate consideration;
preferential legal acts resulting in a situation where one creditor, to the detriment of other creditors,
receives greater satisfaction than they would otherwise have obtained in the bankruptcy proceedings;
legal acts where the debtor intentionally curtails the satisfaction of a creditor, if this intention was
known to the counterparty or, in view of all of the circumstances, must have been known to it.
The unenforceability of the debtor’s legal acts is established by an insolvency court ruling on an
action brought by the insolvency practitioner protesting the debtor’s legal acts (an action to set a
transaction aside).
The insolvency practitioner may bring an action to set a transaction aside within one year from the
date on which the insolvency decision takes effect. If an action is not brought within that time limit,
the title to have a transaction set aside lapses. The debtor’s consideration from unenforceable legal
acts forms part of the estate once the ruling upholding the action to set a transaction aside becomes
final.
DK On certain conditions, the debtor’s pre-insolvency transactions may be avoided by the insolvent
estate. Avoidance means that an otherwise valid transaction made by the debtor is reversed if the
transaction in question has defeated the assets of the estate or increased the debtor’s debt. If the
trustee believes that that debtor’s actions are contrary to the avoidance rules of the DBA, the estate
in bankruptcy must no later than 12 months from the issue of the bankruptcy order institute legal
proceedings against the third party or creditor that was given preference by the debtor’s voidable
transaction.
The debtor’s voidable transactions under the DBA include:
gifts from the debtor;
payment of debt;
transactions giving preference to a creditor over the other creditors;
transactions that mean that the debtor’s assets avoid being included in the assets of the estate in
bankruptcy;
transactions that mean that the debtor’s debt increases.
If the trustee is successful in the claim for avoidance against a third party, the third party must give
up and return the preference to the estate in bankruptcy that s/he has obtained through the debtor’s
voidable transaction, but not more than the loss of the estate.
EE After bankruptcy is declared, any dispositions by the debtor with regard to objects forming part of
the bankruptcy estate are null and void. A debtor who is a natural person may dispose of the
bankruptcy estate with the trustee’s consent. Any dispositions without the trustee’s consent are null
and void. The court will revoke, by way of recovery procedure, any transaction or other act by the
debtor that was concluded or performed before bankruptcy was declared and that damages the
creditors’ interests. If a transaction subject to recovery has been concluded or any other act subject to
recovery has been performed during the period from the appointment of an interim trustee to the
declaration of bankruptcy, the transaction or act is deemed to have damaged the creditors’ interests.
FI The RA sets out the general grounds for revocation of inappropriate and preferential transactions, as
well as specific grounds for revocation of certain types of transactions. The RA applies in all
insolvency proceedings under Finnish law, as well as in foreclosure proceedings.
A transaction or any other action can be revoked where it was made during the applicable suspect
period before the filing of therelevant proceedings. Under the general grounds for revocation set in
Section 5 of the Recovery Act, any action made within a five-year suspect period can be revoked if:
The action favours a creditor to the detriment of the other creditors, removes assets from the reach
of the other creditors, or
increases debt to the detriment of the other creditors;
The debtor company was insolvent when undertaking the action or became insolvent as a result of
it;
The action was improper or inappropriate, in particular from the point of view of the other creditors
of the transacting party, and the counterparty of the transacting party knew, or should have known,
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of the insolvency and the improper nature of the arrangement.
Transactions that did not take place during the suspect period can only be revoked if they were made
with related parties. Under the RA, a related party means a party closely related to the debtor
company, including immediate family members, entities that have common (financial) interests (for
example, due to shareholding or partnership), or persons that have a significant influence over the
debtor due to a management or a supervisory status (RA, Section 3). For related parties, the above
time limit is extended to two years.
FR In reorganisation or liquidation, any transaction entered into during the suspect period (période
suspecte) can be subject to clawback provisions. The suspect period runs from the date when the
company is deemed insolvent, and can be backdated by the court by up to 18 months before the
insolvency judgment. The act is void in relation to all and cancelled retroactively.
There are twelve cases of compulsory nullity concerning irregular acts:
all acts transferring ownership of movable property or real estate free of charge;
any commutative contract in which the debtor’s obligations far exceed those of the other party;
any payment, by whatever method, for debts which are not due on the date of payment;
any payment of debts due, other than in cash, bills of exchange, bank transfers, transfer deeds or any
other form of payment commonly accepted in business dealings;
any deposit or any consignment of sums made following the pledge of property, in the absence of a
final court judgment;
any contractual mortgage, any legal mortgage, as well as a legal mortgage of spouses, and any right
of lien or pledge created on the debtor’s assets for debts previously contracted;
any preservation measure, unless the registration or writ of attachment predates the cessation of
payment;
any authorisation and exercising of options by the employees of the business;
any transfer of goods or rights to a fiduciary estate, unless this transfer occurred as a guarantee for a
debt contracted simultaneously;
any amendment to a trust agreement affecting rights or assets already transferred to a fiduciary
estate to guarantee debts contracted prior to this amendment;
where the debtor is an individual entrepreneur with limited liability, any assignment or change to
the assignment of an asset,
subject to the payment of income not assigned to the business activity, resulting in depletion of the
assets covered by the proceedings in favour of another asset of this entrepreneur;
the notarial declaration of exemption from attachment made by the debtor.
Any payment made, or any transaction entered into during the suspect period is also subject to
optional voidance, if proper evidence is brought before the court that, at the time of the payment or
transaction, the contracting party knew the company's insolvency. When dealing with intra-group
transactions, this knowledge is presumed for companies belonging to the same corporate group.
DE To prevent actions detrimental to the creditors, any acquisition of assets belonging to the insolvency
estate after the opening of the proceedings is in principle void, whereas the acquisition before the
opening of the proceedings of assets that would have belonged to the insolvency estate after the
opening of the proceedings is in principle valid, but can be contested under certain circumstances.
Since the opening of the insolvency proceedings, the right of the debtor to dispose of his property is
vested in the insolvency administrator. Any disposal by the debtor of an asset belonging to the
insolvency estate after the insolvency proceedings have been opened is in principle absolutely
invalid (the main exception being where there is an acquisition in good faith of land, although this
can be contested) (Section 81(1), first sentence, GIC). Nor is there any acquisition of rights to an
asset belonging to the insolvency estate if the debtor has disposed of an asset belonging to the
insolvency estate before the insolvency proceedings are opened but the result occurs only after the
proceedings are opened (Section 91(1) GIC) (the main exception being an acquisition of land,
Section 91(2) GIC).
Rights of security acquired as a result of enforcement proceedings during the last month preceding
the application to open the insolvency proceedings, or after such application, likewise become
legally ineffective once the insolvency proceedings are opened (Section 88(1) GIC).
An acquisition from the insolvency estate before the proceedings are opened, unlike an acquisition
after the proceedings are opened, is in principle valid, but can be contested under certain conditions
(Sections 129 et seq. GIC). This right to contest an insolvent debtor’s transactions is of decisive
importance for the functioning of insolvency law, since it allows the insolvency administrator access
to outflows from the debtor’s assets that took place before the insolvency proceedings are opened. It
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can help greatly to increase the insolvency estate, and thus to ensure that insolvency law makes good
on its claim to provide equal satisfaction for the creditors in an orderly fashion and to prevent
preferential treatment of individual creditors. If the insolvency administrator successfully exercises a
right to contest, the party who benefited as a result of the contested transaction must return
everything that has been withdrawn from the insolvency debtor’s assets by the transaction. If he
cannot do so in kind, he has to pay compensation.
The insolvency administrator can bring an action to enforce the right to restitution, and can rely on
the right to restitution against any opposing claims brought by a creditor. If the recipient of a benefit
under a contestable transaction restores the property received, any counterclaim he may have revives
(Section 144 GIC).
EL Vulnerability of transactions is determined by reference to the date of cessation of payments, which
is set by the bankruptcy court in its judgment declaring bankruptcy in respect of an insolvent debtor
in accordance with the Insolvency Code. 'Cessation of payments' means the evidenced general and
permanent inability of a debtor to pay its debts as they fall due. The date of cessation of payments
so set by the court cannot fall earlier than two years prior to the date of the issue of the judgment
declaring bankruptcy.
Under Article 117 of the Insolvency Code, certain acts carried out by the debtor during the suspect
period (i.e., the period commencing on the date of cessation of payments and ending on the date of
the declaration of bankruptcy by the court) are subject to compulsory rescission by the bankruptcy
officer. These acts include:
any acts of the insolvent debtor carried out without consideration being received in return and that
have the effect of reducing the value of the debtor's estate and any undervalue transactions entered
into by the debtor (other than disposals made out of a moral or legal duty or as necessary to sustain
the debtor's children, provided that in each case such disposals were in proportion to and did not
deteriorate the debtor's financial condition);
any payment of debts that are not yet due and payable;
any repayment of due and payable debts not made by payment in cash or in the pre-agreed manner
(other than voluntary transfers of properties to credit or financial institutions in or towards
repayment of due and payable debts); and any security interest created over the debtor's assets to
secure a pre-existing debt whereby the debtor had not pre-agreed to grant such a security interest, or
to secure a new debt replacing a pre-existing debt (but subject to the protection accorded to security
interests in favour of banks pursuant to Legislative Decree 17.7./13.8.1923).
In addition, under Article 118 of the Insolvency Code, certain acts carried out by the debtor during
the suspect period, which are not subject to compulsory rescission, as above, may be subject to
rescission by the bankruptcy officer. Acts subject to challenge in this manner include:
any payment of debts that are due and payable, and
any transaction entered into by the debtor for consideration.
This applies in each case if the relevant party or creditor (as the case may be) was aware of the
cessation of payments and that such payment or transaction is detrimental to the other creditors. For
these purposes, deemed knowledge of that party or creditor applies in respect of a spouse, close
relative, founder, administrator, director, or manager of the debtor or, where that party or creditor is
an affiliate of the debtor within the meaning of Article 32 of Law 4308/2014, if the terms of the
transaction manifestly deviate from normal market terms.
Exceptionally, certain transactions may be vulnerable even if concluded earlier than the set date of
cessation of payments. Under Article 119 of the Insolvency Code, acts of the debtor concluded
within the five years immediately prior to the declaration of bankruptcy are subject to rescission, if
the debtor intended the act to operate to the detriment of its creditors in general or to benefit certain
creditors to the detriment of other creditors, and the relevant party was, at the time of the act, aware
of the debtor's intention.
HU The administrator or creditors may challenge such transactions by lodging a petition and may
request the transaction to be declared invalid. Any assets thus returned to the debtor increase the
assets of the insolvent estate. Under Hungarian law, acts can be challenged within a term of 90 days
before an imminent insolvency. For transactions with the intent of defrauding creditors the
avoidance period is of 5 years.
IE Insolvency Proceedings: The creditors do not have any right to seek reversal of any transactions or
asset transfers prior to the commencement of the insolvency proceedings. However, if the debtor can
be considered to have made excessive contributions to a pension fund, the creditor may seek
financial relief from the courts. This may result in the court ordering that the fund provider issues a
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full refund of the amount for distribution among the creditors party to the arrangement.
Bankruptcy: Previous asset transfers and payments that bankrupts made to creditors or other
individuals can be overturned under bankruptcy legislation. This includes situations where:
The bankrupt has paid an amount or transferred an asset to any creditor in preference to any other
creditors to whom they owe a debt. The OA can seek to have such payments, made in the three years
prior to the date of adjudication, reversed. If the OA is successful, the amount in question would be
paid back into the bankruptcy estate for the benefit of all creditors;
The bankrupt has transferred or gifted an asset to a third party for an amount less than the fair
market value. Upon successful application before the High Court by the OA, such transfers within
three years prior to the date of adjudication can be voided
and the shortfall would be paid into the bankruptcy estate for the benefit of all creditors;
The bankrupt has transferred an asset or made a payment which can be considered to be an
‘avoidance transaction’, i.e. the bankrupt was intending to avoid having the asset or sum of money
considered as part of their bankruptcy estate. Two time periods apply in these cases:
Any such transactions made three years prior to the bankruptcy can be reversed by the OA on
successful application to the High Court, and;
Any such transactions made five years prior to the bankruptcy, provided that the bankrupt fails to
prove they were solvent at the time of the transaction.
IT Legal acts carried out by the insolvent before the opening of the insolvency proceedings can be
revoked if they were carried out within a certain period (one year or six months) before the opening
of the proceedings.
The legal references relating to the effects of legal acts carried out by the bankrupt prior to the
declaration of bankruptcy which are detrimental to the mass of creditors are contained in Article 64
et seq. of the bankruptcy law. Article 64 of the bankruptcy law establishes the ineffectiveness against
creditors of free acts carried out by the bankrupt in the two years preceding the declaration of
bankruptcy, with the exception of gifts for use and acts carried out in fulfilment of a moral duty or in
the public interest, but on condition that these gifts are proportionate to the donor's assets.
Article 65 of the bankruptcy law sanctions with ineffectiveness payments made by the bankrupt in
the two years preceding the declaration of bankruptcy and concerning debts due on the day of the
declaration of bankruptcy or later.
Article 66 of the bankruptcy law extends to the trustee in bankruptcy the right to bring an ordinary
revocatory action pursuant to article 2901 of the Civil Code, in order to obtain a declaration of the
ineffectiveness of the acts carried out by the debtor to the detriment of the masses, where the
objective and subjective conditions exist.
Art. 67 of the bankruptcy law is the pivotal rule of the bankruptcy revocation regulations contained
in Section III of the bankruptcy law since it represents the main instrument for protecting the ‘par
condicio creditorum’ and compliance with the prohibition of altering the legitimate order of
privileges.
The objective premise of the bankruptcy revocation action is the ‘eventus damni’, i.e. the very fact
of the damage to the ‘par condicio creditorum’, which can be linked, by legal and absolute
presumption, to the removal of the asset from the estate following the act of disposal.
The bankruptcy law distinguishes, with regard to the subjective presupposition of the revocation
action, ‘normal’ acts from ‘abnormal’ acts, i.e. acts that can be carried out in the normal course of
business activity from acts that, although they can be carried out in the course of business activity,
have peculiarities that lead them to real anomalies in the entrepreneur's management.
If the trustee intends to apply for the revocation of ‘normal’ acts carried out by the debtor in the
suspected period, he must prove the existence of the subjective condition of the defendant's
knowledge, at the time the act was concluded, of the debtor's state of insolvency (scientia
decoctionis). If, on the other hand, the trustee acts to revoke an ‘abnormal’ act, then he does not have
to provide any evidence of the scientia decoctionis, since the law presumes that the defendant who
took advantage of the abnormal act was aware of the state of insolvency of the debtor who later
became bankrupt.
For the purposes of the bankruptcy revocation, the liquidator must take into consideration only that
part of the debtor's activity (payments, contracts, deeds, and the provision of guarantees) carried out
in a period that the law considers to be ‘suspicious’ and that corresponds to a period of time
preceding the date of the judgment declaring bankruptcy (or the date of a different order, in the
event of the completion of bankruptcy proceedings).
As a result of Decree-Law no. 35/2005, converted into Law no. 80/2005, the backward time limits
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for the exercise of the revocation action were halved to two years for gratuitous acts, one year for
abnormal acts and six months for normal acts.
As regards the starting date, the suspected period is calculated backwards from the date of
publication of the declaration of bankruptcy in the company register, and not from the date of filing
the judgment in the registry. Pursuant to Article 44 of the Bankruptcy Act, on the other hand, all
legal acts carried out by the bankrupt and payments made by him after the declaration of bankruptcy
are ineffective against creditors. Payments received by the bankrupt after the declaration of
bankruptcy will also be ineffective; Finally, acts of extraordinary administration carried out by the
bankrupt during agreements with creditors and without the authorisation of the court are null and
void.
LV Prerequisites for avoiding a transaction are losses incurred by the debtor (such as in the case of
undervalue transactions) and knowledge of losses by the counterparty. Knowledge is presumed in
the case of transactions concluded with related persons. In addition, the law vests with the
insolvency administrator the right to reclaim payments made by the debtor prematurely within six
months prior to insolvency, if, at the same time, other payment obligations were not honoured in
time.
LT Any transaction by the debtor that infringes upon creditors’ rights may be challenged by the
assigned insolvency administrator or an individual creditor, on the basis of actio Pauliana within a
one-year period of limitation, which starts to run on the day when the transaction became known or
should have become known. For a transaction to be successfully contested on the basis of actio
Pauliana, existence of all of the following conditions is necessary:
the creditor must have an indubitable and valid right of claim, i.e. the debtor must have either failed
to fulfil his/her obligation entirely or must have fulfilled in improperly;
the transaction at issue must infringe the creditor’s rights. Creditors’ rights are infringed where the
transaction renders the debtor insolvent or where a solvent debtor prioritises another creditor, or the
transaction, while not rendering the debtor insolvent, changes (reduces) the debtor’s ability to
discharge the obligation to the creditor, for instance, reduces the value of the debtor’s assets (such a
situation may occur, for instance, when the price received for property sold is significantly below
the market price);
the debtor was not obliged to enter into the disputed transaction;
the debtor did not act in good faith, because he/she knew that the transaction would breach the
rights of the creditors;
the third party that concluded the bilateral transaction with the debtor in exchange for a
compensation did not act in good faith.
Additionally, at the time bankruptcy or restructuring, disposal of the debtor’s property is restricted
by law and the debtor’s transactions concluded in violation of those restrictions are invalid as of the
moment they were concluded.
LU To protect the interests of creditors, the period between the cessation of payments and the order is
regarded as the ‘suspect period’. Certain acts carried out during this period, where they may be
detrimental to the rights of creditors, will be null and void. These involve in particular:
any acts in relation to movable or immovable property that the bankrupt has sold at no cost or in
return for payment where the sale price is clearly much lower than the value of the property in
question;
all payments made in cash or by transfer, sale, offsetting or otherwise for debts that have not yet
fallen due;
all payments made other than in cash or using commercial instruments for debts falling due;
any mortgage or any other property rights granted by the debtor for debts contracted before the
cessation of payments.
Any acts carried out or payments made in fraud of creditors, i.e. where done by the debtor in full
knowledge of the detriment that this will cause to the creditor (i.e. by reducing the insolvency estate,
not respecting the ranking of claims, etc.) are deemed null and void, whatever the date on which they
occurred.
MT Prejudicial transactions to creditors should address transactions undertaken by the debtor with the
intention to prejudice the creditors. Currently, the suspect period in Malta is six months
NL During bankruptcy proceedings, a liquidator may invoke the actio Pauliana to invalidate antecedent
transactions that are detrimental to the insolvent estate. Clawback generally requires prejudice,
which will materialise if creditors receive a lower distribution on their claims as a result of a
transaction.
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Prejudice would typically be the result of a reduction in the total value of the debtor's estate as a
result of a transaction (transactions at an undervalue) or as a result of a disturbance of the statutory
waterfall of priorities when a company is already insolvent (preferences). The liquidator should look
at the entire transaction (including beneficial aspects of the transaction) and, therefore, has no right
to cherry-pick by only looking at one particular provision of a document as a clause that has a
negative impact on the recourse position of the joint creditors. If the disputed act was part of a set of
transactions, the positive or negative effects of the combined set should also be considered.
Where prejudice has been established, the right to challenge the prejudicial action depends on further
circumstances. The avoidance of an act entered into without a pre-existing obligation to perform the
relevant act requires that the debtor (and in the case of a transaction against consideration, also the
counterparty) knew or should reasonably have known that such prejudice would materialise.
Knowledge of a mere chance that prejudice may occur is insufficient to invoke the actio Pauliana.
Knowledge must relate to a reasonable degree of likeliness that insolvency proceedings will be
opened, and that the insolvent estate contains a deficit. In certain cases, the onus of proof regarding
knowledge of prejudice is reversed by law (e.g., in the event of certain transactions executed
between related parties within a period of one year prior to the bankruptcy date).
A compulsory or involuntary legal act, on the other hand, can only be avoided either in the event that
the transaction occurred at a time when the counterparty knew or ought to have known that a petition
was submitted for the commencement of insolvency proceedings against the debtor, or in the event
of a concerted action by the debtor and the creditor aimed at facilitating preferential treatment of the
latter (collusion).
Finally, set-off effected in the period immediately prior to the commencement of insolvency
proceedings could be clawed back if the creditor effecting the set-off acted in bad faith when
acquiring its claim or debt on which it relied when setting off. Bad faith is, notably, given when the
creditor knew or should have known that the insolvency could reasonably be expected. A similar
rule applies to the right of an account bank to exercise its pledge over monies standing to the credit
of bank accounts of its clients (such a pledge is generally stipulated in the general terms and
conditions used by the relevant account bank). The pledge cannot be exercised by account banks in
relation to monies paid into the account at a time when the account bank is considered to be in bad
faith (as defined above).
PL In bankruptcy proceedings the legal actions performed by the bankrupt party in respect of the
bankruptcy estate are void. Under threat of nullity, the consent of the creditors’ committee is
required for the following actions (Article 206 of the Bankruptcy Act):
the continued management of the enterprise by the receiver if it is to last more than three months
after the declaration of bankruptcy;
waiving the sale of the enterprise as a whole;
the direct sale of the assets included in the bankruptcy estate;
contracting loans or credits and encumbering the bankrupt party’s assets with limited proprietary
rights;
the admission, waiver of entering into a composition regarding disputed claims and bringing a
dispute before a court of arbitration.
In restructuring proceedings, in accordance with Article 129 of the Restructuring Act, under pain of
nullity the following actions by the debtor or the insolvency practitioner require the consent of the
creditors’ committee:
encumbering elements of the composition or remedial estate with a mortgage, pledge, registered
pledge or maritime mortgage
in order to secure a claim not subject to composition;
the transfer of the ownership of an object or a right in order to secure a claim not subject to
composition;
encumbering elements of the composition or remedial estate with other rights;
contracting credits or loans;
concluding an agreement on the leasing of the debtor’s enterprise or of its organised part or another
similar agreement;
the sale, by the debtor, of real property or other assets worth over PLN 500 000.
The insolvency practitioner may institute proceedings to declare actions invalid and other
proceedings in which a claim is based on the invalidity of an action.
PT Acts detrimental to the insolvent estate performed within two years prior to the date of
commencement of the insolvency proceedings may be resolved (Article 120, no. 1 of CIRE). This
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includes all those acts that diminish, frustrate, hinder, endanger, or delay the satisfaction of creditors
(Article 120.2 of CIRE).
The resolution presupposes bad faith of the third party. Bad faith is understood to be the knowledge
that the debtor was in a situation of insolvency; of the prejudicial nature of the act and that, on that
date, the debtor was in an imminent situation of insolvency; or of the beginning of the insolvency
process (Article 120, nr. 5). In any case, the bad faith of the third party is presumed when the acts
performed or omitted have occurred in the two years prior to the commencement of the insolvency
proceedings and in which persons especially related to the insolvent, such as parents or children,
participated or benefited from (Article 120, nr. 4).
In some cases, the requirement of bad faith may be waived (Article 121 of the CIRE). There are,
therefore, some acts which are resolvable irrespective of any requirement. For example, the
following are therefore resolvable: acts performed by the debtor free of charge in the two years prior
to the commencement of insolvency proceedings (including the repudiation of an inheritance or
legacy); bail, sureties, sureties, endorsements and credit mandates granted by the debtor during that
period, which do not concern transactions or businesses of real interest to the debtor; onerous acts
performed by the insolvent in the year prior to the commencement of the insolvency proceedings, in
which he manifestly assumed more obligations than the counterparty.
RO The following acts or transactions performed by the debtor can be annulled in order to return the
transferred assets or the value of other benefits provided:
acts of transfer without consideration performed in the two years prior to the opening of the
proceedings; sponsorships for humanitarian purposes are exempted;
unequal transactions, where what is given by the debtor is clearly greater than what is received,
performed in the six months prior to the opening of the proceedings;
acts performed in the two years prior to the opening of the proceedings with the intention on all
sides of preventing assets from being pursued by creditors, or of harming their rights in any other
way;
acts of transfer of ownership to a creditor for or towards the satisfaction of a prior debt, performed in
the six months prior to the opening of the proceedings, if the amount which the creditor could obtain
in the event of a winding-up of the debtor is below the value of the act of transfer of ownership;
the establishment of a right of preference in regard to an unsecured claim in the six months prior to
the opening of the proceedings;
advance payment of debts which are made in the six months prior to the opening of the proceedings,
if the due date was to have been a date after the opening of the proceedings;
acts of transfer or assumption of obligations performed by the debtor in the two years prior to the
opening of proceedings with the intention of concealing or delaying the state of insolvency or
committing fraud against a creditor.
The action for annulment can be brought against a constitutive act under property law or an act of
transfer of ownership under property law if it is concluded by a debtor in the normal course of its
day-to-day business. An application for the annulment of a constitutive act or of an act of transfer of
ownership will be entered automatically in the appropriate public registers. After the insolvency
proceedings have been opened, all acts, transactions and payments performed by the debtor after the
opening of proceedings are automatically null and void, with the exception the ones required for the
conduct of current business, ones authorised by the delegated judge, transactions endorsed by the
court-appointed administrator
SK The Bankruptcy Act legislates for acts detrimental to the creditor by making them ineffective under
certain conditions. Ineffectiveness only has consequences if the debtor’s acts are contested. The
insolvency practitioner and the creditors have the right to contest them, but a creditor only has this
right if the insolvency practitioner does not act on the creditor’s request to contest a legal act within
a reasonable time.
The right to contest a legal act lapse if it is not exercised in respect of the debtor or in court within a
year of bankruptcy being declared; the right to contest a legal act is only considered to have been
exercised in respect of the debtor if the debtor acknowledges the right in writing. Under the
legislation, legal acts from which entitlements are enforceable, or have already been satisfied, can
also be contested.
SI Creditors and the bankruptcy administrator have the right to contest a legal act of the debtor. Any
legal acts can be contested (including omissions) that result in unequal or reduced payment of
bankruptcy creditors or in placing a particular creditor in a more favourable position.
Legal acts that may be contested in bankruptcy proceedings are those that were committed in the
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period from the last year before the submission of a petition to launch bankruptcy proceedings until
the opening of bankruptcy proceedings. An unpaid legal act (or legal acts of disproportionately low
counter value) can be contested when committed in the period starting 36 months before the
submission of the request to launch bankruptcy proceedings and ending upon the opening of
bankruptcy proceedings.
A lawsuit for voidability must be lodged within 12 months after a decision on opening bankruptcy
proceedings becomes final. It is not possible to contest legal acts performed by the debtor in
bankruptcy during compulsory settlement proceedings, in accordance with legal rules applicable for
conducting the debtor's business in the proceedings; legal acts performed by the debtor in
bankruptcy to pay creditor claims in the proportions, within the deadlines and at the interest rates set
out in a confirmed compulsory settlement; and payments for bills of exchange or cheques if the other
party had to receive a payment in order for the debtor in bankruptcy not to lose the right of recovery
against another person obligated under the bill of exchange or cheque.
Legal acts performed by the debtor to pay creditor claims or to perform other obligations in
accordance with a confirmed agreement on financial restructuring cannot be contested either.
ES The regulation of revocatory actions in insolvency proceedings is contained in Articles 226 et seq. of
the Recast Text of the Insolvency Law. These provisions have undergone successive amendments,
mainly in relation to the nature of the ‘protective mechanisms’ of the refinancing agreements.
Article 226 contains the legal system for claw-back actions, based on a general clause declaring all
acts carried out by the debtor that are ‘detrimental to the assets covered by the proceedings’ as
‘revocable’, whether or not there was ‘intention to mislead’. In order to safeguard the effects of
revocation, a specific period of time is established: the two years prior to the date of the insolvency
order.
The law opts for the establishment of a specific revocation period: two years dating back from the
date of the insolvency order. Actions carried out during the ‘suspect period’ by the debtor are
revocable if they are detrimental to the assets covered by the proceedings. Pecuniary detriment must
be satisfactorily proven by the party making the complaint. However, given the difficulties normally
entailed in proving detrimental acts, the Insolvency Law facilitates bringing actions through the
establishment of a set of presumptions. As happens in other parts of the law, the presumptions may
be irrebuttable or rebuttable.
The pecuniary detriment is presumed irrebuttable in two cases:
when dealing with the free disposal of assets, except donations for use, and
when dealing with payments and other acts settling obligations that fall due after the insolvency
order, unless they are secured by collateral, in which case the presumption admits evidence to the
contrary;
The pecuniary detriment is presumed rebuttable in three cases:
when dealing with the disposal of assets against payment to persons with a special relationship with
the insolvency debtor,
when dealing with the creation of charges on property in favour of pre-existing obligations or in
favour of new obligations incurred to replace the former, and
payments or other acts settling obligations secured by collateral and that fall due after the
insolvency order.
Legal standing to bring revocatory actions in insolvency proceedings falls to the administrator.
However, for the purpose of protecting creditors against the inactivity of administrators, the law
provides for a subsidiary or second grade legal standing for creditors that have urged the
administrator in writing to bring a revocatory action, if within a period of two months since the date
of the request the action is not brought by the administrator. The law contains rules aimed at
ensuring that administrators effectively carry out the role of ensuring that the assets covered by the
proceedings are not disposed of. For actions against refinancing agreements, legal standing is
exclusive to the administrator, excluding any subsidiary standing.
In order to protect the refinancing agreements, there are special rules resulting from recent
legislative amendments, which define protective mechanisms that make these agreements (approved
under certain conditions) resistant to revocatory actions.
SE An act can be reversed if it improperly favoured a certain creditor over others, or if the creditors
have been deprived of the debtor’s property, or if the debtor’s debts have increased, and if the debtor
was insolvent or became insolvent as a result of the proceeding alone or as a result of the proceeding
in combination with other factors, and the other party knew or should have known that the debtor
was insolvent and what the circumstances were that rendered the legal act improper.
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Payment of a debt later than three months before the reference date using a method other than the
customary means of payment, or in advance, or of an amount that appreciably worsened the debtor’s
financial status, can be reversed unless it can be regarded as ordinary in the circumstances. If the
payment was made to one of the debtor’s family members prior to that date but later than two years
before the reference date, it can be reversed unless it is shown that the debtor was not insolvent and
did not become insolvent as a result of the act in question.
Source: Deloitte/Grimaldi (2022).
2.2 Asset tracing
Closely related to transaction avoidance, asset tracing is a “follow the money” tool, that
enables courts, insolvency practitioners or parties that demonstrated a legitimate interest
to determine and locate the assets, examine the revenue generated by often fraudulent
activity, and follow its trail. “Asset tracing” is a legal process of identifying and locating
misappropriated assets or their proceeds (values) belonging to the debtor’s estate. It
includes both the preservation (freezing) of the assets identified and the repatriation (if
the asset is to be found in another State). 284
The effectiveness of tools for asset tracing
has a key importance in the maximisation of the value of the insolvency estate.
Insolvency practitioners can use the European Preservation Order Procedure
(“EAPO”)285
to trace and recover assets above at least in relation to detrimental payments
the debtor made to third parties. However, many aspects of EAPO implementation are
governed by national laws and the main use of the instrument appears limited to tracing
banking accounts286
.
Consultations with stakeholders revealed problems if a cross-border element is implied,
that is the asset is situated in another Member State than the one where the proceedings
have been opened. In fact, recurring feedback from the stakeholder consultation was that
the means available for insolvency practitioners to trace and freeze assets belonging to
the estate in another Member State are insufficient or inadequate which often results in
the dissipation of those assets by the time action is taken.
Although the EU Insolvency Regulation287
ensures that the powers of the insolvency
practitioners have cross-border effects, subject to certain conditions, exercising these
powers encounters difficulties in practice. Stakeholders pointed out that essential
information for the purpose of asset tracing are included in national registers, but these
registers are either not accessible and/or are not comprehensible by the insolvency
practitioners (due to language barriers). Furthermore, information is not updated occur in
practice.
284
UNCITRAL, Civil asset tracing and recovery in insolvency proceedings. Note by the Secretariat, 4
October 2021 (A/CN.9/WG.V/WP.175), § 29. See previously the Report of the Colloquium on Civil Asset
Tracing and Recovery (Vienna, 6 December 2019) (A/CN/9/1008). The documents are available at
www.uncitral.org.
285
Regulation (EU) No 655/2014 of the European Parliament and of the Council of 15 May 2014
establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in
civil and commercial matters.
286 Antonio Leandro, Asset Tracing and Recovery in European Cross-border Insolvency Proceedings, 21
December 2021.
287
EU Regulation 2015/848 of 20 May 2015 on Insolvency proceedings, hereafter EIR.
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From the substantive standpoint, the current framework implies that powers of
insolvency practitioners may not include coercive measures if they are not provided by
the applicable law, unless ordered by a court of the specific Member State or the right to
rule on legal proceedings or disputes. However, both the recognition of the powers of
insolvency practitioners to act in relation to the assets located in another Member State288
and the recognition of injunction and interim courts orders289
are well established.
Preservation measures, instead, may be adopted only where an insolvency practitioner
has been appointed290
which means that prior to the commencement of the insolvency
proceedings provisional measures may be only ordered by the court upon the request of
the debtor, creditors or third parties or the foreign representative291
.
Lastly, in respect to the publicity of the information regarding assets, there is a need to
facilitate and speeding up the process of tracing assets for the efficiency of insolvency
proceedings, in compliance with fundamental rights and data protection requirements,
relying on IT tools. The EU has already taken significant steps: the EIR requires Member
States to establish insolvency registers interconnected via the European e-Justice portal
and to publish certain mandatory information establishing the insolvency registers’
interconnection (“IRI”); the Business Registers Interconnection System (“BRIS”) aims at
facilitating the access to information on EU companies for the public and ensure that all
EU business registers can communicate to each other; the Beneficial ownership registers
interconnection system (“BORIS”) serves as a central search service making available all
information related to the beneficial ownership operating as a decentralised system
interconnecting the national beneficial ownership registers of the Member States and the
European e-Justice Portal through the European Central Platform. Lastly, there is a
Proposal for a Regulation on a computerized system for communication in cross-border
civil and criminal proceedings292
(e-Codex system) which includes both the into its
scope.
288
France, Cass. Com. No. 17-16.200, Dalloz 2020, 1799, note R. Damman/A.Sallou.
289
France, Cass. Civ. No. 15-14.664, Rev. Sociétés 2017, 303 note N. Morelli. See R. Damman/M.
Guermonprez, BJE February 2018.
290
Art. 52 EIR.
291
Note of the Secretariat of the UNCITRAL Working Group V, 4 Ocotber 2021 (A/CN.9/WG.V/W)
292
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on a
computerised system for communication in cross-border civil and criminal proceedings (e-CODEX
system), and amending Regulation (EU) 2018/1726, 2.12.2020.
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Table A.5.3: Insolvency practitioners in insolvency proceedings in the EU Member States, powers relating to asset
tracing are underlined
AT Trustee in bankruptcy proceedings:
the practical conduct of the insolvency proceedings;
reviews the financial position of the debtor;
continues to run the business if it is not yet closed on opening the proceedings and no disadvantage
from continuation arises
for the creditors;
examines the claims lodged;
examines whether a restructuring plan is in the interests of the creditors and whether it is likely to
be executable;
establishes and disposes of the assets;
administers and represents the insolvency estate;
exercises the right of challenge for the insolvency estate;
distributes the proceeds from the estate.
Administrator in restructuring proceedings
supervises the debtor and the debtor’s business management;
grants or refuses authorisation for legal acts which are not carried out in the normal course of
business;
represents the debtor in all matters in which the debtor does not have power of disposal;
ascertains the financial position of the debtor;
examines whether the restructuring plan is executable and whether reasons exist for withdrawal of
possession; examines the claims lodged;
exercises the right of challenge for the insolvency estate.
BE General
The concept of ‘insolvency practitioner’ (IP) is defined in Article I.22, 7° of the BCEL.
Belgium listed persons that, under national law, are to be considered as insolvency practitioners
because they perform at least one of the tasks listed in Article 2(5) of the Regulation. The list
includes:
the receiver;
the delegated judge;
the judicial representative;
the debt mediator;
the liquidator;
the provisional administrator.
The core of the matter is set out in Article XX.20 of BCEL, which regulates the profile of insolvency
practitioners, the insurance of their professional liability, the obligation to appear on the lists of
practitioners provided for by the law, the methods for determining and collecting fees, the
procedures for increasing or replacing fees, the procedures for increasing their number or replacing
them, as well as matters relating to the end of their mandate.
Receiver
The day on which the bankruptcy is declared by the Company Court, a receiver is appointed to
assume all responsibilities from the board of directors and other corporate organs. The court has
absolute discretion regarding the identity and the number of receivers appointed; however, the
receiver has to be a licensed insolvency practitioner registered on the list of receivers held by the
court. For bankruptcies of large companies, it is not unusual to appoint a committee of receivers.
The receiver has full control over the company, only subject to the oversight of the court and the
judge-commissioner.
Delegated judge
If the delegated judge is included among the insolvency practitioners listed in Annex B, this does not
imply that he will be subject to the rules applied by Book XX to insolvency practitioners in general.
His status (like that of the judge-commissioner, who is not included in Annex B) is different from
that of genuine insolvency practitioners. It is also apparent that he is not primarily responsible for
any of the tasks listed in Article 2, 5 of Regulation 2015/848.
Judicial representative
The judicial representative is, in the context of a judicial reorganisation by transfer under judicial
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authority, the person responsible for organising the transfer of all or part of the undertaking. In the
context of a judicial reorganisation procedure by collective agreement, a judicial representative may
be appointed to facilitate the conclusion of an amicable settlement.
BG Receivers
Under Art. 655 of BCA, natural persons must fulfil certain conditions in order to become receivers
(e.g. to have passed successfully the examination for acquiring qualification). The bankruptcy court
shall appoint the receiver in bankruptcy elected by the first meeting of the creditors. The receiver in
bankruptcy shall exercise his powers with the care of a prudent merchant.
Under Art. 658 of BCA, the receiver in bankruptcy shall have the power to represent the undertaking
and to manage its affairs. This include (the right to supervise the debtor’s business, to obtain and
keep the books and handle the business correspondence, to make enquiries and identify the debtor’s
assets, to request that contracts to which the debtor is a party be terminated, cancelled or annulled, to
propose a recovery plan etc.).
Liquidators
Under Art. 266 et subseq. of the BCA, liquidators must be registered in the commercial register.
Liquidators shall bear the same liability for their activities related to the liquidation as the managers
and the other executive bodies of the trade companies. The liquidator shall be obliged to exercise his
competencies with the care of a diligent merchant. The liquidators shall be obliged to complete any
pending transactions, to collect debts due, to convert the remaining company's property into cash and
satisfy the creditors.
HR Trustee
The trustee of the pre-bankruptcy proceeding is appointed by a decision of the court. The trustee has
a number of duties, such as examining the business operations, the assets and liabilities of the debtor
and the credibility of registered claims. Among others, he/she may contest claims, supervise the
business operations of the debtor and file complaints to the court in cases of breaches of the CBL.
Liquidator The liquidator in bankruptcy proceedings is selected at random and appointed by the
court in the decision on opening bankruptcy proceedings. The liquidator is vested with the rights and
obligations of the corporate bodies of the debtor, unless otherwise specified in the CBL. S/he is
obliged to put the accounting records in order, compile a preliminary cost estimate and send it to the
committee of creditors for approval, ensure the realisation of the debtor's claims, to prepare
distribution to creditors and execute distribution after approval, to deliver a final account to the
committee of creditors, to make subsequent distributions to creditors etc.
CY Compulsory winding-up by the court cases
If the court considers it appropriate, it can appoint a temporary liquidator, for the period after the
submission of the petition before it and before it delivers the order of the compulsory winding-up, to
protect the company’s assets. The powers and responsibilities of a temporary liquidator are those
that the court will give him at his appointment. The liquidator (not a temporary one) in this
procedure has to ensure that the company’s assets are gathered, realized, and distributed to the
company’s creditors, and if there is a remainder to the people entitled to it. For this reason, he has
the power to proceed with almost any actions necessary to do this. There are certain actions for
which the liquidator needs the permission of the court or of the supervisory committee, and there are
some other actions that remain vested to the court (for instance the preparation of the contributors
list, order a contributor to pay etc). The powers of the liquidator in compulsory winding-up are
subject to the supervision and control of the court.
Voluntary winding-up
The liquidator in a voluntary winding-up has all the powers and responsibilities that the liquidator
has in compulsory winding-up. In addition, he can proceed with certain actions relating to
liquidation without the court’s or the supervisory committee’s permission, for which a liquidator in
compulsory winding-up would need such permission. Moreover, he can perform some actions that in
a compulsory winding-up would be vested to the court. However, there remain some actions for
which the liquidator still needs the approval of the court or the supervisory committee.
Winding-up under the court’s supervision
The liquidator’s powers and responsibilities remain the same as in a voluntary winding-up, unless
the court imposes restrictions.
Receivership
The powers and responsibilities of the receiver depend on and are contained in the agreement that
had been previously made by the debtor and the secured creditor.
Examinership
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The examiner has all the powers that are afforded to auditors. Moreover, s/he has the right to call for
meetings and participate in them and to take measures to stop, prevent or rectify an
action/omission/decision made by the company, or its creditors, or its members or its stakeholders,
or by any other person, that is harmful to the company as a going concern. With the court’s approval
he can verify claims against the company and reach agreements for their settlement. His most
important task is to prepare proposals for a scheme of arrangement or settlement or restructuring, so
that insolvency can be prevented and the viability of the company as a going concern secured.
CZ General Insolvency administrator General Insolvency administrator’s powers:
Review of the registered receivables;
Drafting the list of insolvency estate (assets);
Right to challenge insolvency debtor’s legal actions and payments in the period up to 5 years before
commencement of the insolvency proceedings;
Notification of foreign EU creditors (in cooperation with insolvency court);
Cooperation with the creditors’ committee;
Informing creditors of the economic situation of the insolvency debtor;
Fulfilment of other duties imposed by the court in preliminary injunction;
Insolvency administrator powers in bankruptcy
In general – all powers of the insolvency debtor’s management;
Administration of the assets;
Enforcement of the debtor’s receivables;
Sale of the assets;
Payments to the creditors;
Right to terminate the contracts;
Administration of accounting;
Insolvency administrator powers in reorganisation
Supervision of the management of the company;
Supervision of fulfilment of the reorganisation plan.
DK The trustee has to sell the assets of the bankrupt and investigate the dispositions made in the
company and thereby recover as much money as possible. The trustee is first to cover his
outstanding salary for his work and then the creditors will divide the rest according to the rules in the
DBA. The trustee must manage the interests of the estate to the widest extent possible, in order to
ensure that the outcome of bankruptcy is as favourable as possible.
EE A trustee in bankruptcy enters into transactions relating to the bankruptcy estate and performs other
acts. The rights and obligations arising as a result of the trustee’s actions belong to the debtor. A
trustee, in accordance with their duties, participates in court as a party to disputes relating to the
bankruptcy estate in lieu of the debtor.
The trustee has the following prerogatives:
determines the creditors’ claims, administers the bankruptcy estate, organises its formation and sale
and satisfaction of the creditors’ claims out of the bankruptcy estate;
ascertains the causes of the debtor’s insolvency and the time when the insolvency arose; arranges
for the debtor’s business activities to continue, where necessary;
conducts the liquidation of the debtor who is a legal person, where necessary;
provides information to the creditors and the debtor in the cases prescribed by law;
reports on their activities and provides information concerning the bankruptcy proceedings to the
court, the supervisory official and the bankruptcy committee;
performs other obligations provided for by law.
If the debtor’s insolvency was caused by a grave error in management, the trustee is required to
lodge a claim for damages against the person liable for the error immediately after sufficient grounds
for lodging a claim become evident. In addition to the trustee’s rights provided for by law, a trustee
also has the rights of an interim trustee. The trustee must perform their obligations with the care
expected of a diligent and honest trustee and take into account the interests of all the creditors and
the debtor.
FI Trustee in bankruptcy
The trustee has a central role in the administration of an estate in bankruptcy. The duties of the estate
administrator include representing the insolvency estate, seeing to the current management of the
estate, drawing up the estate inventory and the debtor description, receiving the lodgement of claims,
and drawing up the draft disbursement list and the final disbursement list. The trustee also sees to the
management and sale of assets belonging to the estate and disbursement of the funds. When
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bankruptcy starts, the debtor loses their authority over the assets of the insolvency estate.
Insolvency practitioner
The insolvency practitioner is responsible for realising the purpose of the restructuring proceedings
and for protecting the interests of the creditors. The insolvency practitioner draws up a report of the
debtors’ assets and liabilities and a proposal for a restructuring programme (some other parties, such
as the debtor, are also entitled to draw up their own proposal for a restructuring programme). The
insolvency practitioner also supervises the debtor’s activities.
FR Judicial reorganisation
Where safeguard or judicial reorganisation proceedings are opened, the debtor is not disinvested and
continues to manage his business. Under safeguard proceedings, the court may appoint an
administrator to supervise or assist the debtor in his business management, according to the mandate
defined by the court in the judgment. In certain cases (businesses with at least 20 employees and
turnover excluding taxes of at least EUR 3 million) that appointment is compulsory.
Under judicial reorganisation proceedings, the court may also appoint an administrator
(administrateur judiciaire) who will assist the debtor in his management or manage the business
himself, in whole or in part, in place of the debtor. That appointment is compulsory in the same
cases as in safeguard proceedings.
Judicial liquidation
In the case of judicial liquidation proceedings, the debtor is divested of the administration and
disposal of his assets. The liquidator (liquidateur) exercises his rights and performs actions in
relation to his business assets. The liquidator therefore undertakes the administration of his assets.
General conditions
Insolvency practitioners are court-appointed representatives placed under the supervision of the
public prosecutor’s office and are members of regulated professions. These specialised professionals
must be entered on national lists and meet strict conditions as to suitability and good character.
Persons not entered on these lists, but with particular experience or qualifications in the light of the
case, may also be designated. Insolvency practitioners are appointed by the court when proceedings
are opened. Insolvency practitioners could incur civil and criminal liability under ordinary law. The
practitioners’ fees are determined by scales fixed by decree; their remuneration under these scales is
charged by the court to the debtor.
Court-appointed administrator
In principle, the court opening safeguard or judicial reorganisation proceedings appoints an
administrator, who may be proposed by the debtor under the safeguard proceedings or by the public
prosecutor’s office. It is not compulsory to appoint an administrator if the debtor has a workforce of
fewer than 20 employees and if his turnover excluding taxes is less than EUR 3 million. In the case
of accelerated safeguard and accelerated financial safeguard proceedings, the appointment of an
administrator is always compulsory.
Under safeguard proceedings, the debtor is not disinvested and continues to dispose of and manage
his assets, unless the court decides otherwise. The court-appointed administrator, if one is appointed,
supervises or assists the debtor in his business management, according to the mandate defined by the
court.
Under judicial reorganisation proceedings, the court-appointed administrator assists the debtor in his
management or manages the business himself, in whole or in part, in place of the debtor. The court-
appointed administrator must take, or have the debtor take, the necessary measures to preserve the
rights of the business against its debtors and the necessary measures to maintain its production
capacity.
The court-appointed administrator is vested with specific powers, such as operating under his
signature the bank accounts of a debtor who has been prohibited from issuing cheques, requiring the
continuation of current contracts and implementing the necessary redundancies.
Court-appointed receiver
It is compulsory for the court to appoint a receiver (mandataire judiciaire) in any collective
proceedings. His task is to represent the creditors and their collective interests. He draws up the list
of declared claims, including wage claims, with his proposals for admission, rejection or referral to
the competent court, and forwards the list to the bankruptcy judge.
Liquidator
The court appoints a liquidator in the judicial liquidation order. The liquidator must verify the claims
and realise the debtor’s assets in order to pay off creditors. He implements redundancies and may opt
for the continuation of current contracts. He represents the disinvested debtor and thus exercises
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most of his rights and performs most of the actions relating to these assets during judicial liquidation
proceedings. On the other hand, he may not exercise the debtor’s non-pecuniary rights
DE The insolvency administrator is the key player in the insolvency proceedings. Only natural persons,
and not legal persons, can be appointed as insolvency administrator (Section 56(1), first sentence,
GIC). In particular lawyers, accountants or tax advisers come into consideration for this
appointment.
With the opening of the insolvency proceedings, the right to manage and dispose of the debtor’s
property is vested in the insolvency administrator (Section 80(1) GIC). The insolvency administrator
is required to clear the assets he finds on the opening of the insolvency proceedings of any items that
are not the property of the debtor. He also has to transfer to the debtor’s assets items which belong to
the debtor’s assets under liability law, but which were not yet entered among the debtor’s assets at
the time insolvency proceedings were opened.
The debtor’s assets determined in this way constitute the insolvency estate (Insolvenzmasse, Section
35 GIC) which will be realised by the insolvency administrator and f om which the creditors will be
satisfied. Further duties of the insolvency administrator include:
payment of wages to the employees of the insolvency debtor,
deciding whether to continue or end pending legal disputes (Sections 85 et seq. GIC) and how to
deal with contracts which have not been fully performed (Sections 103 et seq. GIC),
drawing up a statement of assets and liabilities (Section 153(1), first sentence, GIC),
contesting transactions entered into prior to the opening of insolvency proceedings that are likely to
disadvantage the ordinary creditors (Sections 129 et seq. GIC).
The insolvency administrator is subject to the supervision of the insolvency court (Section 58(1)
GIC). If a creditors’ committee is set up, it supports and monitors the insolvency administrator in the
performance of his duties (Section 69, first sentence, GIC).
After the opening of the insolvency proceedings, when the right to dispose of the debtor’s property
has been vested in the insolvency administrator, the administrator can in principle dispose freely of
all the assets belonging to the insolvency estate. There are limits on transactions of particular
importance, such as the sale of the enterprise or the entire stock. Transactions of particular
importance such as these require the approval of the creditors’ meeting or the creditors’ committee.
The fact that the approval requirement has been infringed, however, has no effect on outside parties,
but results only in the liability of the administrator. The administrator also has to comply with a
decision of the creditors’ meeting to wind up the enterprise or to continue in business (Sections 157
and 159 GIC).
If the insolvency administrator wrongfully violates the obligations incumbent on him under the
Insolvency Code, he is liable for damages to all parties to the proceedings (Section 60(1) GIC).
Section 60(1) of the Code provides: ‘The insolvency administrator shall be liable to compensate the
damage suffered by any party to the proceedings if he wrongfully violates the duties incumbent on
him under this Code. He shall conduct himself with the care expected of a proper and diligent
insolvency administrator.’
The insolvency administrator is entitled to remuneration in consideration of the exercise of his office
and to reimbursement of appropriate expenses (Section 63(1), first sentence, GIC). The remuneration
is regulated in the Insolvency Law Remuneration Regulation (Insolvenzrechtsvergütungsverordnung
– ‘InsVV’) and is determined according to the value of the insolvency estate at the time the
insolvency proceedings come to an end. The Regulation provides for graduated standard rates, which
may, however, be increased according to the scale and difficulty of the duties of the insolvency
administrator.
EL General
The insolvency practitioners perform specific tasks related to debt adjustment and second chance
under Law 4738/2020. They must be registered in the Registry of Insolvency Practitioners.
The granting, renewal and revocation of the license to Insolvency Practitioners is given by the
Insolvency Administration Commission which was established on 21.4.2021 and operates within the
Ministry of Finance under the supervision of the Special Secretariat for
Private Debt Management.
Corporate debt adjustment through the out-of-court mechanism
In cases of corporate debt adjustment through the out-of-court mechanism:
They work for the benefit of companies in order to achieve the settlement of their debts to the State,
relieving the public officials of the creditors of the relevant responsibility. To this end, they provide
an opinion that:
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that the assessment of the restructuring agreement provides for a recovery at least equal to the
recovery in the event of the debtor's bankruptcy (and therefore that the State will not be worse off
than it would be in the event of the debtor's bankruptcy);
that the implementation of the restructuring agreement allows the viable operation of the company
or makes it solvent, that the conditions, rules and restrictions of the debt arrangement with the State
are met (e.g. that the conditions for debt writeoff are fulfilled).
Corporate debt restructuring
Insolvency Practitioners are appointed by the court as special representatives with the power to
exercise some or all of the powers of the administration of the company in debt restructuring
proceedings. They may also be selected by banks and loan managers to give their reasoned opinion
in order to obtain the consent of the State and social security institutions to multilateral restructuring
agreements for amounts owed to them exceeding EUR 1,5 million, etc.
Second chance cases
They are appointed by the court as receivers, with the power to sell all or part of the debtor's assets
and subsequently distribute the resulting amounts to creditors.
HU Bankruptcy trustee
The court appoints a bankruptcy trustee, who shall monitor the debtor’s business activities with a
view to protect the creditors’
interests and to prepare for the composition with creditors.
Accordingly, the bankruptcy trustee shall:
review the debtor’s financial standing, which may entail inspection of the debtor’s books, assets,
and liabilities, contracts, and
current accounts, requesting information from the directors of the economic operator, from the
supreme body, supervisory
board members and the auditor, and - in the case of a recognized group of companies governed by
the Companies Act from
the dominant member -, shall inform the creditors regarding his findings;
carry out - assisted by the debtor - the tasks relating to the registration and categorization of claims ;
approve and endorse -any financial commitment of the debtor after the time of the opening of
bankruptcy proceedings;
advise the debtor to enforce its claims and shall oversee the way it is executed, and in the event of
the debtor’s failure to
comply shall notify the supreme body, the supervisory board and the auditor thereof;
contest, at its discretion, any contract or legal statement the debtor has made in the absence of his
approval or endorsement,
and shall initiate or open proceedings for the recovery of any payments effected unlawfully or
arising out of or in connection
with any unlawful claim, as well as proceedings for the restoration of the situation that existed
previously;
categorize the registered claims and inform the creditors about the registration and categorization of
their claims;
exercise joint power of representation and joint right of disposition over the current accounts in the
case the court orders it,
or if the majority of the creditors may make the extension of the deferral period conditional on the
debtor granting the trustee
a joint right of representation or a joint right of disposal over the current accounts;
perform the tasks of initiating the extension of payment deferral.
The bankruptcy trustee shall have powers to approve any new commitment made by the debtor.
However, the bankruptcy trustee
may grant approval for a commitment, or for a payment, if they serve the debtor’s interest in terms
of operations, and for the
preparation of composition arrangements, and may provide guarantees for such commitments only if
agreed by the creditors
representing the majority of the claims held by creditors with voting rights.
The executive officers of a debtor, including its supreme body, shall exercise their respective rights
only if it does not violate the
powers vested in the bankruptcy trustee. The court shall impose a financial penalty on the executive
officer of the debtor between
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100,000 and 500,000 Hungarian forints for any breach of his statutory obligation to cooperate with
the bankruptcy trustee.
Liquidator
A liquidator may only be an organization of which a member (shareholder) is known and in which a
member (shareholder) does not have a direct or indirect shareholding, who is resident in a state
specified in the regulation on the publication of the list of noncooperating states or in which the law
does not require the tax liability corresponding to corporation tax - not including a State party to the
Agreement on the European Economic Area, or the prescribed tax rate is not more than 10 percent.
The liquidator shall appoint a liquidator officer to carry out the liquidation of the debtor who has no
criminal record, is not subject to a prohibition on engaging in the activity of liquidator, is not subject
to a conflict of interest or meets the conditions set out in the Bankruptcy Act. This also applies to the
person carrying out the tasks of bankruptcy trustee.
The rights of the owner(s) of the debtor, as defined in other regulations, shall cease as of the time of
the opening of liquidation proceedings. As of the time of the opening of liquidation only the
liquidator shall be authorized to make any legal statements inconnection with the assets of the
debtor.
In order to perform his duties, the liquidator may enter the debtor's premises and inspect any of its
assets. The debtor is obliged to open its closed areas immediately upon the liquidator's call and
provide information on the existence and location of its property (furniture and other movables).
The executive officer of the debtor may be subject to a fine of up to 50 % of his income received
from the debtor in question in the year preceding the time of the opening of liquidation proceedings,
or up to 2.000.000 Hungarian forints, if his income cannot be determined, for failure to cooperate
with the liquidator.
The liquidator shall analyse the financial standing of the economic operator and the claims against it.
If the creditors have formed a creditors’ committee the liquidator shall be required to obtain the
consent of the committee for continuing business operations of the debtor. The same rule applies if
the creditors have selected a creditors’ representative.
The liquidator may lease or transfer the debtor's assets only with the approval of the creditors
'committee or the creditors' representative or two-thirds of the creditors to a person or entity who, at
the time of order of liquidation or within one year, was the executive officer of the debtor, or the
debtor's sole or majority owner.
The liquidator shall have powers to terminate, with immediate effect, the contracts concluded by the
debtor, or to rescind from the contract if neither of the parties rendered any services. Any claim that
is due to the other party owing to the above may be enforced by notifying the liquidator within forty
days from the date when the rescission or termination was communicated.
From the commencement date of the liquidation - within the framework of the law, the collective
agreement and the internal regulations and employment contracts - the liquidator exercises the
employer's rights and fulfils the obligations. The liquidator collects the debtor's claims when they
fall due, enforces its claims and sells its assets. The liquidator is obliged to take care of the
protection of the debtor's property during the liquidation proceeding. The liquidator is obliged to
ensure the preservation of the debtor's records and documents.
The liquidator shall act with the due diligence expected of the person holding such office. He is
liable for damages caused by a breach of his obligations under the rules of civil liability. The
liquidator is liable for the debtor's assets existing at the commencement of the liquidation or
acquired during the liquidation.
One of the liquidators' due diligence is that if an unlawful asset withdrawal from the debtor has
taken place in the period before the insolvency of the debtor has been declared, and the liquidator
considers that action against such unlawful withdrawal may increase the liquidity of the debtor, it
must initiate proceedings to reclaim such asset, and inform the creditors' committee.
Reorganization expert
The assistance of a reorganization expert is mandatory in the reorganization proceeding. Only the
National Reorganization Non-Profit Limited Liability Company may act as a reorganization expert.
The reorganization expert shall immediately review the financial situation of the debtor after the
commencement of the reorganization proceeding and shall be informed of all circumstances
affecting the planned reorganization.
The reorganization expert is involved in negotiating the reorganization plan with creditors. During
the reorganization, the senior executive of the company is obliged to co-operate with the
reorganization expert, facilitate the performance of his duties and provide him with all the
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information and documents necessary for the performance of his duties.
During the reorganization, the executive officer of the company is obliged to report to the
reorganization expert on the fulfilment or challenging of debts due during the moratorium period, the
necessary measures that have been taken to enforce the company's claims, as well as and if the
company is in arrears of more than 20 days with its payment obligations not covered by the
moratorium.
The reorganization expert may get acquainted with the data and documents of the company
containing business secrets and other private secrets for the purpose necessary for the performance
of his duties, the exercise of his rights and the fulfilment of his obligations. The reorganization
expert is entitled to make a statement to the creditor providing new or temporary financing about the
investment risk of the company's situation and the reorganization plan. As part of the reorganization
plan, creditors may stipulate that the reorganization expert will monitor the implementation of the
reorganization plan and report to the creditors, and the company must tolerate the control and
cooperate with the reorganization expert.
If the reorganization plan requires the reorganization expert to monitor the implementation of the
plan, the reorganization expert has an obligation to report to the decision-making body of the
company and to the creditors involved in the reorganization plan. It shall immediately notify the
decision-making body, the supervisory board and the auditor of the undertaking, as well as the
interim or new financiers, if the undertaking is in arrears with its payment obligations for more than
30 days or if it fails to take action to enforce its claims.
IE General
The PI Act creates a new profession regulated by the ISI, which falls into two categories:
Approved Intermediaries (AIs): a person or corporate body authorised by the ISI to support debtors
who wish to make an application for a DRN; Personal Insolvency Practitioners (PIPs): a person
authorised by the ISI to act as liaison between the debtor and their creditor(s) for the purposes of
securing a DSA or PIA. A PIP is legally obliged to act in compliance with the PI Act and associated
regulations.
Insolvency Proceedings
A PIP, when engaged by a debtor, will act as a negotiator between the debtor and their creditors.
PIPs are bound by legislation to act in the best interests of both the debtor and the creditor(s),
therefore they are obliged to formulate the best possible arrangement for all parties concerned in an
insolvency arrangement.
The role and functions of a PIP include:
Engaging with a debtor who is contemplating making a proposal for an insolvency arrangement;
Accepting the appointment to act as insolvency practitioner;
Reviewing the Prescribed Financial Statement (PFS) prepared by the debtor and providing advices
to the debtor on options and their eligibility to make a proposal for a debt settlement or personal
insolvency arrangement;
Satisfying themselves that the financial information provided to them by the debtor is accurate and
complete;
Providing an opinion, based on the criteria set out in legislation, as to which type of insolvency
arrangement (DSA or PIA) best suits the debtor’s situation;
Providing information relating to the procedure chosen, the general effect of, and the likely costs of
becoming a party to an insolvency arrangement;
Applying on behalf of the debtor for a Protective Certificate (PC);
Notifying all creditors of the PC, PIP appointment, enclosing a copy of the debtor’s PFS;
Preparing a proposal to creditors and convening a statutory meeting of creditors to consider and
vote upon the proposal;
Where a proposal is approved, notifying the ISI and all creditors of the outcome;
Once approved by court or on a court review, operating the terms of the arrangement including the
collection of funds from the debtor and payment to creditors over the duration of the arrangement;
Monitoring the arrangement throughout its lifetime;
Carrying out a review of the arrangement on at least an annual basis;
In insolvency proceedings, the debtor’s role is to participate honestly in the process, agree to the
arrangement negotiated by their PIP and meet the required terms of the arrangement.
Bankruptcy
On adjudication in bankruptcy, all assets divest from the bankrupt and vest in the Official Assignee
(OA) in Bankruptcy. The OA is an independent statutory officer whose role is to administer
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bankruptcy estates and manage the Bankruptcy Division of the ISI.In Ireland, a private individual
can be appointed as trustee in bankruptcy to replace the High Court Official Assignee in Bankruptcy
(OA). In practice, such appointments are extremely rare. The Bankruptcy Act does not specify any
qualifications for such appointments. The debtor’s powers in bankruptcy are limited to being able to
apply to the High Court to challenge certain decisions of the OA. The debtor has an obligation to
comply with requests made by the OAs office with regard to the administration of the bankruptcy
estate.
IT Curatore
The insolvency practitioner (curatore) has the power/duty to manage the assets, sell them, and
distribute the proceeds to the creditors. The curator is appointed by the judgment declaring the
bankruptcy, or in case of replacement and revocation by court decree. The law requires certain
positive requisites in order to be appointed. In fact, the following may be called upon to carry out
these functions pursuant to Article 28 IBL:
lawyers, accountants and bookkeepers;
associated professional studios or companies between professionals;
those who have carried out functions of administration, management and control in joint stock
companies.
Liquidator
The liquidator is called upon to carry out the following tasks:
to affix the seals on the bankrupt's assets and draw up the inventory;
draw up the first information report on the causes of the economic breakdown;
draw up, every 6 months, a report summarizing the activities carried out ;
draw up the balance sheet for the bankrupt's last financial year;
examine applications for admission to the liabilities;
attend the hearing for the discussion of the statement of liabilities;
examine applications for admission to the liabilities which are submitted late;
to present a request to the court which orders the non-prosecution of the statement of liabilities due
to insufficient realization of assets;
prepare a liquidation plan;
submit a statement of available funds every 4 months;
present a management report; promote the closure of the bankruptcy;
propose to the delegated judge, in order to obtain authorization, the leasing of the bankrupt's
company or company branches to third parties.
LV An administrator shall be appointed by a court on the basis of a nomination by the Insolvency
Administration immediately after the initiation of an insolvency matter. The Insolvency
Administration chooses and recommends one administrator candidate by the principle of accident.
An administrator has many duties according to the Latvian Law. He or she shall:
Ensure that the insolvency proceeding proceeds lawfully and effectively;
Assume the property, documentation and seal of the debtor until termination of the insolvency
proceedings or the entering
into of a settlement;
Administer the property of the debtor during the insolvency proceedings and ensure its maintenance
until the termination of the insolvency proceedings and the payment of money intended to cover the
costs of administration and debts, or the entering into of a settlement;
Ascertain the causes of actual insolvency and provide his or her opinion regarding them to the
creditors’ meeting and the court;
File to the Insolvency Administration information and documents about insolvency proceedings in
accordance with the Insolvency Administration’s requirements, etc.
LT Bankruptcy proceedings
Under corporate bankruptcy proceedings, the appointed bankruptcy administrator takes over the
company’s management, disposes of its estate, organises the sale of the estate and settles with
creditors using the proceeds, and takes any steps necessary to wind up the company. The key
functions of the corporate bankruptcy administrator are as follows:
to represent the company and to defend its interests and those of all its creditors;
to take over the management of the company in bankruptcy and the bankruptcy estate;
to terminate company contracts that will no longer be implemented (including contracts with
members of the management bodies and staff);
to apply for money from the Guarantee Fund in order settle up with creditors/employees;
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where necessary, to enter into temporary work or service contracts required for the purposes of the
bankruptcy procedure;
to verify the creditors’ claims filed and to submit the list of these for approval by the court;
to oversee the business operations of the company in bankruptcy;
to check the company’s transactions entered into over the three-year period prior to the institution of
the bankruptcy proceedings;
to dispute the company’s transactions in court if they are contrary to the company’s operating
objectives and may have contributed to the company’s inability to pay its creditors;
where justified, to apply to the court to have the bankruptcy declared intentional;
to convene creditor meetings;
to draft activity reports and to submit them to the meeting of creditors;
to compile and deliver the company’s annual and intermediate financial statements;
to implement the decisions of the court and the creditors’ meeting;
to provide information on the bankruptcy procedure;
to organise the sale of the bankrupt company’s assets;
to use the funds obtained in the course of the bankruptcy procedure to settle up with the creditors;
to perform any actions necessary to wind up and unregister the company.
Restructuring proceedings
In the case of a company restructuring, the assigned restructuring administrator acts as a professional
consultant and independent person in control of the restructuring procedures. The key functions of
the restructuring administrator are as follows:
to contribute to the drafting and consideration of the company’s restructuring plan and to take
measures to ensure that the restructuring plan is drafted, submitted for approval and implemented
within the deadlines set by the court;
to prepare a written conclusion on the feasibility of the draft restructuring plan;
to oversee the activities of the management bodies of the company being restructured in as far as
they relate to the implementation of the restructuring plan, to notify the members of the company's
management bodies of iv) the shortcomings found in their activities and set a deadline for rectifying
these, and to apply to the court for removal of the management bodies of the company;
to convene meetings of the company’s members, owners of the representatives of the body
exercising the rights and obligations of the owner of a State or municipal enterprise and to
participate in those meetings without voting rights;
to supply information concerning the restructuring proceedings and to inform the court about the
progress of the restructuring plan.
The restructuring administrator, together with the management bodies of the company being
restructured, are responsible for the implementation of the court-approved restructuring plan. In the
case of bankruptcy of a natural person, the assigned bankruptcy administrator disposes of the assets
of the natural person organises their sale, and uses the proceeds to settle with the creditors. The key
functions of the natural person bankruptcy administrator are as follows:
to dispose of the assets of the natural person and the funds in the deposit account;
to keep the accounts of all the funds received by the natural person and of the use thereof;
to organise the sale of the natural person's assets and settle up with the creditors;
to convene creditor meetings and take part in them without voting rights;
to provide information on the bankruptcy procedure for the natural person and to deliver the
restoration plan implementation report;
to initiate amendments to the solvency restoration plan;
to represent the natural person in proceedings for recovery of assets on behalf of the natural person
in bankruptcy and take action to recover debts from the debtors;
to defend the rights and legitimate interests of the natural person and all creditors;
to evaluate the expediency of a natural person’s self-employment and/or farming activities.
LU Trustees in a bankruptcy represent both the bankrupt person and the body of their creditors. In this
dual capacity, they not only are responsible for administering the bankrupt’s assets, but are also
authorised to monitor, as claimants or defendants, all actions that seek to preserve the assets that
must be used as security for the creditors, and also to recover or increase those assets in the common
interests of the latter. The trustee may bring any actions in respect of the common security for the
creditors, consisting of the bankrupt’s assets seek to recover, protect or liquidate those assets.
MT Winding up proceedings
The insolvency practitioner in a winding up by the court shall, have the power:
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to sell the movable and immovable property, including any right, of the company by public auction
or private agreement with power to transfer the whole or any part thereof;
to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other
documents;
to raise on the security of the assets of the company any money requisite;
to appoint a mandatory to act for him in his capacity as insolvency practitioner for particular
purposes.
Reorganisation proceedings
In Reorganization Proceedings, during the period that a recovery (reorganization) order is in force,
the company shall continue to carry on its normal activities under the management of the special
controller. The special controller needs to be an individual who the Court has ascertained to its
satisfaction that he/she enjoys proven competence and experience in the management of business
enterprises, is qualified and willing to accept the appointment, and has no conflict of interest in
relation to his appointment. The special controller has the authority to:
take into his custody or under his control all the property of the company and he shall thenceforth
be responsible to manage and supervise its activities, business and property;
after informing the Court, to remove any director of the company and to appoint any individual to
serve as a manager;
engage persons for the provision of professional or administrative services, and commit the
company to the payment of their respective fees or charges; and to call any meeting of the members
or creditors of the company.
Bankruptcy proceedings
In case of Bankruptcy, the special controller has the power to:
take possession of all the bankrupts’ property and rights of any kind belonging to the bankrupt;
take all the necessary steps to preserve the rights of the bankrupt against his debtors;
register in the Public Registry any hypothec affecting the property of the debtors of the bankrupt.
Within one month from the delivery of the judgment of bankruptcy, s/he shall make up an inventory
of the bankrupt’s property
NL The court will appoint an administrator. The debtor must inform the administrator about everything
that might be relevant for its situation. Often the administrator will end debtor’s business and sell its
company's assets.
PL In bankruptcy proceedings, after the declaration of bankruptcy the receiver draws up an inventory,
estimates the bankruptcy estate and drafts a liquidation plan. The liquidation plan defines the
proposed manner of selling the bankrupt party’s assets, in particular the enterprise, the time of the
sale, an estimate of expenditure and the economic rationale for the continuation of the business
activity (Article 306 of the Bankruptcy Act). After drawing up the inventory and financial report or
after submitting a general written report the receiver liquidates the bankruptcy estate (Article 308 of
the Bankruptcy Act). After the liquidation the receiver may continue to manage the bankrupt party’s
enterprise if a composition with the creditors is possible or if it is possible to sell the whole of the
bankrupt party’s enterprise or organised parts thereof (Article 312 of the Bankruptcy Act).
PT General
According to Article 2 of the Statute of the Judicial Administrator (Law No. 22/2013, February 26)
‘the judicial administrator is the person in charge of the supervision and guidance of the acts
integrating the special revitalization process, as well as the management or liquidation of the
insolvent estate under the insolvency proceeding, being competent to perform all the acts committed
by this statute and by the law.’ As follows from Art.2, no. 2 of CIRE, the judicial administrator may
have three different designations, depending on the functions he performs in the proceedings:
Insolvency administrator
In view of the lack of confidence in the debtor's administrative capacity, which the debtor's
insolvency naturally implies, it is necessary to appoint an insolvency administrator, i.e., an
autonomous administrator of the debtor, who has, among other duties (Article 55 of CIRE), the
powers to administer the insolvent estate. Thus, with the judgment of declaration of insolvency, the
CIRE requires the appointment of an ‘Insolvency Administrator’ or reappointment of the
‘Provisional Judicial Administrator’, whose role, in collaboration and under the supervision of the
judge and the creditors' committee (if any, since it is an optional body in the process), is to
administer the insolvent estate, proceeding with the recovery of the company or its liquidation.
Provisional Judicial administrator
In the special revitalization process (PER) and in the special process for payment agreement (PEAP),
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having as competencies, according to Article 33 of CIRE, the maintenance and preservation of the
debtor's assets, providing for the continuity of the company's operation, unless he considers that the
suspension of activity is more advantageous to the interests of creditors and such measure is
authorized by the judge. The provisional judicial administrator is thus only in charge of assisting the
debtor in the administration of his assets.
Fiduciary
During the assignment period (5 years) regarding the discharge of the remaining liabilities, after the
granting and opening of the process for the discharge of the remaining liabilities (Art.235 et seq. of
CIRE), the Trustee is appointed as Fiduciary acting only as a supervisor of the process, verifying
that the insolvent who requested the discharge of his liabilities complies with the plan determined by
the Court and not having any executive power, as results from Art.241 of CIRE, under the heading
‘Functions’.
RO The authorities and responsibilities of the Romanian insolvency practitioners arise, in the first place,
from the provisions of the Government Emergency Ordinance no. 86/2006 on the organization of
their activity. Under the applicable rules, insolvency practitioners have a number of powers and
responsibilities both in insolvency prevention and in bankruptcy proceedings; moreover the
Insolvency Office Holders (IOHs) also play an important role in the ordinary procedures for the
dissolution and the liquidation of companies according to the Companies Law no. 31/1990.
The Government Emergency Ordinance no. 86/2006 specifies the functions of IOHs, as follows:
the Judicial Administrator is the insolvency practitioner appointed to fulfil duties provided both by
law or assigned by the court during the observation period and the reorganization procedure;
the Judicial Liquidator is the insolvency practitioner appointed to control the debtor's activity within
the bankruptcy procedure and to perform other duties provided by the law or assigned by the court;
the Composition Administrator is the insolvency practitioner appointed to perform the tasks
provided by the law or assigned
by the court, within the preventive composition procedure;
The ‘ad hoc agent’ (in Romanian language ‘Mandatarul ad hoc’) is the insolvency practitioner
appointed to perform the tasks set out by the law or the ones assigned by the court, within the out-of-
court settlement with creditors procedure.
SK General duties
Insolvency practitioner primarily manages the assets subject to bankruptcy proceedings, realises
them and uses the proceeds to pay the debtor’s creditors. When the bankruptcy order is made, the
debtor’s right to dispose of assets subject to bankruptcy proceedings and the right to act on the
debtor’s behalf in matters concerning these assets pass to the insolvency practitioner, who now acts
in the name and for the account of the debtor.
Insolvency practitioners’ duties are to:
produce a list of assets in the bankruptcy estate and disposes of them (i.e. the assets subject to the
bankruptcy proceedings);
terminate certain contracts;
realise the assets from the estate, pays the costs of the bankruptcy proceedings, proposes the
distribution schedule for the proceeds, and subsequently implements it;
if the bankruptcy proceedings use a payment schedule, to draft the payment schedule and submits it
to the court for approval.
Role in case of reorganisation
In case of reorganisation, the insolvency practitioner’s main role is to draft the reorganisation plan in
collaboration with the debtor and the creditors. S/his duties are to:
examine the claims lodged and establishes or denies them;
supervise the debtor.
SI Receiver
In accordance with the provisions of ZFPPIPP the receiver shall be a body in insolvency
proceedings, executing its competencies and tasks in such proceedings, stipulated by an Act, with
the aim of protecting and realising the interests of creditors. In insolvency proceedings, the receiver
shall conduct the operations of the insolvent debtor according to the needs of the procedure, and
represent him:
in procedural and other legal actions in relation to testing claims, to rights to separate satisfaction
and exclusion rights;
in procedural and other acts in relation to rebutting the legal actions of the insolvent debtor;
in legal transactions and other acts necessary for the realisation of the bankruptcy estate;
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in realisation of the right to dispose of the claim and other rights acquired by an insolvent debtor as
legal consequences of the initiation of bankruptcy proceedings, and;
in other legal transactions which the insolvent debtor may carry out pursuant to ZFPPIPP.
The receiver shall perform his tasks and competencies in accordance with ZFPPIPP and regulations
issued on the basis thereof, other acts which apply for an insolvent debtor, and regulations issued on
the basis thereof and the rules of the profession of persons who execute operations for other persons
as mandataries. In performing his tasks and competencies, the receiver shall act conscientiously
and fairly, with a corresponding professional care, and so as to protect and realise the interests of
creditors, which shall be the guide in executing such tasks and competencies.
The receiver shall treat creditors who are in an equal position vis-a-vis the insolvent debtor, equally
and shall not enable or allow that individual creditors in the procedure achieve priority payment or
other benefits to the detriment of other creditors who are in an equal position vis-a-vis the insolvent
debtor, or that other persons obtain the insolvent debtor’s assets which belong to the bankruptcy
estate without providing for an equivalent counter performance, or other benefits to the detriment of
the bankruptcy estate which are not in accordance with acts, regulations and rules of the profession
mentioned above.
The receiver shall prepare a regular report on the conduct of the procedure every three months. The
receiver shall submit a regular report to the court in compulsory settlement proceedings within eight
days, and in bankruptcy proceedings within one month following the end of the period to which the
report refers.
Upon a request by the court or creditors’ committee, the receiver shall submit a written report on a
certain matter significant for the conduct of the procedure, or protection, or realisation of interests of
creditors in such procedure (extraordinary report), within eight days following the receipt of the
request, unless a longer time limit for submission is determined in the request.
A presiding judge shall instruct the receiver on the work which are obligatory for him.
Liability of the receiver
The receiver shall be liable to creditors for any damages incurred as a result of a violation of his
obligations. The receiver shall be liable to creditors for the damages referred to in the previous
sentence, caused in an individual insolvency proceeding, up to five times the amount of entitled
remuneration from such procedure, but not less than EUR 5,000.
ES The functions of the insolvency administrator are limited by the type of insolvency proceeding in
which he acts, so that in the case of a compulsory insolvency proceeding the administrator will
replace the debtor in the exercise of his powers of administration and disposal of the estate, while in
the case of a voluntary insolvency proceeding his actions will be limited to simple intervention in the
functions of the company's management board, whose actions will be subject to his consent.
The administrator is a necessary person that assists the judge and is entrusted with managing the
insolvency proceedings. Once insolvency proceedings have been opened, the judge orders the
initiation of phase two of the proceedings, which includes everything relating to the appointment,
provisions governing, powers and responsibilities of the administrator. The administrator is chosen
from among the natural and legal persons voluntarily registered in the Public Insolvency Register in
accordance with the conditions established by law.
Insolvency practitioner has a series of duties, such as:
duties of a procedural nature;
duties relating to the debtor or its governing bodies;
duties regarding labour matters;
duties relating to creditors’ rights;
report and evaluation duties;
duties relating to the realisation or liquidation of assets;
secretarial duties.
Their most important duty is to submit the report provided for in Article 292, to which they must add
an asset inventory proposal and the list of creditors
SE Bankruptcy
Once a bankruptcy decision is announced, the debtor loses control of any property pertaining to the
bankruptcy estate. The debtor may not enter into any obligations that might be invoked during the
bankruptcy. There are some exemptions. During the bankruptcy process the bankruptcy estate is
represented by the administrator. The administrator is appointed by the district court, and must have
the special knowledge and experience required for the task, and be suitable for the task in other
respects. A person employed by a court may not be appointed as an administrator. A person may not
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Source: Deloitte/Grimaldi (2022).
2.3 Duties of directors (and liabilities) of companies to file for insolvency
Directors owe a series of duties to the companies to which they are appointed. Overall,
beside their general duties, directors are subject to other duties enshrined in insolvency
law, such as fraudulent trading and wrongful trading.293
Directors of companies have a
duty to act in the best interests of the company, seeking to avoid insolvency and in the
“likelihood of insolvency”, directors should change their point of view and consider
within their duties also the interests of the creditors.294
Specifically, if there is a
likelihood of insolvency, directors need to:
(a) take immediate steps to minimize the loss for creditors, workers, shareholders;
(b) have due regard to the interests of creditors and other stakeholders;
(c) take reasonable steps to avoid insolvency; and
(d) avoid deliberate or grossly negligent conduct that threatens the viability of
business.
In the event of a “serious loss of the subscribed capital”, directors have the duty to
convene the shareholders' meeting to take the best appropriate action (Article 58 of
Company Law Directive (EU) 2017/1132). For example, the German public company
legislation provides a duty for the directors if “upon preparation of the annual balance
sheet or an interim balance sheet it becomes apparent, or if in the exercise of proper
judgment, it must be assumed that company has incurred a loss equal to one half of the
293
Carsten Gerner Beuerle and Edmund – Philipp Schuster, „The evolving Structure of Directors’ Duty in
Europe“ (2014) European Business Organisation Law review 15, p. 224
294
World Bank Principle B.2. clearly states that “Laws governing directors’ obligations in the period
approaching insolvency should promote responsible corporate behaviour while fostering reasonable risk
taking and encouraging business reorganization. The law should provide appropriate remedies for breach
of directors’ obligations, which may be enforced after insolvency proceedings have commenced. The
World Bank, Principles for Effective Insolvency and Creditor/Debtor regimes, 2021.
be appointed as an administrator if they have a conflict of interest.
Business reorganisation
A business reorganisation officer must have the special knowledge and experience required for the
task, must have the confidence of the creditors, and must be suitable for the task in other respects.
The business reorganisation officer investigates the debtor’s financial standing and, in consultation
with the debtor, draws up a plan setting out how the aims of the reorganisation are to be achieved.
The plan must be supplied to the court and to the creditors. The business reorganisation officer may
engage expert assistance.
The debtor is required to provide the business reorganisation officer with all information concerning
his or her financial circumstances that is relevant to the restructuring of the business. The debtor
must follow the business reorganisation officer’s instructions concerning the manner in which the
business is to be run. There are some legal acts that the debtor cannot perform without the business
reorganisation officer’s consent. These include paying debts that arose prior to the decision,
undertaking new obligations, and transferring or pledging property of substantial importance for the
debtor’s business. If the debtor fails to fulfil these obligations, however, the legal act in question
remains valid.
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share capital, the management board shall promptly call a shareholders’ meeting and
advise the meeting thereof”.295
In case of non-compliance with such obligation to file for insolvency within a
predetermined maximum time limit, directors could be held personally liable for the
losses incurred by creditors as a result of the delay in the opening of the insolvency
procedure as compared to a timely filing. The nature of the liability varies across
Member States and will usually involve, at least, civil liability to creditors for loss of
company assets/funds that resulted from failing to file for insolvency on time. In
jurisdictions where the obligation of directors does not change with the advent of vicinity
to insolvency, directors are not free to act as they wish. Many of these jurisdictions - in
fact - provide that director can be held liable for a form of wrongful trading, i.e., if the
director continues to operate the company without mitigating the to minimize losses to
creditors296
. In other jurisdictions, while directors of a company are not subject to
specific corporate or bankruptcy law restrictions, they can be held liable for wrongful
trading by creditors of the company. For example, in the Netherlands, directors could be
subject to tort action by a creditor with whom they contracted on behalf of the company
when the directors knew or should have known that the company would not be able to
meet its obligations to the creditor or have sufficient assets to discharge the obligation to
the creditor297
.
Even where commonalities exist, the concrete solutions diverge: e.g. when the company
meets the conditions of being insolvent, duties of the directors vary in the Member States
as to the type of action they have to take, the time limits within which they have to act or
the consequences they face in case of breaching this duty (e.g. civil liability for damages
of the creditors. Where jurisdictions place less emphasis on shareholders and more on a
range of stakeholders, if a company is on the verge of insolvency, it has been suggested
that it could be left to the courts to balance the interests of stakeholders and consider the
financial position of the company298
.
The conduct of the directors in the vicinity of insolvency is key in terms of influencing
the prospects of value maximization and recovery rate in the concrete proceedings.
Differences in national laws add to legal uncertainty for cross border investors.
Differences in the duties and liability of directors can also incentivise companies to
engage in forum shopping, i.e. relocating the company’s centre of main interest (COMI)
shortly before the commencement of insolvency proceedings with the aim to achieve a
more lenient treatment under the new applicable law.
Concretely, an alerting mechanism to induce more cognitive behaviour for directors
(thereby justifying eventual sanctions against reckless/wrongful behaviour) could be
295
Aktiengesetz article 92(1)
296
Article 2394 and 2086 Italian civil Code.
297
The relevant rule in the Netherlands is called the “Beklamel-rule” and named after the case that decided
that directors could be liable on the basis discussed in the article: C. Garner-Beuerle, P. Paech and E.
Schuster, “Study on Directors’ Duties and Liability” April 2013, London, LSE, and prepared for the EC, at
p351.
298
Alessandra Zanardo “Fiduciary Duties of Directors of Insolvent Corporations: A comparative
Perspectives” (2018) Chicago-Kent Law review 93.
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introduced and/or a shift of fiduciary duty to be owed to the creditors of the debtor
(instead of the shareholders) when the debtor is insolvent or insolvency is imminent.
Such a rule would be challenging as conflicting existing approaches of national
company/insolvency laws.
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Table A5.4: Rules on directors’ duties in EU Member States
AT If the managing directors (or certain other legal representatives) of the entity fail to file for the
commencement of insolvency proceedings in time, they face exposure to claims by creditors and the
insolvent entity. Under the Austrian Company Reorganisation Act, managing directors are liable vis-
à-vis the company for liabilities not covered by the eventual insolvency estate if, within the last 2
years before the insolvency filing, they:
have received a report from the company’s auditor stating that the equity ratio (Eigenmittelquote) is
less than 8% and the notional debt repayment period (fiktive Schuldentilgungsdauer) exceeds 15
years, and they have not immediately filed for reorganisation proceedings or have not properly
continued them, or;
have not prepared annual financial statements, or have not done so in a timely manner, or have not
immediately commissioned the auditor to audit the annual financial statements.
BE In case the company is declared bankrupt, the directors can be held liable:
for a part or all the debts of the bankruptcy, if it can be demonstrated that they made a gross error
that contributed to the bankruptcy;
for a part or all debts of the bankruptcy, if the directors did not file for bankruptcy although it was
clear that there was no reasonable prospect of continuing the activities and avoiding a bankruptcy
(wrongful trading);
for certain social and tax debts, if the directors during the last 5 years prior to the bankruptcy were
involved in at least two other bankruptcies in which there were unpaid social and tax debts.
BG There are no specific provisions with regards to liability and the responsibilities of directors during
insolvency proceedings. General rules apply. According to Art. 237 of the BCA, ‘the members of
the boards shall be obliged to perform their functions with the care of a diligent merchant in the
interest of the company and all stockholders.’ Under Art. 240 of the BCA, the members of the
boards shall be jointly and severally liable for any damages caused through a fault of theirs.
HR The CBL rendered more stringent rules on directors' liability for insolvency related duties, i.e. for a
timely filing of the petition to open bankruptcy proceedings. Directors are required to initiate
bankruptcy proceedings within 21 days from the moment the bankruptcy reason occurred.
In certain cases the liquidator, supervisory board members and each shareholder are also required, to
file request for opening bankruptcy proceeding. Failure to initiate bankruptcy proceedings when
required is considered a criminal offence under the Croatian law. Furthermore, failure to initiate
bankruptcy proceedings within the set time frame by the responsible person means he/she shall be
personally liable for damages caused to creditors for failure to fulfil his/her duty. There are no
obligations to initiate pre-bankruptcy or extraordinary administration proceedings.
CY If, during liquidation, a director is proved to be involved in fraudulent trading under Section 311 of
the CCL or some other offence (such as misappropriation of assets under section 312 of the CCL),
the court may make an order for him/her to be personally liable for the company's debts or to pay
compensation. However, in the absence of severe misconduct such as this, there are no provisions
for lifting the corporate veil.
CZ The management of the debtor is under a duty to file an insolvency petition on behalf of the debtor
without undue delay after it learns or with due diligence ought to have learnt about the debtor's
insolvency. The management (the executives and directors) is personally liable for a failure to file
the insolvency petition on time. The law gives a presumption that the damage that a creditor is
entitled to recover corresponds to the entire unsatisfied portion of the creditors' claims. The liability
is strict, and mitigation is possible only if the defendant proves that the delay had no adverse effect
on the extent of the creditor's satisfaction or if the petition was not filed due to circumstances beyond
the defendant's control.
DK Once a company reaches the point-of-no-return, its management has an obligation to cease the
operations of the company, ensure the equal treatment of creditors and initiate the necessary
insolvency proceedings. If it is considered gross negligence on the part of management to allow a
company to continue trading beyond the point-of-no-return, then management can be held liable for
any losses suffered by creditors as a result thereof. Such a claim against management can be brought
by either the trustee or an affected creditor. Also, if management is deemed to have grossly
mismanaged its duties, it risks being put into bankruptcy quarantine – i.e., prohibited from
participating in the management of any limited liability company for a given timeframe (usually
three years).
EE Members of the management board or of a body substituting for the management board are liable for
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the failure to submit a bankruptcy petition.
FI The general duties of the board of directors and the managing director of the company (together the
‘Management’) are set out in the Companies Act (CA). According to the CA, the board of directors
of a debtor company has a general duty of care towards the company’s stakeholders (CA, Chapter 1,
Section 8). In addition, the board of directors is responsible, together with the managing director, for
ensuring that the company’s accounting and financial affairs of the company have been arranged in
accordance with the law and in a reliable manner (CA, Chapter 6, Sections 2 and 17).
The managing director must provide information on the company’s financial standing to the board of
directors, which, in accordance with the general duty of care, shall assess the need to file for
insolvency proceedings in the event of the company being in financial distress. Trading should be
discontinued where continuing is likely to worsen the company’s financial distress or cause
insolvency. In addition, the board of directors has an obligation to act in case the shareholders’
equity is adversely impacted (CA, Chapter 6, Section 2). When considering the interests of the
company and its stakeholders, the company’s management should also take into account the interests
of the company’s creditors to a certain extent.
According to the CA (CA, Chapter 22, Section 1), members of the board of directors and the
managing director may become personally liable for the loss or damage caused to the stakeholders
by a delay or failure to file for insolvency. A member of the board of directors may be held
personally liable for a wilful or negligent breach of the general duty of care or the company’s articles
of association. In a distressed situation, actions by the board of directors that diminish the assets or
increase the liabilities of the company without a business rationale, are particularly susceptible to
trigger liability.
FR Liability can arise where, as a result of management errors, a company's assets do not cover its
debts. An action for mismanagement (other than mere negligence), which only applies in liquidation
proceedings, can lead to an insolvent company's management being liable for all or part of its debts.
This liability can extend to formally appointed directors or managers with representation powers,
and to any individual or entity that is not officially a director or manager but, that repeatedly
influenced the company's management or strategic decisions (that is, shadow (de facto)
directors/managers).
In addition, directors (or de facto directors/managers) found liable for certain specific breaches can
be (independent of any liability action or criminal prosecution based on the same facts):
Forced to assign their equity interest in the company.
Prohibited from managing any business for up to 15 years and holding any public office for up to
five years.
Breaches include:
Using the company's assets or credit for their own benefit, or the benefit of another corporate entity
in which they have a direct or indirect interest;
Using the company to conduct and conceal business transactions for their own benefit;
Carrying out business activities at a loss to further their own interests, knowing that this would lead
to the company's insolvency;
Fraudulently embezzling or concealing all or part of the company's assets;
Fraudulently increasing the company's debts.
DE If a company is insolvent, its managing director is generally not liable for the company's debts, with
the following exceptions:
Suretyship, guarantee, or other contractual obligation;
Liability for payments made after illiquidity or over-indebtedness. A managing director will be
liable towards the insolvency estate for any payments made by the company to third parties after the
company has become illiquid or over-indebted (section 15b, GIC). The insolvency administrator (or
in the case of self-administration, the custodian) can bring a claim against the managing director to
recover the money paid. The background for this liability is that on illiquidity or over-indebtedness,
the managing director must file an insolvency petition without undue delay (at the latest, three weeks
after the commencement of illiquidity or six weeks after the commencement of over-indebtedness).
The liability for payments made after illiquidity or over-indebtedness is subject to very limited,
narrow exceptions;
Liability for payments to shareholders resulting in illiquidity or over-indebtedness of the company;
Delayed filing of insolvency petition. If a managing director fails to file an insolvency petition
without undue delay, they are liable for both payments made after illiquidity or over-indebtedness
and any decreases in insolvency quotas;
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Preservation of capital. A managing director is liable towards the insolvency estate for unlawful
repayments of capital.
Exceptions apply if the payment is made under a profit transfer agreement covered by a collectible
claim for repayment against the shareholder or made in respect of repayment of a shareholder loan;
Duties of care. A managing director is liable towards the insolvency estate if they fail to act with
due care in managing the company's affairs. For example, a managing director must:
comply with applicable laws, by-laws and articles of association (Satzung);
ensure proper organisation of the company, including compliance of the company with applicable
laws;
carefully prepare all business decisions in advance, being aware of any risks, and of financial
impact, and of alternatives, and compile the necessary documentation in advance (business
judgement rule, as understood under German law). In practice, however, a defence based on the
business judgement rule will often not be successful because one or more of the prerequisites can
often not be proven because they were not fulfilled or documented in advance;
supervise any developments which may jeopardise the company's survival.
Embezzlement of company's assets;
Tort. A person who, in a manner contrary to public policy, intentionally inflicts damage on another
person or company is liable to the other person or company to make compensation for the damage;
Tax debts. A managing director is liable to the tax authorities for any failure of the company to
settle tax obligations when due, if they acted wilfully or through gross negligence;
Employees' share of social security premiums. A managing director is liable to the social insurance
authorities for any failure of the company to pay employees' share of social security premiums;
Deception regarding illiquidity. A managing director is liable towards a contract partner if the
contract partner (for example, a supplier) is deceived about the company's illiquidity.
EL Specific duties are provided for under the Insolvency Code for the members of the board of
directors. Failure to file (or delay in filing) for bankruptcy upon cessation of payments exposes the
directors to personal liability. The same applies if bankruptcy results from gross negligence or wilful
misconduct of the directors, while the directors are further exposed to criminal liability in the event
of loss-making or extraordinarily risky transactions, inappropriate borrowings, misleading or
incomplete company books and records, failure to prepare and approve financial statements or
inventories as required by law, undue disposals or deterioration of assets, or preferential payments to
the detriment of other creditors. Furthermore, the directors have personal and criminal liability in the
event of tax indebtedness, in accordance with tax legislation.
HU The liquidator or the creditors may lodge lawsuits against the debtor’s former directors for their
activities which were detrimental to the interests of the creditors on the grounds that the former
directors did not carry out their managerial functions, taking into account the creditors’ interests
when a situation with the threat of insolvency arose, leading to a decrease in the economic operator’s
assets, or frustrated the full satisfaction of the creditors’ claims or neglected to settle environmental
charges. If this is proven, the former director of the debtor must compensate the creditors for the
damage thus caused.
IE Directors or officers can be liable for the debts of an insolvent company in the following
circumstances:
Reckless trading. Personal liability can arise if, in the course of winding up a company, it appears
that any person was, while an officer of the company, knowingly a party to the carrying on of any
business of the company in a reckless manner. Liability can also apply to directors who ought to
have known that these actions were reckless;
Misfeasance. Where it appears that a director or other party has misapplied the assets of the
company or been guilty of ‘misfeasance’ or breach of duty or breach of trust, the court can compel
him to restore such assets or to provide the company with compensation in respect of such
misapplication of its assets. This provision is not confined to directors and officers of a company but
applies to any person who has taken part in the formation or promotion of the company. It is also not
limited to insolvent procedures;
Fraudulent trading. Where a person is knowingly a party to the carrying on of a business with intent
to defraud creditors of the company or any other person, or for any other fraudulent purpose, that
person will be guilty of an offence;
Failure to keep proper books and records. A director or officer of an insolvent company can be held
personally liable for debts of the company where they have failed to keep proper books and records
and where that failure has contributed to the company's inability to pay its debts as they fell due,
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caused uncertainty as to the assets and liabilities of the company, or has impeded the orderly
winding-up of the company.
IT There is no way that directors can be held liable for a company's debts. They are liable for personal
debts arising from liability actions that can be brought against them by:
The company, when directors are in breach of their fiduciary duties;
The company's creditors, when directors are in breach of their duty to preserve the integrity of the
company's assets to the extent that they are no longer sufficient to satisfy the creditors;
A single shareholder and/or third party, whose personal assets were damaged by the directors'
misconduct.
Liability actions against directors are brought by the bankruptcy trustee, when the company is
declared bankrupt.
LV Directors must take care about safeguarding the assets for the creditors as well as timely apply for
insolvency of the company. Additionally, both directors and any other responsible representative
must be able to transfer the books and assets of the company to the insolvency administrator, should
insolvency proceedings of the company be started.
The directors who are management board members are jointly liable for losses caused to the
company in case they fail to transfer the books to the insolvency administrator, or, if the condition of
the books does not allow to obtain a clear understanding of the company’s transactions and assets in
the three years prior to the commencement of insolvency proceedings. The Insolvency Law contains
a presumption that the losses are in the amount of the accepted principal claims of the creditors.
LT In Lithuanian case law and doctrine, the general obligation to initiate insolvency proceedings in a
timely manner is regarded as an imperative duty of the director, and failure to comply with this duty
is unlawful inaction that may cause damage and therefore incur a director’s civil liability. This is a
clear element of the liability for delaying insolvency proceedings doctrine.
LU Directors’ duties in case of bankruptcy
The managing director is declared negligent bankrupter if:
their personal expenditure are deemed excessive, or;
they have spent large sums of money in gambling, or in fictitious stock exchange transactions or
with the intention of delaying their bankruptcy, they:
made purchases to resell at a loss; or
engaged in ruinous borrowing to raise money; or
cannot justify the use of assets and funds; or
if, after the cessation of payments, they have paid or favoured a creditor to the detriment of the pool
of creditors.
A managing director manager may also be declared negligent bankrupter if s/he:
have contracted for the account of others, without receiving any value in exchange;
are declared bankrupt, without having fulfilled the obligations of a previous scheme of composition;
have not made an admission of cessation of payments within the time limit;
have been absent without authorisation from the examining magistrate;
have not kept their accounts in accordance with the law.
Duties of Managers of Public - Limited Companies
The managers of public limited companies (SA) may still be sentenced as a negligent bankrupter if
they:
do not provide the information requested by the examining magistrate or the trustee; or
provide inaccurate information.
Bankrupt of the managing director
The managing director is declared fraudulent bankrupter if s/he:
remove company accounts or other accounting documents, or fraudulently alter their content; or
misappropriate or conceal part of their assets; or
fraudulently acknowledge that they owe amounts that are not owed.
MT If a director mismanages the company in a way that endangers the good governance of the company
or fails to adequately supervise and act as the bonus paterfamilias while managing the company’s
affairs, he would be personally liable for the damages ensued by the company.
Directors can be liable for the following acts under the MCA:
Duty to file for insolvency;
Fraudulent preference;
Duty to keep proper accounting records;
Fraudulent or wrongful trading.
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Article 329A of the MCA provides that where the Directors become aware that the company is
unable to pay its debts or is imminently likely to become unable to pay its debts, they shall convene
a General Meeting of the company to review the company’s position and to determine the next steps
that should be taken.
Under MCA, any act which dispossesses the property or rights of the company made in the period of
6 months prior to the dissolution of the Company, shall be deemed as fraudulent preference against
its creditors if it is made gratuitously or at an undervalue or if preference to any creditor is given.
Directors may incur liability when proper accounting records are not kept by the insolvent company
under Art. 314 of the MCA.
Fraudulent trading is defined as carrying out acts with the intention to defraud:
creditors of the company; or
creditors of any other person; or
for any fraudulent purpose.
Under Maltese law, directors can be subjected to the following sanctions:
Disqualification – under Art. 320 MCA, if the director is found guilty in terms of Section 312
(delinquent directors), (fraudulent trading) and (wrongful trading) and consequently ordered by the
court to make a contribution to the assets of the company or declared personally liable for the debts
of the company, is subject to a disqualification order;
Liability in tort – direct liability if the director is involved in fraud or other crimes;
Criminal liability;
Administrative fines – for failure to inform the Registrar regarding a resolution for the dissolution
and voluntary winding up of a company
NL Only a few managerial duties are described in the Dutch law. An example is the standard of care that
the director should observe towards the company. A director may be held liable by the company
itself – or, in case of bankruptcy, by the trustee − for the damages suffered by that company when he
acts contrary to his obligations and the damages are a result of that mismanagement.
The director is obliged to perform to the best of his abilities in the interest of the company and as
could be reasonably expected from a competent and qualified director under the same circumstances.
For liability to be accepted there must be a serious personal reproach/fault on the side of the director.
All relevant facts and circumstances must be taken in account.
Not every imperfection or mistake leads to liability: the director is granted a certain degree of
latitude. In principle, collective responsibility entails that all directors are severally and jointly liable
for failure, although individual directors do have the opportunity to exculpate themselves when held
liable. For exculpation the director must show that he is not to blame for the mismanagement and
that he has not been negligent in taking measures to avert the negative consequences of the
mismanagement.
The board of directors may also be discharged by the general meeting of shareholders, lifting the
directors from (internal) liability with regard to the management in the period relevant to the
discharge. The discharge only relates to the facts that are officially known to the general meeting.
An example of improper performance is entering into irresponsible financial transactions involving
great financial risks. Another example of internal liability may apply when a director forces a
company to lend a large amount to a third party without stipulating security and/or interest and the
third party subsequently goes bankrupt.
PL Directors are responsible for any damage caused as a result of their failure to file a petition within
the applicable time limit, unless they are not at fault. It is presumed that this damage covers the
amount of unsatisfied creditor receivables toward the company.
Members of the management board may also be subject to specific liability consisting of a
prohibition on holding managerial positions or conducting business activity for a period of 1 to 10
years in the case of, inter alia, a wilful failure to file for bankruptcy in the event of the company’s
insolvency.
PT Directors are also legally required to apply for a declaration of insolvency on behalf of the company
within 30 days of the date on which directors become aware of, or ought to have become aware of,
the insolvency situation
RO There is liability for wrongdoing committed before the proceedings are opened. Corporate officers
and directors are personally liable if they have committed one of the following acts, if it resulted in
the insolvency:
they used the goods or credits of the legal person for their own benefit or for that of another person;
they carried out the activities of production, trade or provision of services in personal interest, under
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the cover of the legal person;
they ordered, in personal interest, the continuation of an activity that obviously led the legal person
to the cessation of ayments;
they kept fictitious accounts, made some accounting documents disappear or did not keep the
accounts as required in accordance with the law. In the case of non-delivery of the accounting
documents to the judicial administrator or the judicial liquidator, both the fault and the causal link
between the deed and the damage are presumed, the presumption being relative;
they have misappropriated or concealed a part of the legal person’s assets or have fictitiously
increased its liabilities;
they used ruinous means to procure funds for the legal person to delay the cessation of payments;
in the month preceding the cessation of payments, they have paid or are willing to pay in a manner
that favours one creditor to the detriment of the other creditors; or
any other deed committed intentionally that contributed to the debtor’s state of insolvency, as
ascertained according to the provisions the law.
SK In general, directors are liable for damage caused to the company as a result of a breach of their
duties, whether in cases of financial distress or not. For the liability to arise there has to be:
a breach of a duty under the law or incorporation documents of the company;
damage incurred by the company; and
a causal link between the breach and the damage incurred by the company.
A breach of duty can be based on a director’s action or omission. The breach does not require a
culpable act (i.e. negligence or intent of a director). The law provides for a rebuttable legal
presumption that a director has breached their duties. This means that unlike in standard damage
claims, where the claimant would bear the burden of proof regarding the breach, in the event of a
breach of duties the burden of proof rests on the director, who must substantiate that the duties were
not breached.
There are several legal provisions that create directors’ liability in the case of financial distress. For
instance, if a director found out or, considering all circumstances, could find out that the company is
in crisis (i.e. if the company is insolvent or at risk of insolvency), the director is obliged to procure
all reasonably necessary steps to overcome the crisis. Further, directors may not distribute dividends
or other distributions to shareholders if, considering all circumstances, it causes insolvency of the
company and the company’s equity to be lower than its share capital plus reserve funds.
Furthermore, there are a number of other cases of specific personal liability of directors which are
discussed in the following parts of this survey
SI When a company becomes insolvent management must, within one month, draft a report on its
financial position and its opinion of its chances of restructuring and, based on this report and the
likelihood of successful restructuring, either financially restructure the company or petition for
bankruptcy (after which, the supervisory board must opine on such report within five working days).
If the management or the supervisory board of the company fails to fulfil their respective duties,
their individual members will be jointly and severally liable to the creditors for any damages
incurred by the creditors due to the members' failure to achieve complete payment in bankruptcy
proceedings. The ZFPPIPP provides specific rules on damage liability, amount of damages,
exemptions and limitations of the liability, enforcement of claims and more.
ES The failure to take reasonable steps to minimise losses to creditors may violate the duties and
responsibilities of directors. Article 164(1) of the Insolvency Act provides that the insolvency will
be found to be negligent when the insolvency has been originated or aggravated with bad faith or
gross negligence on the part of the company's directors or liquidators (or any person holding such a
position in the two-year period before the filing of the insolvency petition). If the insolvency is
found to be negligent, the directors can be held liable for ‘bankruptcy liability’, that is the liability to
cover the deficit between the assets and the liabilities.
In addition, if directors violate their duties by misappropriating corporate assets, the insolvency will
be declared negligent, and the directors would be subject to bankruptcy liability. Article 164(2.4) of
the Insolvency Act provides that the insolvency will be found to be negligent when the debtor has
taken all or part of his assets to the detriment of his creditors, or had carried out any act that delays,
makes difficult or impedes the efficiency of a seizure of assets in any kind of enforcement action.
SE Where there is reason to believe that the shareholders’ equity is less than one-half of the registered
share capital or if it has been shown during execution of a distraint order that the company lacks
attachable assets, the board of directors is obliged to prepare immediately a balance sheet of the
company for liquidation purposes.
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Source: Deloitte/Grimaldi (2022).
2.4 Pre-packs
Piece-meal asset liquidation of the insolvency estate or its restructuring or reorganization,
usually in the form of sale of businesses in insolvency on “a going concern basis”,
including pre-package sales (‘pre-packs’). A sale on a going concern basis means a
liquidation of a debtor by the sale of the whole or a significant part of the business as an
operating and functioning entity as opposed to the so-called piece-meal liquidation under
which individual assets of the business are sold separately. The opposite of this approach
of transferring assets is the so-called piece-meal liquidation, consisting of a sale in which
"individual assets of the business are sold separately", a sale that may come into play in
the event of a business liquidation.
A pre-pack sale means a sale on a going concern basis under a contract which is
negotiated confidentially prior to the commencement of an insolvency procedure without
consultation of all creditors and followed by a very short formal insolvency proceeding in
which the pre-negotiated sale and settlement is confirmed.
A ‘pre-pack’ describes a sale of all or part of the business, negotiated before filing for
insolvency and in secrecy, followed by a liquidation procedure where the court quickly
distributes the proceeds from the sale to the creditors. The availability of a pre-pack
procedure maximises value preservation in the sale as a going concern, which tend to
result in a much higher price being paid by a purchaser than sales on a break-up or
piecemeal basis299
.
Usually, there are two methods based on which the transfer of business activities takes
place, i.e. either by transferring the shares of the company running the business, or by
selling the entire business or a substantial part thereof (a substantial part of the assets,
including contractual positions and liabilities, goodwill, etc.). The transfer of a business
or a business branch can also be used as a tool for restructuring or reorganising the
business300
. The purpose of such a transfer would be to keep the business running, by
299
U.S. Congressional report on the measures that led to the US Bankruptcy Code makes the common
sense point that “assets that are used for production in the industry for which they were designed are more
valuable than those same assets sold for scrap” HR Rep No 595, 95th Congress, Ist Sess 220 (1977).
300
UNCITRAL uses the term reorganization as well, to which the following definition applies: “a
reorganisation is the process whereby the financial well-being and viability of a debtor’s business can be
restored and the business can continue to operate, using various means possibly including debt
Directors must issue a notice of a general meeting if the balance sheet shows that shareholders’
equity is less than one-half of the registered share capital. If a second balance sheet, prepared within
a set time limit, shows that the shareholders’ equity still does not exceed one-half of the registered
share capital, the board of directors has a duty to petition the court for a liquidation order.
Should the board of directors fail to prepare the balance sheet (to convene the initial general
meeting) or to petition the court for a liquidation order within set time limits, the directors can be
jointly and severally liable for the obligations incurred by the company during the period of such
failure to act, unless a director can prove that he or she was not negligent.
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separating the activities, that can still be profitable, from the debtor while the latter shall
be left with those activities that are not viable anymore.
Through a prepack, the sale of the business (as a going concern) will take place at the
very start of the proceedings, right (or very shortly) after the opening of the formal
liquidation proceedings. This can be achieved, because the complete preparation of the
actual business sale (i.e. the marketing of the business and the negotiation with the
possible buyer) takes place – usually in a confidential manner – before the formal
opening of the proceedings, under the steering of a ‘silent administrator’.
The procedure consists of an accelerated winding-up procedure, which allows for the sale
of the debtor's business (in whole or in part), as a going concern, to the highest bidder
selected during a competitive sale procedure ("preparation Phase") preceding the formal
opening of the liquidation ("winding-up Phase")301
. This liquidation procedure is without
prejudice to the other aspects of the insolvency law, i.e. the ranking of claims and
distributional rules, that continue to apply as long as they are compatible.
The ‘prepack procedure’ is considered a liquidation procedure and is acknowledged
under Annex A of EIR. Furthermore, based on Council Directive 2001/23/EC of 12
March 2001, the pre-pack is also considered as a bankruptcy or insolvency procedure
initiated with a view to liquidating the assets of the transferor under the supervision of
the competent public authority. In the context of bankruptcy practice in Europe, sales on
a going concern basis were already regulated in several Member States already in
2003302
. These sales on a going concern basis are governed differently in different
Member States depending on whether or not bankruptcy law prevails and, therefore,
whether or not the sale of an asset takes place in the context of formal insolvency
proceedings.
Pre-packs sales are a fast and efficient way to recover value for creditors/investors. They
can increase the recovery value by selling parts of the defaulting company early on,
thereby reducing the deterioration of the asset values. While the instrument seems most
commonly used to restructure a company and spin of the viable from unviable business
lines, they can also play a useful role in liquidations.303
There may still be business lines
that are viable and assets that worthy, so their early realisation and transfer in a package
could maximise the recovery value.
Unlike in a restructuring case, the position of the debtor should not matter if a pre-pack is
used during the winding down of the company. All creditors should benefit from the
forgiveness, debt rescheduling, debt-equity conversions and, our focus in this chapter, sale of the business
(or parts of it) as a going concern”.
301
ELI Instrument – Rescue of Business in Insolvency Law, cit., Recommendation 7.03.
302
The principles of European insolvency law (2003) under Section 12.1 provide that: “If and to the extent
that there is no reorganisation, the administrator converts the debtor’s assets into money and distributes it
among the creditors. The assets can be realised separately or together, whether or not as a going
concern”. The Leeds Study (2016) lists France, the Netherlands, Greece, Ireland and Slovenia and the ELI
2017 Instrument ’Rescue on Business in Insolvency Law’ adds Germany and Italy to the list.
303
Schoenfeld (2020) found however that the financial situation is an important determinant of consent on
pre-packs and financial performance tend to be poor in an analysis of restructuring cases in the Czech
Republic.
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higher recovery value realised through pre-packs. The survival of individual business
lines as going concern would also be in the interest of other stakeholders such as
employees or public authorities. Smaller and also foreign creditors may however be
concerned that larger and domestic creditors will have a key role in determining the
conditions under the pre-pack takes place, possibly even taken over viable business lines
or assets at a price favourable to them.304
Foreign creditors may see themselves
disadvantaged if rules governing the pre-pack are non-transparent and accountability is
unclear. Comparable rules on pre-packs would be to their advantage and could encourage
their cross-border lending activity.
Pre-packs are build on the insight that there is likely to be a substantial saving of cost and
convenience if a debtor minimises the time that it spends in formal insolvency
procedures. The longer and more drawn out the procedure, the greater the costs and
expenses that are likely to be incurred. Further to the sales on a going concern basis
another instrument may be envisaged in cases where there is a risk that the value of the
debtor's assets will decrease significantly in a short period of time305
, i.e. the prepack
sales. In events where there are situations such as to ensure that the direct appointment is
not detrimental to creditors' interests, Member States may either allow debtors and/or
creditors (or creditors' committees) to directly choose the advisor without the
involvement of a court or allow the insolvency practitioner to directly authorise and
execute the sale of the assets without the involvement of a court.
Member States shall ensure that insolvency practitioner participating in pre-pack
procedures have relevant experience and expertise, retain liability in case of failure to
perform their duties and receive appropriate remuneration, proportionate to their potential
responsibilities306
. On the other hand, the Court shall have exclusive jurisdiction over any
dispute arising in the course of the pre-pack procedure, any action against the advisor
subsequently appointed as the insolvency practitioner and over urgent operational
measures that may be instrumental to the success of the pre-pack procedure, such as
termination or amendment of employment agreements. Member States shall ensure that,
during the preparation phase, the pre-pack applicant should be entitled to apply for a stay
or moratorium of enforcement measures307
also in order to facilitate the Pre-pack
procedure and provided that the advisor approves such an application for a stay.
The 2019 Directive on Restructuring and Insolvency lists the sale of the business as a
going concern as one of the measures of ‘restructuring’, but this is just offered as an
option for Member States, depending on their laws, and is not harmonised. Furthermore,
in the preventive restructuring framework such a sale forms part of the restructuring plan
and the legal entity usually is kept (is not liquidated). The pre-pack liquidation procedure
is, therefore, a new solution, for which there is a demand on the side of the stakeholders.
304
These points are also made as major disadvantages of pre-packs in Cormack et al. (2016).
305
ELI Instrument – Rescue of Business in Insolvency Law, cit., Recommendation 7.02.
306
ELI Instrument – Rescue of Business in Insolvency Law, cit., Recommendation 7.04.
307
As provided for in Articles 6 and 7 of Directive 2019/1023
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Table A5.5: Prepack rules and practices in the EU Member States
AT Under the new draft legislation308
(entered in force in July 2021), Austria will implement the
pre-pack sales via a ‘simplified’ restructuring plan proceeding. According to the draft, the
debtor agrees the restructuring measures (potentially including sale of assets/business and debt
cut) and – together with the required majority of financial creditors – applies for the court's
approval of the restructuring plan.
BE Not existent. But the Business Continuity Act (BCA) of 2009 provides debtors in a state of
financial crisis with three tools apt to reorganise their business, i.e.: (i) an amicable settlement;
(ii) a collective reorganisation plan or (iii) a transfer of the enterprise or of its activities, in
whole or in part, to third parties under court supervision (Leeds)
BG Not existent.
HR Pre-bankruptcy agreement exists and operates in a reversed manner – pre-bankruptcy court
proceedings are opened and aim at the conclusion of a pre-bankruptcy settlement with the
creditors outside of bankruptcy proceedings, which will enable the reorganisation of the
debtor. However, the court is involved – it verifies whether the conditions for confirmation of
pre-bankruptcy arrangement have been met.
CY Pre-packaged sales are not common in Cyprus though they may be implemented through
receivership.
CZ The option of pre-packed insolvency (‘pre-pack’) is perceived as a fast and effective way of
reorganisation in the Czech Republic. Reorganisations, in general, are subject to the size and
other constraints set out in Section 316 Article 4 of the Czech Republic Insolvency Law
(CRIL). The pre-pack is the only case in which these criteria do not have to be met, which
means that the reorganisation procedure is also open to SMEs when their creditors agree with
the rehabilitation procedure and a suggested reorganisation plan. The pre-pack prepares the
ground for further derogations in distressed companies’ behaviour and has the advantage that
the creditors already agree with the suggested reorganisation plan before the insolvency
proposal. This avoids the negotiation processes during the insolvency proceedings and can
potentially shorten the insolvency proceedings and achieve other positive effects.
DK Pre-packed sales are allowed, but the trustee must ensure that the sale is made on arm’s-length
terms.
EE No information
FI Not existent. Distressed debtors and their creditors may enter into voluntary contractual
agreements out of the court proceedings. However, the contract must focus on debt
restructuring (ex: extending the repayment period or cutting the outstanding amount).
FR The law of 22 October 2010 on banking and financial regulations, effective as of 1 March
2011, and its implementing decree of 3 March 2011, created a type of accelerated safeguard
inspired by the US Chapter 11 pre-pack. The purpose of this expedited financial safeguard
process (sauvegarde financière accélérée) is to restructure financial debt in a very short time
frame, assuming the consent of at least two-thirds of financial creditors and of bondholders.
DE Not existent per se. So-called prepacked plans in a German context are insolvency plans that
are planned and created before the debtor files a request for insolvency. Usually, they are
submitted together with the petition to open insolvency proceedings.
EL Pre-packs business recovery process is available contingent to court ratification
HU Not existent.
IE The usage of pre-pack insolvency sales is less developed in Ireland than in other jurisdictions,
but there has been an increasing number of asset sales structured through pre-pack
receiverships.
In Ireland there are no corresponding rules or guidelines in general usage, although some
insolvency professionals follow the Statements of Insolvency Practice guidelines. In the
absence of detailed rules, the critical standard for the appointed insolvency office holder is to
ensure that he obtains the best price possible for the assets at the time of sale. Provided the
insolvency office holder complies with this test and adheres to the highest professional
standards, there is no barrier to effecting a pre-pack sale in a manner which stands up to
scrutiny and which will allay the concerns of creditors.
308
The Restructuring Code (Restrukturierungsordnung).
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IT Pre-packed plans provide for the sale or lease of the debtor’s assets to a third-party investor,
based on agreements reached by the debtor and the third-party investor prior to filing. Should
the assets be sold to a third party different from the original investor as a consequence of the
competitive procedure above mentioned, the latter has the right to be reimbursed for the costs
incurred in connection with the agreement reached with the debtor up to an amount equal to
three per cent of the price of the assets agreed therein.
LV No information available
LT There are no pre-pack sales identified in the Lithuanian law
LU No information found.
MT Pre-packs are not formally codified under Maltese law, and practice has thus far not
necessitated their judicial recognition. However, the local legislative architecture may indeed
be stretched to accommodate pre-packs; if pre-packs were to enter into vogue locally as a
result of developments in the Maltese restructuring market, they could be sanctioned under the
CRP or the compromise or arrangement restructuring route.
Since pre-packs thrive on speed of execution and minimal court involvement, the CRP would
seem to be the more appropriate route for their execution. Where all required consents to the
pre-pack are solicited before entry into the CRP, the issuance of the company recovery order
(approving the pre-packaged sale) may take place shortly after, and, in any event, within a
maximum of 20 days of the CRP application being filed.
There would be no plausible grounds for a putting a pre-packaged restructuring plan to
creditor or member meetings and subsequently applying to the courts to sanction its outcome
under the compromise or arrangement option, unless such option is necessary to overcome
hold-out within an impaired debt tranche.
NL In Netherlands there is the option of a pre-packaged bankruptcy filing. Before filing for
bankruptcy or suspension of payment, the company’s management, shareholder or (third
party) investor and/or purchaser prepare a plan to acquire or sell certain parts of the business
out of the (bankrupt) estate and continue business in another company standing at the ready.
Following the preparation of such plan, the court may be asked to appoint a ‘silent
administrator’ prior to the request for bankruptcy (or suspension of payment) to ensure that
the pre-pack plan is acceptable to the administrator and the bankruptcy judge.
PL A debtor that has become insolvent can also find a buyer for its assets on its own. The debtor
can then file a bankruptcy petition along with an application for approval of the terms of sale
of the enterprise—known as a ‘pre-pack.’ It is also possible to file a pre-pack application after
filing of the bankruptcy petition. A pre-pack application may also be filed by an in personam
creditor of the debtor. A pre-pack consists of a sale of the assets of an insolvent debtor,
approved by the court, but negotiated and prepared prior to the declaration of the debtor’s
bankruptcy. This procedure allows an investor to quickly acquire the assets of an insolvent
company, relatively soon after the declaration of bankruptcy, unlike the time-consuming
acquisition of assets under the standard conditions of bankruptcy procedure. In the pre-pack
procedure, it is possible to acquire the debtor’s enterprise, an organised part of the enterprise,
or a set of assets constituting a significant portion of the enterprise. A sale made in the form of
a pre-pack has the effects of a sale in execution (acquisition free of encumbrances on the
assets or debts of the debtor).
PT There are no pre-pack procedures.
RO Pre-pack administrations are not regulated under Romanian law. The sale of assets in
distressed M&A transactions is stricter once the target has entered insolvency. Insolvency
proceedings are highly regulated under Romanian law, and involve various approvals and
confirmations that must be obtained from the creditors’ assembly and the court of law prior to
implementing it: In case of bankruptcy, the assets will be evaluated by an authorised valuator
and the creditors committee must approve the valuation reports as well as the type of sale
(direct negotiation, auction or a combination of the two) and the sale regulation.
SK There are no rules concerning pre-pack sales in Slovakia
SI Pre-package sales are not foreseen by Slovenian law. [some use according to Leeds]
ES For the time being, there is no specific legal regulation of this figure in the Spanish legislation.
But from the actions already carried out, the following structure can be observed:
First, there is a preliminary phase. During this phase, the entrepreneur must inform the Court
of the opening of negotiations with its creditors. Then, it must communicate that operations
are being carried out regarding the sale of production units. An independent expert appointed
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by the company will be in charge of carrying out the sale of the production units. This
independent expert will also be in charge of ensuring compliance with the law and providing
transparency to the process. Once the insolvency proceedings are declared, this independent
expert will become the insolvency administrator.
The second phase is the judicial phase of authorization and implementation of the pre-pack
operations. This will be done through Article 530 of the Consolidated Text of the Insolvency
Law. This determines that the debtor must present a liquidation plan with a proposal for the
acquisition of the productive unit. Subsequently, the judge will agree the opening of the
liquidation phase.
SE Pre-packaged sales are possible in practice and is not uncommon. However, a pre-pack and its
commercial terms will always be reviewed by the official receiver in subsequent bankruptcy
proceedings, thus with a risk of being set aside. Also, with little transparency and no creditor
consultation pre-packs have been debated, and still are, especially where the business/assets
are sold to someone connected to the debtor. When doing a prepack sale, it is recommended to
obtain a third-party valuation of the property sold, to avoid a sale at undervalue which can be
criticized and potentially challenged.
Source: Deloitte/Grimaldi (2022).
3. Procedural elements of insolvency
3.1 Opening of insolvency
Under insolvency frameworks of Member States there are different understandings and
definitions of when a business should be obliged to undergo insolvency proceedings.
Systems diverge considerably between Member States that equate insolvency with
illiquidity (inability to pay debts when they fall due) and Member States which (in
addition also) consider a company insolvent if it is over-indebted on the basis of a
balance sheet analysis.
There are typically two insolvency tests under national law to kick off an insolvency
proceeding: cash flow (i.e. a company cannot pay its debts as they become due) and
balance sheet (i.e. the value of a company’s liabilities outweigh the value of its assets). In
practice it is, however, not easy to determine whether either or both of these tests are
satisfied. What often causes difficulties is how one deals with contingent and prospective
liabilities and assets. That means that in reality there could be as many as 27 different
answers to the question of whether a business is (in)solvent.
In practice, however, it is often not easy to determine whether the opening of the
insolvency test requires that either or both of these tests need to be satisfied. According
to UNCITRAL, insolvency occurs “when a debtor is generally unable to pay its debts as
they mature or when its liabilities exceed the value of its assets”309
. This can happen due
to a company making a bad investment, misjudging business risk, or making mistakes in
pricing. However, general market changes or an economic downturn can also drive a
company to insolvency. Thus, the reasons that in the abstract can lead to a situation of
insolvency can be both internal (for instance bad management of funds) to the company
and external (for instance disruptive change in the markets).
The 2019 Restructuring and Insolvency Directive leaves it up to Member States whether
they wish to require that companies seeking the advantages of a restructuring (including a
309
Uncitral, United Nations Commission on International Trade Law, Legislative Guide on Insolvency
Law, 2005.
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moratorium on debt payments) need to undergo a viability test to determine whether a
restructuring is likely to have more than short-term effects and to avoid ‘zombie’
companies. It was not possible to agree on a mandatory viability test in the 2019
Restructuring and Insolvency Directive, let alone define what it should look like. This
Directive is now being transposed by Member States (many of which requested an
extension of the transposition deadline by July 2022).
In a competitive economy, companies that are not economically viable (e.g. because their
business idea has lost its appeal to the market) should exit the market to allow for the re-
attribution of resources to more innovative companies. One avenue to ensure the timely
initiation of insolvency proceedings could be to explore a common definition of the
prerequisites when insolvency proceedings should be commenced. It needs to be noted
however that so far it has been considered too difficult to bring about a harmonisation of
the notion of insolvency or likelihood of insolvency and even the European Insolvency
Regulation determining international jurisdiction and the applicable law in insolvency
matters refrains from such a common definition. Also it could be explored to which
extent the information on the insolvency trigger should be made available in an investor-
friendly format on e-Justice portal (see below). This would contribute to the investor’s
ex-ante awareness of the insolvency proceeding, allowing her/him to factor this in the
cost of capital.
The pronounced differences in insolvency triggers across Member States imply learning
costs for foreign creditors. These are likely higher the more discretionary and less
explicit the trigger is defined and the more different definitions and concepts are in the
destination of the investment from the location of the investor. A well-defined trigger
reduces uncertainty to creditors and in particular to foreign investors, who would have
lower learning costs if triggers are similar or based on a common terminology.
Creditors may face disadvantages from a well-defined trigger if they are accountable to
ultimate investors and/or supervisors and therewith under pressure to correct their asset
valuations once the trigger is reached. Such loss of discretionary judgment may however
be beneficial for ultimate investors and financial stability. Debtors would benefit from
clarity primarily in the run up to insolvency. A clear trigger would augment the debtors’
problems once the threshold is reached because it inflicts reputational damage and will in
many cases cut off the company from new financing. This accelerates the need to wind
down the company and takes away any possibility that it can remain a going concern.
The setting of a clear trigger for the start of the process that leads to the liquidation of the
company may however reduce the impact of such reputational effects in the pre-
insolvency phase. In the presence of a well-defined trigger, both creditor and debtor
would be able to assess under which conditions an insolvency process starts, which
should create incentives for debtors to react pre-emptively as well as for creditors to seek
solutions before courts get involved. This helps avoid that the start of an insolvency
procedure is postponed, which means the beginning of protective measures (avoidance
actions, treatment of all creditors), use of outside expertise (insolvency practitioners,
viability assessment), initiates the search for a definite solution (creditors committee).
Since the insolvency triggers have a direct impact on the opportunity of debtors to access
appropriate tools preserving the value of their business or ensuring an orderly exit from
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the market, divergences in laws obviously influence the performance level of the
insolvency frameworks.
Table A5.6: Insolvency triggers in EU Member States
AT The commencement of any proceeding under the Austrian Insolvency Act (AIA) is dependent on
the existence of certain factual predicates. In the case of corporate entities, these are: illiquidity
(cash flow insolvency or zahlungsunfähig; Sec 66, para 1 of the AIA); over-indebtedness (balance
sheet insolvency or überschuldet; Sec 67, para 1 of the AIA).
BE The two conditions for opening insolvency proceeding are: (i) the persistent failure to pay its debts,
and; (ii) the company has lost the confidence of its creditors (Art. XX.99 BCEL). A company is
deemed to have generally lost all creditworthiness when it can show that it cannot receive credit on
the market (typically with financial institutions) at reasonable conditions for an amount that is
sufficient to pay the company’s debts as they fall due.
BG There are two triggers for insolvency proceedings: (i) insolvency (inability to pay), and; (ii) over-
indebtedness (of a limited liability company, a joint-stock company or a limited stock partnership).
These triggers are not cumulative. Insolvency and over-indebtedness are objective factual
conditions, which have legal definitions in the Bulgarian Commerce Act (BCA). Under Art 608 of
the BCA, insolvency is assumed when the debtor has stopped his payments and may be present
when the debtor has paid or is in position to pay partially or in full only the claims of individual
creditors. According to Art 742 of the BCA, a trade company shall be deemed overindebted,
provided its assets are insufficient to meet its financial liabilities
HR Insolvency incurs when a debtor: (i) becomes insolvent (incapable of payment), or; (ii) becomes
over-indebted. A debtor shall be deemed insolvent (incapable of payment) if, in the Register of the
order of priority of payment liabilities kept by the Croatian Financial Agency, it has one or more
registered unsettled liabilities, due for more than 60 days, for which there is a valid basis for
payment. A debtor is considered to be over-indebted if the value of his assets does not cover the
existing obligations.
CY According to Cyprus Company Law (CCL), a company will be deemed to be insolvent if (i) the
company fails to pay for more than 3 weeks a debt of more than five thousand euros, or; (ii) the
company fails to execute in full a judgement/order/decree given by the court in favour of a creditor
of the company, or; (iii) the court is satisfied that the company is unable to pay its debts as they
become due, taking into account the company’s future or possible obligations, or (iv) the court is
satisfied that the value of the company’s assets is less than its debts, taking not account future or
possible debts.
CZ A debtor is insolvent if (these are cumulative conditions): (I) the debtor has multiple creditors; (ii)
the debtor has pecuniary liabilities that are more than 30 days overdue; (iii) is not able to perform
those commitments.
DK Pursuant to the DBA, a debtor is insolvent when it is unable to meet its liabilities as and when they
fall due, unless such inability must be deemed to be only temporary. The final decision is based on
an assessment of the debtor’s liquidity (a cash flow test). The fact that the debtor’s liabilities exceed
its assets is not generally of importance.
EE The first main precondition for the opening of bankruptcy proceedings is the fact that the debtor is
insolvent. A debtor is insolvent if the debtor is unable to satisfy the creditors’ claims and, due to the
debtor’s financial situation, that inability is not temporary.
FI The Finnish Bankruptcy Act provides that a debtor who cannot repay his or her debts can be
declared bankrupt
FR Judicial liquidation proceedings are opened when the business has reached the stage of cessation of
payments and when judicial reorganisation is clearly impossible.
DE The general reason for opening insolvency proceedings is inability to pay. There is inability to pay
if a debtor is not in a position to meet payment obligations that have fallen due; insolvency is
presumed as a rule if the debtor has stopped payments (Section 17(2) of the German Insolvency
Code - GIC). If the debtor is a legal person or a company in which none of the partners is a natural
person with unlimited liability, proceedings may also be opened on grounds of over-indebtedness.
There is over-indebtedness if the debtor’s assets no longer cover the existing liabilities, unless it is
highly likely in the circumstances that the enterprise will continue in being for the next 12 months
(Section 19(2) GIC)
EL Under the Insolvency Code, bankruptcy proceedings commence by a declaration of the court on the
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application of any creditor, the debtor or the attorney general, if the debtor has ceased payments in
the sense that it is generally and permanently unable to pay its debts as they fall due. In respect of
simplified bankruptcy proceedings, cessation of payments is deemed to have occurred if the debtor
does not pay the due amounts towards the state, the social security funds or credit or financial
institutions for an amount of at least 60 per cent of the total amount due and for a period of at least
six months, and if the non-performing debt or debts exceed in aggregate the amount of €30,000.
HU The court will declare that a debtor is insolvent and order the liquidation proceeding, when: (i) the
debtor has not repaid or disputed (in writing) an acknowledged or undisputed debt, arising out of
contract, within 20 days of the debt’s maturity and upon a subsequent written payment demand
from the creditor; or (ii) the debtor failed to repay its debt within its maturity as stated by the court's
definitive judgement; (iii) judicial enforcement proceedings against the debtor were unsuccessful;
(iv) the debtor has breached the obligations it has undertaken under a composition entered into with
its creditors in previous bankruptcy or liquidation proceedings; (v) the court terminated the
previous bankruptcy proceedings; (vi) in the proceedings initiated by the debtor or the liquidator,
the debts of the debtor exceed his assets, or the debtor could not or will not be able to satisfy his
debts (debts) at the due date, and in the proceedings initiated by the liquidator, the members
(owners) of the debtor business organization do not declare their commitment to provide the
resources necessary for the payment of debts.
IE The primary condition for opening personal insolvency proceedings is that the debtor is insolvent,
i.e. they are unable to meet their debts as they come due. The nature and extent of the debts and the
debtor’s income then determines which of the three arrangement types is appropriate: DRN, DSA
or PIA.
IT The objective prerequisite for the declaration of bankruptcy is the state of insolvency provided for
in Art. 5 of the Italian Bankruptcy Law (IBL), which establishes that a person is in a state of
insolvency if he is unable to regularly meet his obligations. Insolvency can be manifested by
defaults or other external facts (e.g. the escape of the entrepreneur or the closure of the premises in
which he exercised the activity), which demonstrate that the debtor is no longer able to meet his
obligations. An entrepreneur who can only partially pay his debts is considered insolvent, as is an
entrepreneur who can fulfil his obligations, but only after they have expired, or in an irregular
manner (e.g. an entrepreneur who is forced to sell real estate to satisfy the company's creditors).
LV The insolvency proceedings of a natural person may be applied to a natural person who has been
the Republic of Latvia for the last six months and who has financial difficulties (signs of
insolvency): (i) There is no possibility of settling debts of a total of more than EUR 5000 for which
the deadline has entered into; (ii) on the basis of verifiable circumstances, it will not be possible for
that person to settle debts above EUR 10 000 for which the deadline is set to expire within one
year.
LT Bankruptcy proceedings may be brought against a legal person where the court has determined the
existence of at least one of the following circumstances: (i) the company is insolvent; (ii) the
company is late in making payments relating to employment relationships to its employees; (iii) the
company is or will be unable to meet its obligations. In addition, company insolvency is understood
to be a state where a company is unable to meet its obligations (does not pay debts, does not
perform work paid for in advance, etc.) and the overdue obligations of the company (debts, overdue
work, etc.) exceed one half of the book value of its assets.
LU According to the law of Luxembourg, the conditions needed to open an insolvency proceeding are:
(i) Status of trader ; (ii) cessation of payments: it means that unquestionable debts due for payment
(e.g. wages, social security, etc.) are unpaid, with term or contingent debts and natural obligations
not being sufficient; (iii) loss of creditworthiness (the trader can no longer obtain credit from banks,
suppliers or creditors).
MT Insolvency Proceedings (Companies) conditions: according to article 214(2)(a)(ii) of Chapter 386
of the Companies Act (MCA), the company shall be deemed to be unable to pay its debts: (i) if a
debt due by the company has remained unsatisfied in whole or in part after twenty-four weeks from
the enforcement of an executive title against the company by any of the executive acts specified in
article 273 of the Code of Organization and Civil Procedure; or (ii) if it is proved to the satisfaction
of the court that the company is unable to pay its debts, account being taken also of contingent and
prospective liabilities of the company.
NL A debtor who is in a situation where he has stopped to pay his due and demandable debts shall be
declared bankrupt by court order, rendered either upon his own request or upon the request of one
or more of his creditors. Moreover, the bankruptcy order may also be rendered for reasons of public
205
interest or upon the request of the Public Prosecution Service. In practice this means, although not
formally required, that such creditor must not only submit his own claim(s), but he has to make
plausible as well that the debtor is in default of performing at least one other claim of another
creditor ('supporting claim'). Only then the court is able to asses that the debtor has stopped to pay
his due and demandable debts. So it is not possible for a creditor to lodge a petition for bankruptcy
when the debtor only fails to comply with this creditor's claim(s). In such event the creditor can
only try to acquire an enforceable judgment against the debtor (to be obtained after normal
proceedings) which makes him entitled to foreclose the debtor's property, from which he,
subsequently, may recover his claim(s).
PL The Bankruptcy Law identifies two independent grounds for the existence of a state of the debtor’s
insolvency, known as the liquidity test and the balance-sheet test. ad 1: The essence of the liquidity
test, which is the most common grounds for insolvency, is the debtor’s loss of the ability to perform
its monetary obligations as they come due. The Bankruptcy Law provides for a presumption that
the liquidity test is met if the debtor’s delay in performing monetary obligations exceeds three
months. Ad 2: The balance-sheet test provides, in turn, that a debtor that is a legal person, a
commercial partnership, or other organisational unit (with certain exceptions) is also insolvent
when the value of the debtor’s monetary obligations exceeds the value of the debtor’s assets over a
period exceeding 24 months.
PT Insolvency is a factual situation of insufficiency of assets of any legal subject (insufficiency which
translates into the impossibility to comply with its due obligations) described by the Insolvency and
Recovery Code (Código da Insolvência e da Recuperação de Empresas – CIRE). In other words,
insolvency is characterised as the impossibility to comply with the generality of the due obligations
of an individual or legal entity, and this situation may be current (incapacity to comply with the due
obligations) or imminent (situation of potential incapacity to generate cash flow to cover the
liabilities).
RO Any company is entitled to petition for insolvency in Tribunal as soon as it determines that it
is/soon will be unable to perform payment of its current/or future debt exceeding the threshold of
RON 50,000 (approx. EUR 10,000). At the same time, any creditor of a company may file an
insolvency petition in court if its receivables against that company exceed the aforementioned
threshold and are overdue for more than 60 days. The debtor may defend against the creditor’s
petition indicating that even if the above conditions are met, it has sufficient liquidity.
In certain cases, the court may decide to oblige the petitioning creditor to pay a bond of up to 10%
of the value of his claim (but not exceeding the sum of RON 40,000 equivalent EUR 8,000) in
order to cover any damages incurred by the debtor in case the creditor’s petition is without
sufficient grounds.
SK Insolvency means that the debtor has excessive debt or is cash-flow insolvent. A debtor has
excessive debt if the debtor is obliged to keep accounts in accordance with the applicable
legislation (Act No 431/2002 on accountancy), has more than one creditor, and the value of the
debtor’s liabilities is greater than the value of the debtor’s assets. A legal person is cash-flow
insolvent if it is more than 30 days overdue with the payment of two or more financial liabilities to
more than one creditor. A natural person is cash-flow insolvent if he or she is unable to pay at least
one financial liability 180 days after payment was due.
SI Insolvency is defined as a situation where: (i) the debtor has been insolvent for a lengthy period of
time because it was unable to pay all of its obligations due in that period; or (ii) the debtor has
become long-term insolvent because the value of its property is less than the sum of its obligations
(over-indebtedness), or because the loss of the debtor capital company together with the loss
brought forward in the current year exceeds half of the share capital, and the losses cannot be
covered by profit brought forward or from reserves.
ES The law lays down certain subjective and objective prerequisites to be met in order to open
insolvency proceedings: (i) Subjective prerequisite: any debtor can be declared insolvent, whether a
natural or legal person, an entrepreneur or a consumer, (ii) Objective prerequisite: the debtor’s
insolvency, defined as the inability to pay its liabilities on a regular basis.
SE Insolvency is defined as a situation where the debtor is not able to duly pay his debts, and this
inability is not of a temporary nature.
Source: Deloitte/Grimaldi (2022).
206
3.2 Special insolvency regime for micro- and small enterprises
Micro- and small enterprises (MSEs) rarely use formal insolvency proceedings
voluntarily, and when they do it, it is almost inevitably too late to preserve their value.
For micro and small companies (MSEs), the costs of proceedings can easily exceed the
value of the estate. This is part of the reason why MSEs are often not wound down
properly but remain in limbo. There is extensive evidence that traditional national
insolvency frameworks are of no (or little) use for micro- and small enterprises.
Traditional insolvency proceedings are too costly for such debtors, compared to the
assets at hand belonging to the insolvency estate, or often simply not accessible to them
(due to the lack of assets covering such costs).
Indeed, traditionally, special treatment for the so-called “small and medium-sized
enterprises” has always been highly recommended, for instance, providing for a
simplified application of restructuring or insolvency proceedings. Indeed, beyond such
response by legislators, legal practice has underlined the need for the enterprises that do
not meet certain thresholds to establish a preferred channel, due to their sizes.
A closer look at our analysis reveals that existing national regulations limit such
privileges to businesses that do not exceed certain thresholds. While these thresholds are
different across jurisdictions, the overall picture reveals that a special treatment is
commonly only available for small, but not for medium sized businesses. Indeed, for
medium sized businesses common insolvency and restructuring rules and procedures
appear designed and applicable (although with some differences in the different member
State).
These MSEs rarely use formal insolvency proceedings voluntarily, and when they do it, it
is almost inevitably too late to preserve their value. This is, because:
(i) in the vast majority of cases, micro and small debtors have very little knowledge
of their legal position, seek legal advice too late;
(ii) financial information available to SMEs is often poor, which hinders early
awareness of the financial distress, but also
(iii) affects the ability of creditors to monitor the debtor;
(iv) most small businesses are family-run and constitute the family’s only source of
income, and the reputational stigma associated with formal insolvency
proceedings remains significant.310
The main motivation of a dedicated MSE insolvency regime would be to reduce the costs
of the procedure as reaction to the observation that traditional insolvency procedures are
heavy and lead to legal costs that many defaulting MSEs are not able to cover.311
Many
MSEs are managed by entrepreneurs, which may cause a higher risk of opportunistic
310
“Best practices in European restructuring”, edited by L. Stanghellini, R. Mokal, C. Paulus, I. Tirado,
2018, p 233 et seq. This Final Report of the project “Contractualised distress resolution in the shadow of
the law” was funded from the European Commission Grant JUST/2014/JCOO/AG/CIVI/7627.
311
See Guerra-Martinez (2021) for an analysis of the specific issues of MSE insolvency regimes discussed
in this paragraph.
207
behaviour than if the company is managed by an employed manager. The entrepreneur’s
emotional attachment to the company may furthermore generate a behavioural bias
towards keeping even a non-viable company alive as long as possible, which reduces the
recovery value. It also blocks production factors from a more productive use in other
companies.
Creditors of MSEs may also be small and uninformed, implying that legal advice could
be relatively costly for both creditors and debtors. Foreign investors may be less exposed
to MSEs given their lower transaction value compared to larger companies. There may
however be cases, especially in very innovative companies that are prepared to pay high
risk premia where foreign creditors find interest. Given the general public interest in
MSEs, there is a broader interest in making insolvency regimes also useful for MSEs.
Since the bankruptcy of a MSE has direct consequences for the entrepreneur,
interdependency with rules on second chance or debt discharge is a general concern.
The circumstance that domestic insolvency frameworks are not adapted properly to treat
insolvent micro- and small enterprises represents a lost opportunity for the economy, by
depriving those businesses from an orderly exit (if unviable) or from a sensible
restructuring (if viable), and due to the sheer size of the community of such enterprises –
to the internal market.
A simplification of rules as regards MSEs means a set of derogations from ordinary rules
where such rules are considered overly cumbersome for the purposes of MSEs, rather
than of a new separate procedure. Deviations from the general rules may include, for
example, access to orderly proceedings regardless of assets available to cover the costs;
easy entry conditions; lowered complexity and duration of the procedures; postponement
of the payment of procedural costs; the possible public funding of procedural costs;
rational creditors’ passivity be considered as approval to decisions; administration of
procedures mainly out-of-court; use of mandatory templates and of IT tools312
; providing
for a very short periods of a stay of a plan proposal.
More flexibility often means less safeguards for vulnerable stakeholders, which includes
tort (i.e. involuntary) creditors and cross-border creditors (not likely to be numerous with
these enterprises, though). It needs to be noted that the 2019 Restructuring Directive
already provides for debt discharge for entrepreneurs. The overall trend, set by the World
Bank, UNCITRAL or the United States is to simplify insolvency proceedings for
MSEs313
.
312
UNCITRAL recently adopted legislative recommendations for this purpose (as part 5 of its legislative
guide).
313
European Law Institute 2017 Instrument on insolvency law includes a specific chapter dedicated to this
topic and relevant recommendations in this sense. US adopted federal legislation in 2019 – Small Business
Reorganization Act (SBRA) which modified Chapter 11 of the Bankruptcy Code and which introduces a
simplified sub-procedure to the famous Chapter 11 of the US Bankruptcy Code for small and medium
enterprises. (first feedback from practice is positive).
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Table A5.7: Existence of special rules for SMEs in EU Member States
AT Not existent.
BE In Belgium, in the framework of the transposition of the EU Directive 2019/1023, the Federal
Parliament commissioned a group of experts to submit a transposition text for legislative approval.
In the framework of the discussions in this expert group, the question of the treatment of SMEs is
central and is being debated. Initially, it was planned to not apply the exemption for SMEs in Article
9(4)(3) of Directive 2019/1023, but recent discussions have brought this issue back into the
spotlight.
BG Not existent
HR Currently, Croatian legislative framework does not provide for a specific treatment of SMEs. Special
treatment has been reserved at this stage only for the companies of systemic importance for Republic
of Croatia under the Law on the procedure of extraordinary administration in commercial companies
of systemic importance for Republic of Croatia141. Companies of systemic importance are defined
as joint stock companies (dionička društva), excluding credit and financial institutions, who
cumulatively meet the following criteria: average of more than 5,000 employees in a calendar year,
including its affiliated companies, and debt of more than HRK 7,500,000,000 (approx. EUR 1
billion), including its affiliated companies.
CY There is no specific treatment of SMEs in insolvency regimes, except in the coordinated repayment
plan, which is only available to company’s employing less than 10 persons (this is the only
requirement).
CZ There are no special treatments for SMEs.
DK Not existent
EE No special rules for SMEs.
FI There are no provisions on specific treatment of small and medium-sized enterprises (SMEs) within
the Finnish insolvency regimes and the provisions on restructuring and bankruptcy proceedings are
applicable to all Finnish entities regardless of their size.
FR No information regarding a special insolvency procedure for SMEs. There is a simplified form of
liquidation proceedings available for SMEs, which last for a maximum of 6 or 12 months, depending
on the size.
DE If the debtor is a small enterprise and does not have the financial means to hire a practitioner in the
field of restructuring, there is the possibility of a ‘light’ version of restructuring proceedings (that is,
a restructuring moderator (Sanierungsmoderator), who will negotiate the restructuring settlement
agreement with the relevant creditors). This will require the confirmation by the rest ructuring
court, but unlike the restructuring plan itself, it cannot be forced upon dissenting creditors.
EL The new Bankruptcy Code provides for important amendments to the liquidation of small
companies. The law identifies small and medium-sized entities as those that meet at least two of the
following criteria:
assets or property up to EUR 350 000 (from EUR150 000 that was until now),
have a turnover amounting up to EUR 700 000 (from EUR 200 000 until now), and
employ up to 10 people on average (from 5 persons until now).
In case of individuals the asset criterion applies to the property of each individual ('small-scale
bankruptcies'). The application for the declaration of small-scale bankruptcies is submitted
electronically to the Electronic Solvency Register. Thirty days after the publication of the
application in the Registry and unless an intervention against the application is submitted, the
application is accepted by the Bankruptcy Court. The rapporteur and liquidator are appointed as
well. The debtor loses the right to enjoy the benefits of a hearing, where he can present his
arguments in a timely manner. Announcement of the creditors' claims must take place within three
months of publication of the court's decision. Based on estimates by Institute of Small Companies-
GSEBEE, 81% of small and medium-sized enterprises are potentially included in the new fast track
bankruptcy regime, based on turnover (data from FHW GSEBEE climate survey July 2020).
HU Insolvency regulations in Hungary are not different for large or small or medium-sized enterprises.
The distinction is not justified either, as each enterprise operates according to the same principles
and their organization is subject to similar rules.
IE Not existent
IT There is a derogatory regime - an ‘early warning’ procedure, aimed at detecting deterioration in a
business at an early stage and thereby signalling to the debtor the need to act as a matter of urgency
in order to: avoid insolvency; and continue its business activities.
209
Source: Deloitte/Grimaldi (2022).
4. Distributional elements of insolvency
4.1 Ranking of claims
The notion of ranking of claims determines which class of creditors gets paid first from
the proceeds of a liquidation. It also impacts on any restructuring negotiation to avoid
insolvency, since it is the background against which creditors assess their options.
Regarding the issue of ranking of claims, insolvency law’s core principle is that the
distribution of the remaining value follows a system of priority established by law and
separating between different classes of creditors whereby one can only proceed to
payments on the claims of a lower class if the claims of the higher class have been fully
satisfied. The treatment of secured creditors in insolvency is often also discussed as a
matter of ranking. Their position is determined by national property law. The regime of
how assets can be given as collateral with legal certainty is an important feature for
businesses to obtain financing in an economy. This feature is thus one of the most
In general terms, the early warning procedure is an out-of-court procedure characterised by privacy
and confidentiality. However, SMEs can apply to the court to obtain certain protective measures
such as a stay from enforcement actions by the SMEs’ creditors for a period of up to six months.
The agreement entered into at the end of the early warning procedure has the same effect as a
recovery plan underlying a voluntary composition agreement, thus exempting restructuring related
transactions from insolvency avoidance actions
LV There are no special rules for SMEs in Latvia.
LT There are no specific rules concerning the insolvency of SMEs.
LU Not found
MT The liquidation proceedings in Malta are all designed for Small and Medium Enterprises (SMEs)
because in Malta, over 95% of the companies are considered as SMEs
NL Not existent.
PL The current Polish Restructuring Law and the Bankruptcy law do not provide for a special treatment
of micro and SMEs.
PT SMEs are the focus of the Special Recovery Proceedings (Processo Especial de Revitalização –
PER), which is found in CIRE. It was through this logic of ‘preventive restructuring’ that the PER
was created to try to ‘save’ SMEs. In relation to SMEs, about insolvency proceedings, in addition to
CIRE, the Extrajudicial Business Recovery Regime (RERE), and the Business Recovery
Ombudsman (MRE) should be considered. The RERE is an instrument through which a debtor
(except for natural persons who are not business owners) in a difficult economic situation or of
eminent insolvency may enter into negotiations with all or some of its creditors with a view to
reaching an agreement - voluntary, free-content and, as a rule, confidential - tending to its recovery.
During a transitional period of 18 months from the date of its entry into force, debtors who are in a
situation of insolvency, assessed under the terms of the CIRE, may resort to the RERE.
RO Currently, there are no special tools or procedures used to help SMEs.
SK No provisions found.
SI Special rules for compulsory settlement proceedings over small, medium or large-sized company,
imposed in section 4.8 of the Financial Operations, Insolvency Proceedings and Compulsory
Winding-up Act (ZFPPIPP) regulate the following matters:
the process of appointing insolvency practitioners in compulsory settlement proceedings,
the creditor’s proposal to initiate compulsory settlement proceedings,
financial restructuring measures, lodging and testing of claims and value of collateral,
re-compulsory settlement proceedings after final confirmation of compulsory settlement
proceedings,
creditors’ agent.
ES There are no specific rules for SMEs
SE No specific rules for SMEs.
210
relevant elements in the creditors’ ranking in the CMU context. Bank loans are usually
secured (with collateral).
The issue of ranking claims can be resolved in as many ways as there are purposes of
insolvency law. A simple comparison highlights this interrelationship: In France, the
purpose of insolvency law is, among other things, but above all, to save as many jobs as
possible, whereas in Germany the equivalent purpose.
The ranking of claims increases uncertainty for investors as they cannot know how much
of the residual value of the company can be distributed among those creditors that do not
enjoy preferential treatment. When a company is wound down, employees, tax
authorities and other public authorities including those administering the procedure often
enjoy preferential treatment that puts them on top of other creditors.
The ranking of claims tends to be complex, which make the outcome very difficult to
anticipate for foreign investors since they may have neither a good understanding of the
rules in the destination country, how they area applied and how large the share of these
preferential creditors could be. They have therefore little possibility to assess the impact
of creditor ranking on the recovery value and the recovery time.
The rules on ranking of claims, and in particular those related to the protection of secured
credits, are of particular importance for foreign investors when they try to anticipate the
risks attached to their investments, as these affect the expected recovery rates.
Divergences in this area may thus have a significant impact on the cost of lending to
reflect such risks, and – in certain cases – may serve as a deterrent from engagement for
investors.
The principle of pari passu (alternatively: par condicio creditorum) constitutes a
fundamental principle of equity which implies that in a common situation (such as an
insolvency procedure) where the debtor's existing assets are insufficient to satisfy all his
creditors in full, losses are shared proportionally and equitably. However, this principle
has rarely - if ever - been applied without friction. The history of insolvency law can be
written in terms of an ongoing struggle for privileged status, i.e., a higher rank.
In many Member States, vulnerable creditor groups such as employees rank first. In other
Member States, employees’ rights are protected by social security systems, including e.g.
funds to pay outstanding wages. Outstanding taxes make up the bulk of the claims in
many insolvency proceedings, in particular for SMEs, and in some Member States, they
rank first (aka the fiscal privilege). They also stand in the way of many restructurings
because the administration does not have discretion to forgive tax debts.
More specifically insolvency regimes respect security rights arrangements of the debtor
as long as they are permitted under local civil/contract law and do not constitute a
fraudulent transfer of assets under respective insolvency law provisions. Indeed, secured
transactions play a key role in a well-functioning market economy and discrepancies and
211
uncertainties in the legal framework governing security rights are the main reasons for
the high costs and unavailability of credit314
.
Post-commencement preferences are justified on the basis of a specific legitimate interest
defined in advance to allow each creditor to calculate ex ante their risks in view of the
legal position in a possible future insolvency of their debtor. Thus, to ensure a proper
functioning of the market, having regards to the creditors’ perspective, what matters is to
identify which are the legitimate interests which justify these preferences interference
with the pre-commencement entitlements. It is obvious that these legitimate interests
have to be identified in the interests of all the creditors in so far they provide a priority
over the ordinary claims (i.e., so called super -priority).
The first legitimate interest is to guarantee orderly procedures by securing the payment of
costs of proceedings. The proper and correct functioning of the systems ultimate
safeguards the interests and rights of all the stakeholders. Administrative expenses (i.e.,
claims resulting from the debtors’ estate) should be granted with a priority as well
considering that they are costs resulting from the efforts to organise and orderly liquidate
all assets in the estate or reorganise the debtor’s business in the interest of all creditors.
The second legitimate interest is in securing the going concern (in a going concern sale as
well as in a piecemeal auction process, i.e., prepack sale) which is possible only of if the
assets forming the business are not torn apart at the outset of proceedings by secured
creditors who enforces their pre-commencement entitlements. In effect, a going concern
sale or a prepack sale usually means a higher return for creditors than the receivables
from a piecemeal liquidation.
Lastly, a further legitimate interest may be identified in the protection of interim and/or
new financing as far as it sustains the restructuring proceedings or the sales as a going
concern (see para below on treatment of interim or new financing). As of today, claims
from interim finance enjoy the priority of administrative expenses, which means they
usually rank ahead of pre-commencement creditors, but not affect the rights of secured
creditors. In Belgium, however, interim finance may rank ahead of secured creditors.
when and to the extent that secured creditors have benefited from such finance
themselves. In France, for example, a super-priority is reported meaning that claims
deriving from new finance arrangements in a safeguard proceeding or a judicial
reorganization even rank above other secured and unsecured creditors. In Italy, in
arrangement with creditors and in debt restructuring agreements, both interim and new
finance – consequential to these agreements – are ranked ahead of secured creditors.
Where securing the claim induces creditors to invest more funds, ultimately encouraging
the credit system, providing super-priorities not grounded in the interests of all creditors
makes it extremely difficult to ex ante assess the extent of super-preferred claims and,
thus, almost impossible to precisely calculate credit risks which usually makes credit
more expensive.
Table A5.8 Rules and practices in EU Member States on the ranking of creditors
Types of creditors Ranking
314
World Bank, Principles for Effective Insolvency and Creditor/Debtor Regimes, cit. See principles A2;
A3.
212
AT secured (or preferential),
and unsecured creditors.
Priority claims are defined as claims against the insolvency estate that are
satisfied prior to all other insolvency creditors. Priority claims are reduced
to certain kinds of claims and include:
 costs of the proceedings,
 costs regarding administration, sustainment and supply of the insolvency
estate,
 claims of the employees for current salary,
 claims in connection with the termination of certain kinds of employees,
claims resulting from the fulfilment of certain contracts,
 claims based on transactions processed by the insolvency administrator,
 claims based on unjust enrichment of the insolvency estate, and
 compensation for the members of privileged associations for the
protection of creditors’ rights.
Filing priority claims with the insolvency court separately is not required.
These claims are filed directly with the insolvency administrator.
BE Under Art. 2 of BCEL,
the following categories
of creditors can be
distinguished, each
subsequent category
holding a lower priority
against the previous one:
 Preferential creditors:
 Special privilege,
 General
privilege,
 ordinary creditors.
The competing claims to the estate in bankruptcy occur automatically
under law. The bankrupt debtor's assets are used exclusively to satisfy
creditors existing on the day of bankruptcy and whose claim is fixed on the
day of bankruptcy. In principle, an equal distribution among the creditors
will take place, except when the regime of mortgages and liens allows for
derogations. When a bankrupt's property is realised, liens and mortgages
entitle the lien holder to be paid preferentially from the proceeds with
priority over other unsecured creditors.
The ‘debts of the bankruptcy estate’ (management costs and expenses,
taxes, environmental debts, debts arising from the trustee in bankruptcy's
initiatives or quasi-contracts) constitute preferential claims on the estate in
bankruptcy.
BG Creditors are divided
into several classes
according to Art. 722 of
the BCA, each
subsequent class having
a lower priority against
the previous one:
 Secured creditors
(mortgage, property
subject to lien etc.);
 Privileged creditors:
employment,
bankruptcy costs etc.;
 Unsecured creditors.
The following procedure for settling claims by way of making distributions
from the estate converted into money, stipulated in Article 722 of the
Commerce Act, is followed:
 claims secured by a pledge or mortgage, garnishment or distraint,
registered in accordance with the Liens Act — from the proceeds from
security realisation;
 claims in respect of which the right to lien is exercised — from the value
of the asset subject to lien;
 expenses incurred in the insolvency proceedings (stamp duty payable
upon filing and all other expenses incurred until the entry into force of
the ruling opening insolvency proceedings; the receiver’s remuneration;
the claims of workers and employees when the debtor’s enterprise has
not ceased trading; the costs incurred on augmentation, administration,
valuation and distribution of the insolvency estate; and the maintenance
payments in favour of the debtor and their family);
 claims arising from employment contracts that existed before insolvency
proceedings were opened;
 statutory compensation payable to third parties by the debtor;
 public-law debts to the central government or municipalities, including
but not limited to those arising from taxes, customs duties, fees and
mandatory social security contributions, if they arose before the date on
which insolvency proceedings were opened;
 claims that arose after the commencement of insolvency and unpaid by
the respective due date;
 any remaining unsecured claims that arose before insolvency
proceedings were opened;
 statutory or contractual interest on unsecured debts due after the date on
which insolvency proceedings were opened;
 loans granted to the debtor by a business partner or shareholder;
 donations;
 the expenses incurred by the creditors in connection with the insolvency
proceedings, except for the expenses under Article 629b of the
Commerce Act (prepaid initial litigation expenses).
HR As a general rule, Pursuant to the CBL, claims and their creditors are ranked respectively as it
213
bankruptcy creditors are
classified in payment
ranks according to their
claims. Creditors of
subsequent payment
rank cannot be settled
until the creditors from
the previous rank have
been completely settled.
Creditors of the same
payment rank will be
settled proportionally to
their claims.
follows:
 bankruptcy estate – claims of the bankruptcy estate include bankruptcy
proceedings costs and other claims of the bankruptcy estate (attorney
claims etc.);
 creditors with separate satisfactory right– are not bankruptcy creditors
and they may request extraction of objects to which they are entitled out
of the bankruptcy estate;
 secured creditors– their claims are satisfied from secured assets. Secured
creditors are also bankruptcy creditors only if the debtor is personally
liable to them, and they are entitled to satisfy their claims from the
bankruptcy estate only if they waived their right of satisfaction from the
secured assets or are unable to do so;
 regular bankruptcy creditors– are unsubordinated and unsecured
creditors whose claims are classified into ranks depending on the
particular claim as follows:
 first rank – claims of employees and of former employees of the
bankruptcy debtor which arose from employment until the opening
of the bankruptcy proceedings and certain related claims,
 second rank – all the other claims towards the bankruptcy debtor,
except for the subordinated claims,
 subordinated bankruptcy creditors– are the last in line for settlement and
their rank within the group depends on the type of their claim.
CY In Cyprus, creditors are
divided in:
 secured creditors;
 preferential creditors,
and;
 unsecured creditors.
The order of distribution of assets in all forms of winding-up and in
receivership is as follows:
 the costs of the winding-up;
 the preferential debts. Preferential claims are defined in section 300 of
the Companies Law and comprise:
 all government and local taxes and duties due at the date of
liquidation and having become due and payable within 12 months
before that date and, in the case of assessed taxes, not exceeding
one year's assessment;
 all sums due to employees, including wages, up to one year's
accrued holiday pay, deductions from wages (such as provident
fund contributions) and compensation for injury.
 Claims of employees who are shareholders or directors may not
rank as preferential depending on the nature of the shareholding or
directorship (section 300(1), Companies Law, Cap. 113).
 A person who has advanced funds to pay employees will have a
subrogated preferential claim to the extent that the employees'
direct preferential claims have been diminished because of the
advances (Sec 300(2), CCL).
 any amount secured by a floating charge;
 the unsecured ordinary creditors;
 any deferred debts such as sums due to members in respect of dividends
declared but not paid;
 any share capital of the company. Where there are different classes of
share capital, such as preference shares, their respective rankings will be
determined by the terms on which they were issued.
CZ There are three
categories of creditors:
 secured creditors;
 preferential creditors;
e.g. insolvency
administrator, state
authorities,
employees, suppliers
delivering their
supply after decision
on insolvency;
 unsecured creditors.
After the decision approving the final report becomes final, the insolvency
practitioner submits a draft order on the distribution of the estate to the
insolvency court, stating how much should be paid for each claim in the
revised list of registered claims. On that basis, the insolvency court issues
an order on the distribution of the estate, in which it determines the
amounts to be paid to creditors. All creditors included in the distribution
schedule are satisfied in proportion to the ascertained amount of their
claim. Before the distribution, as yet unpaid claims which may be met at
any time during the bankruptcy proceedings are met, specifically:
 claims against the estate – the cash expenses and fee of the insolvency
practitioner, costs associated with the maintenance and administration of
the debtor’s estate, taxes, charges, social security contributions, the state
employment policy contribution, public health insurance contributions,
etc.;
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 equivalent claims – the labour-law claims of the debtor’s employees,
creditors’ claims to compensation for damage to health, government
claims, etc.;
 secured claims.
DK Danish insolvency law
does not divide creditors
into classes, apart from
(fully) secured and
unsecured creditors.
Creditors with valid and
enforceable security do
not form part of the
ranking. However, if the
security does not fully
cover a creditor’s claim,
they are viewed as an
unsecured creditor in
relation to the unsecured
part of their claim.
The order of priority of the creditors is governed by the DBA. The order is
the following:
 Costs and fees related to the administration of the estate;
 Costs related to a vain restructuring attempt or vain attempts at an
overall arrangement with the debtor’s creditors prior to the bankruptcy;
 Employees’ claims;
 Duties on goods that are subject to duty, e.g. alcoholic and tobacco
goods;
 Unsecured creditors, e.g. an ordinary receivable based on an invoice, tax
and VAT claims etc.;
 Claims for interest after the issue of the bankruptcy order, gifts and
fines.
EE The creditors are divided
into:
 secured creditors;
 unsecured creditors.
Before money is paid on the basis of distribution ratios, payments relating
to bankruptcy proceedings are made out of the bankruptcy estate in the
following order:
 claims arising from the consequences of exclusion or recovery of assets;
 maintenance support payable to the debtor and their dependants;
 consolidated obligations;
 costs and expenses incurred in the bankruptcy proceedings.
After these payments have been made, the creditors’ claims are satisfied in
the following order:
 admitted claims secured by a pledge;
 other admitted claims that were lodged within the term set;
 other claims that were not lodged within the term set, but that were
admitted.
FI The three typical
creditor classes are
secured creditors,
unsecured creditors and
floating charge holders.
According to Ranking Act, the priority order of creditors is, as follows:
 Secured creditors to the extent of the value of the secured asset;
 Preferential claims: court fees, the bankruptcy trustee’s fees, debt
incurred during the proceedings, i.e. after the court’s decision;
 Priority claims: creditors holding a business mortgage;
 The claims that are satisfied last according to the Act on the Ranking of
Claims are:
 interest and penalty for late payment for the period after the
commencement of the bankruptcy;
 certain public penalties imposed on the debtor as a result of a criminal
offense or illegal proceedings;
 a claim based on a bond issued by the debtor company if the terms of the
loan provide a lower priority than the other obligations of the issuer;
 a claim based on a loan that may be paid with its interest in the event of
bankruptcy only with a lower priority to all other creditors; and
 a claim based on the Gift Promises Act (625/1947, as amended).
FR Creditors are divided
into:
 preferential creditors
(both secured and
preferential rights),
or;
 unsecured creditors.
A creditor may thus
have preferential status:
 because he is in
possession of a
guarantee granted by
his debtor or obtained
Preferential creditors are not all equal. Where several preferential creditors
compete, they are paid in an order fixed by law, but still before the
unsecured creditors.
The unsecured creditors are paid from the debtor’s remaining assets, after
payment of the preferential creditors. The distribution is carried out on a
pro rata basis.
The following ranking is applicable:
 ‘Super preference’ of wage claims: payment of remuneration for the last
60 days of work prior to the judgment opening the proceedings;
 Court costs duly arising after the judgment opening the proceedings to
meet the requirements of conducting the proceedings: costs relating to
preservation, realisation of assets and distribution of proceeds among the
creditors (inventory and advertising costs, remuneration of court-
215
from a court decision,
or
 because a preferential
right is conferred on
him by law due to his
status.
appointed representatives, etc.);
 Claims guaranteed by the conciliation preference: benefits creditors who
provide a fresh injection of cash or supply new goods or services with a
view to ensuring the continuation and survival of the business;
 Preference of claims arising after the judgment opening the proceedings:
claims arising to meet the requirements of conducting the proceedings or
of provisional maintenance of the business, or claims arising in
exchange for goods or services supplied to the debtor during the
maintenance of the business or to perform a current contract maintained
by the liquidator, or claims arising for the everyday needs of the debtor
who is a natural person;
 Claims guaranteed by the general preference of employees: payment of
the remuneration for six months of work prior to the judgment opening
the proceedings;
 Claims guaranteed by a special preference or by a mortgage;
 Unsecured claims.
DE Creditors are divided
into:
 secured creditors;
 unsecured creditors;
and
 subordinated
creditors.
In regular insolvency proceedings (Regelinsolvenz) as well as in
procedures with an insolvency plan (Insolvenzplan), creditors and
contributories rank as follows on a debtor's insolvency:
 Owners. Any assets, which belong to third parties, must be surrendered
to these owners;
 Secured creditors (immovable property). A land charge or mortgage
holder has a claim for foreclosure;
 Secured creditors (movable assets, and claims). Secured debts are paid
using the sale proceeds of the relevant assets. An insolvency
administrator is generally entitled to sell such encumbered assets to a
third party free from encumbrances, or to collect such encumbered
claims. The insolvency administrator disburses the proceeds to the
secured creditor up to a maximum amount of the secured claim, and
he/she will withhold a standard fee of 9% from the respective proceeds
for the insolvency estate. Any surplus in excess of the secured claim will
remain with the insolvency estate and will become available to other
creditors;
 Expenses/costs of insolvency proceedings. This includes court fees for
the insolvency proceedings, remuneration earned and expenses incurred
by the preliminary insolvency administrator, the insolvency
administrator and the members of the creditors' committee. The
expenses/costs of insolvency proceedings rank in higher priority to all
other debts (including employees);
 Insolvency estate creditors. These are claims entitled to full satisfaction
and include, for example, claims resulting from new contracts entered
into by the insolvency administrator with third parties, such as suppliers;
 Insolvency creditors. All unsecured creditors (including employees) who
registered their claims in writing with the insolvency administrator and
whose claims have seen no objection by the insolvency administrator or
an insolvency creditor. Insolvency creditors will receive payment on a
pro rata basis;
 Subordinated creditors. Subordinated claims are (among others):
 claims for payment of interest accrued after the opening of
insolvency proceedings;
 costs incurred by individual insolvency creditors due to their
participation in the insolvency proceedings;
 claims for repayment of shareholder loans or similar claims.
 Claims subordinated by agreement. Such claims rank behind statutory
subordinated claims;
 Shareholders. Any remaining surplus will be distributed to the debtor, or
in the case of companies, to the shareholders.
EL Articles 975–978 of the
Code of Civil Procedure
include specific
provisions on the
priority of claims of
The distinction between claims with a general privilege, claims with a
special privilege and unsecured claims is critical in the context of
distribution of the proceeds of liquidation of the assets over which security
has been created. Claims with a general or special privilege are satisfied in
priority over unsecured claims.
216
creditors and distinguish
between:
 claims with a general
privilege, which
applies by operation
of law and concerns,
among others, claims
on account of valued
added tax and other
taxes, claims of
public law entities,
claims of employees
and social security
funds;
 claims with a special
privilege, which
include those of
secured creditors; and
 unsecured claims.
Under Article 977 of the Greek Code of Civil Procedure, if there are only
claims with a general privilege and claims with a special privilege, the
former may only be satisfied up to one-third of the proceeds of liquidation
of the bankruptcy estate.
If there are claims of all three categories, those with a general privilege are
satisfied up to 25 per cent, those with a special privilege are satisfied up to
65 per cent and unsecured claims are satisfied up to 10 per cent of the
proceeds of liquidation of the bankruptcy estate.
If there are no claims with a special privilege, those with a general
privilege are satisfied up to 70 per cent and unsecured claims are satisfied
up to 30 per cent of the proceeds of liquidation of the bankruptcy estate.
If there are only claims with a special privilege and unsecured claims, those
with a special privilege are satisfied up to 90 per cent and unsecured claims
are satisfied up to 10 per cent of the proceeds of liquidation of the
bankruptcy estate.
HU Creditors are divided
into:
 secured creditors;
 unsecured creditors.
The order of payment of creditors is as follows:
 the costs of liquidation;
 the unsatisfied part of the pledged receivables (secured claim) incurred
before the commencement date of the liquidation up to the amount of
the sales revenue of the pledged property excluding VAT, so that the
amount deducted at the time of payment to the pledgee and the amount
set aside for debts shall be used to pay the pledged receivables;
 alimony, life annuity, compensation annuity, mining supplement, and
cash benefits paid to a member of an agricultural cooperative in lieu of
backyard land or crops, which are due to the holder for the rest of his
life;
 other claims of private persons arising from a non-economic activity,
other than claims based on a bond (including, in particular, claims
arising from defective performance, damages, including the amount
quantified by the liquidator in the ordinary course of business-related
warranty or guarantee obligations), the claims of small and micro
enterprises, primary agricultural producers and the claims of the
Common Fund of Cooperative Credit Institutions based on the fact that
the Common Fund of Cooperative Credit Institution has become the
legal successor of the depositors with the insured deposit or the holder
of their claims;
 overdue social security contributions and private pension fund
membership fees, taxes and public debts collectable as taxes, as well as
grants from other international sources based on repayable public
finances, the European Union or an international agreement, as well as
utilities and condominium costs and claims on the Cooperative Credit
Institutions' Common Fund for Equity, other than those referred to in
point (d);
 claims of other unsecured creditors;
 default interest and default penalties irrespectively of the date and legal
ground of their arising, as well as debts of a surcharge and fine; and
 claims owed to directors, executive position employees of the debtor or
by their spouses or close relatives, or claims of companies under the
influence of the debtor, claims originating from agreements without
consideration and claims owed to a member (shareholder) having a
majority influence in the debtor (excluding mandatory minimum wage,
wage and salary claims not exceeding twice the guaranteed wage and
not exceeding six months' average wage in the case of an employee paid
exclusively for performance pay).
IE Creditors are divided
into:
 preferential creditors;
Preferential Debt: In Personal Insolvency Arrangements (PIA) and Debt
Settlement Arrangements (DSA), preferential debts are paid per the terms
of the agreement, and in bankruptcy preferential debts rank directly after
bankruptcy fees and any costs or expenses incurred by the Official
217
 secured creditors;
 unsecured creditors
Assignee (OA) when dealing with the bankruptcy estate.
Debts that are considered to be preferential are:
 Certain amounts due to the Revenue Commissioners, such as Income
Tax, Capital Gains Tax, VAT, PAYE/PRSI etc.;
 Certain Local Authority Rates incurred in the 12 months prior to the
debtor’s date of adjudication or entering into the arrangement
(commencement date). This includes local council rates and charges;
 Wages or salaries owed to any employees of the debtor for the 4 months
previous to the commencement date;
 Any pension-related, holiday-related or sick absence pay due to these
employees.
Secured Debt: In a PIA, the secured creditor is bound by the terms of the
agreement. In a normal PIA the secured lender is paid out of the debtor’s
income at whatever figure is agreed to in the arrangement. The debtor’s
remaining monthly income, if any, after the debtor’s RLEs and PIP’s fees
are deducted is paid to their unsecured creditors by way of dividend.
Bankruptcy does not affect the rights of a secured creditor. Such a creditor
may take one of the following three options with regard their secured debt:
 Rely on their security – this means they effectively stay outside the
bankruptcy;
 Realise or value their security and claim for the shortfall (if any) – the
creditor will calculate the fair market value of the secured asset and
subtract this from the total owing. The resultant shortfall (if any) is
admitted into the bankruptcy estate as an unsecured claim. During this
process, the secured creditor may sell the asset in question;
 Abandon their security – the secured creditor has an option to abandon
their security entirely and have their claim admitted into the bankruptcy
estate as an unsecured claim.
Unsecured Debt: In both a PIA and a DSA, the debts of unsecured creditors
are settled under the agreed terms of the arrangement. In a DRN if a
person’s circumstances improve during the supervision period, s/he must
tell the ISI and depending on the level of change, may be asked to make
some contribution to what he/she owes.
The claims of unsecured creditors of a bankruptcy estate are ranked
equally. Their debts are settled with the disbursement of any funds that
remain after bankruptcy fees, OA expenses and preferential debts have
been settled.
IT Creditors are divided
into:
 secured creditors and
 unsecured creditors.
There are three
categories of claims:
 senior-ranked claims;
 secured claims, i.e.
claims with priority;
 unsecured, i.e.
unsecured claims.
Article 111 of the IBL lays down preference criteria for the method of
liquidation of these claims. According to that article, the sums obtained
from the liquidation must be disbursed in the following order:
 to mortgage and pledge claims, in order to the liquidation of the secured
assets;
 senior-ranked claims;
 other creditors who have a right of pre-emption;
 unsecured creditors.
Senior-ranked claims must be satisfied in their entirety, provided that the
assets are sufficient, but even for these there may be causes of pre-emption,
which must be taken into account in their liquidation. Such claims are
those so defined by law (e.g. in the case of the provisional exercise of the
business by the bankrupt).
If the assets are insufficient, senior-ranked claims must be distributed
according to the criteria of graduation and proportionality, in accordance
with the order assigned by the law (Article 111-bis, IBL).
Article 111- bis makes an exception to this principle, stating that ‘the
proceeds from the liquidation of assets subject to pledge and mortgage for
the part intended for secured creditors’ cannot be allocated to satisfy
senior-ranked claims.’
As regards preferential creditors, which may be either creditors with a
general or special lien (Article 2745 et seq. of the Civil Code) or creditors
secured by a pledge or mortgage, the reference article is 111-quater of the
Bankruptcy Law and Articles 54 and 55 of the Bankruptcy Law.
In particular, claims secured by a general lien have a right of pre-emption
for the capital, expenses and interest, within the limits set out in Articles 54
218
and 55, on the price obtained from the liquidation of the movable assets, on
which they compete in a single ranking with claims secured by a special
lien on movable assets, according to the degree provided for by law.
Claims secured by mortgage and lien and those secured by special
privilege shall have a right of pre-emption for the principal, expenses and
interest, within the limits set out in Articles 54 and 55, on the price
obtained from the assets pledged as collateral.
If the security has not yet been realized, or for the part for which they
remain unsatisfied by the security, they shall participate in the distribution
of the assets in the same manner and in competition with the unsecured,
that is to say in proportion to the amount of the claim for which they have
been admitted.
LV Information not available.
LT Bankruptcies, creditors’ claims are satisfied in two stages. At the first stage, creditors’ claims are paid
without the interest and default penalties; interest and penalties are paid at the second stage. At each
stage, the creditor’s claims of each lower rank are satisfied after the creditor’s claims of the superior rank
in the respective stage have been completely satisfied. If the assets are insufficient to fully satisfy the
claims of one rank in one stage, the said claims are to be satisfied in proportion to the amount due to each
creditor.
 First-rank claims are employee claims arising out of the employment relationship; claims for damage
compensation due to mutilation or other bodily injury, contraction of an occupational disease or death
as a result of an accident at work; and claims of agricultural businesses requesting payment for
agricultural products sold;
 Second-rank claims are claims in respect of taxes and other contributions to State and social insurance
budgets and compulsory health insurance contributions; in respect of money borrowed on behalf of the
State and loans secured by a guarantee provided by the State or a guarantee institution vouched for by
the State; and in respect of support granted from European Union funds and State budget funds.
All other claims from creditors are third-rank claims.
LU Some creditors with a security or preferential claim are paid first. Preferential creditors are ranked in a
legal order that is public policy (property landlords, mortgagees, creditors with securities over the
business capital and, in particular, the public treasury in the broadest sense).
In general, the trustee refers to Articles 2096 to 2098, 2101 and 2102 of the Civil Code (Code civil). The
net assets available to unsecured creditors must be distributed on a pro rata basis in accordance with
Article 561(1) of the Commercial Code.
Once the trustee knows the amount of the fees set by the court, has ranked the preferential creditors and
knows the amount left to be distributed between the unsecured creditors, he/she draws up an asset
distribution plan that is submitted in the first instance to the official receiver. In accordance with Article
533 of the Commercial Code, the trustee invites all creditors to the presentation of accounts meeting by
registered letter, to which he/she attaches a copy of the asset distribution plan.
MT Under Maltese legislation there is no definite list of ranking of creditors, since ranking is not found in a
specific legislation but is found in various legislation. The legislation which deals with ranking of claims
can: be found in
 Article 302 of Chapter 386 MCA states that in the winding up of a company the assets of which are
insufficient to meet the liabilities, the rights of secured and unsecured creditors and the priority and
ranking of their debts shall be regulated by the law for the time being in force;
 Article 535 of Chapter 13 MCA also states that creditors having pledges, privileges or hypothecs shall
be ranked according to the law for the time being in force.
In both cases the law states that ranking of debt shall be regulated by the law for the time being in force.
Various specific laws which grant priorities to certain claims, as is the case with the Value Added Tax
Act, the Employment and Industrial Relations Act, and the Social Security Act.
NL A leading principle of Dutch bankruptcy law is the paritas creditorum (pari passum), which means that
all creditors have an equal right to the debtor’s assets and that the proceeds of the bankrupt estate are
distributed among them pro rata parte. However, there are creditors to whom the principle of paritas
creditorum (pari passum) does not apply:
 Creditors that hold a security interest; and
 Creditors that have a preference by virtue of law.
Therefore, the paritas creditorum (pari passum) applies to those who have an unsecured claim and do not
have a right of preference, i.e. the ordinary creditors share pro rata parte in the amount available to them.
A further exception can be made for subordinated claims.
PL The claims to be paid out of the bankruptcy estate fall into the following categories:
 the first category - claims under an employment relationship for the period before the declaration of
bankruptcy (applies mutatis mutandis to the claims of the Fund for Guaranteed Employee Benefits for
the repayment, out of the bankruptcy estate, of benefits paid out to the bankrupt party’s employees) ;
219
 the second category - other claims, if not met in other categories, in particular taxes and public levies
as well as other claims in respect of social insurance contributions;
 the third category - interest on claims included in the categories above, in the order in which the
principal amounts are paid as well as court and administrative fines and claims regarding donations
and legacies;
 the fourth category - partners’ or shareholders’ claims regarding a loan or another legal act with
similar effects, especially the supply of goods on deferred terms to the bankrupt party that was a
capital company in the five years preceding the declaration of bankruptcy, with interest.
The sum falling to the creditor is counted first of all towards the main claim, then to interest and other
collateral claims, with the costs of proceedings being covered at the end.
Claims secured with a mortgage, pledge, registered pledge, fiscal pledge and maritime mortgage as well
as rights expiring according to the provisions of the Act and the effects of disclosing personal rights and
claims encumbering real property, a right to perpetual usufruct, a cooperative member’s ownership right
to residential premises or a sea-going vessel entered in the shipping register, are met out of the sum
obtained through the liquidation of the encumbered party minus the costs of liquidating that party and
other costs of bankruptcy proceedings in an amount no higher than a tenth of the sum obtained through
the liquidation; however, the deducted part of the costs of bankruptcy proceedings cannot be higher than
the part corresponding to the proportion of the value of the encumbered object to the value of the total
bankruptcy estate.
Those claims and rights are met in the order of their priority. If the sum obtained through the liquidation
of the encumbered party is used to meet both claims secured by a mortgage and expiring rights as well as
personal rights and claims, the priority depends on the moment as which the entry of a mortgage, right or
claim in the land and mortgage register begins to have effect.
PT The graduation of claims and corresponding hierarchy or priority of payment shall take place in the
following order:
 secured claims;
 privileged claims
 common claims; and
 subordinated claims.
The secured claims: Secured claims are the ones that benefit from real guarantees, including special
credit privileges, up to the value of the assets subject to the guarantee, are paid. Secured credits are
credits benefiting from: mortgage, pledge, special credit privileges, right of retention, among others.
Secured credits are only paid with the proceeds of the sale of the assets encumbered by the guarantee,
after:
 deduction of the costs of the respective settlement (payment of any commissions to auctioneers, costs
of notarial acts such as the execution of the public deed or the authentication instrument, etc.) and;
 deducting 10% of the sale proceeds to pay the insolvent estate's debts.
Privileged claims: In second place and, if the balance remains, the privileged credits are paid, which are
the credits that benefit from general, movable or immovable privileges of credit. General preferential
claims are those that apply to the generality of the debtor's assets.
Only claims that benefit from general preferential claims are classified as preferential claims and not
those that benefit from special preferential claims, which are those that are over specific assets of the
debtor. In effect, special preferential claims are considered as real guarantees and are therefore classified
as secured claims.
Common claims: In the third place and if the balance subsists, the common claims are paid, which are the
claims that do not benefit from real guarantees (secured claims), nor from general privileges of credit
(privileged claims), nor do they qualify as subordinated claims.
Thus, common claims are, for example:
 credits that benefit only from personal guarantees, such as surety and personal guarantee;
 credits that, despite benefiting from a real security, have not been able to be paid with the value of the
sale of the secured asset, as mentioned above under the heading ‘1st place, secured credits’;
 credits whose real security had been extinguished upon the declaration of insolvency (this is the case
of some general and special privileges of the State, among others);
 claims whose security in rem is completely removed in the context of insolvency proceedings. This is
the case of claims secured by a real guarantee of a procedural nature, such as seizure, attachment and
judicial mortgage.
Subordinated claims: In 4th and last place, if a balance still remains (which is very unlikely),
subordinated claims are paid. Subordinated claims are, for example:
 claims held by persons especially related to the debtor, whether a natural or legal person; or the,
 claims for shareholder loans held by the partners of private limited companies or single partner limited
companies, among others.
RO The funds obtained from the sale of assets and rights from the debtor’s estate which are secured in favour
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of the creditor on a preferential basis will be distributed in the following order:
 fees, stamp duties and any other expenditure arising out of the sale of the assets concerned, including
expenses required for the conservation and administration of those assets, expenses incurred by the
creditor under the forced recovery procedure, claims of utilities suppliers which arise after the opening
of the procedure, and remuneration due to persons employed in the common interest of all creditors on
the date of distribution, which will be borne on a pro rata basis in proportion to the value of all the
debtor’s assets;
 claims of creditors enjoying preference that arise during the insolvency proceedings; these claims
include capital, interest and other ancillaries, where applicable;
 claims of creditors enjoying preference, including the entire capital, interest, and increases and
penalties of any kind. If the sums realised from the sale of these assets is insufficient for the full
payment of the claims concerned, the creditors have an unsecured or public budget claim, as the case
may be, for the difference, which will be ranked with the other claims in the appropriate category. If,
after the payment of the sums referred to previously, a surplus remains, it will be deposited by the
court-appointed liquidator in the account of the debtor’s estate..
SK In bankruptcy
proceedings, the
distribution of the
proceeds varies
according to the type of
creditor:
 secured creditors,
 unsecured creditors,
 creditors with
subordinated claims,
 contractual penalties
and claims from
creditors related to the
debtor.
A creditor may lodge all claims against the debtor, including claims that
are not yet due for payment. A secured claim (with a security interest in the
debtor’s assets) can also be lodged. A secured claim a creditor has against a
person other than the debtor can be lodged if the security interest concerns
the debtor’s assets (there are certain restrictions on satisfaction in such
cases); if such a claim is not lodged, it is treated as a weaker claim against
the estate.
Future claims and contingent claims can also be lodged. Claims that are not
lodged by means of an application are called claims against the estate.
They are divided into claims against the general estate and claims against a
separate estate (secured with a security interest).
The insolvency practitioner satisfies claims against the general estate on an
ongoing basis; if claims of the same ranking against the general estate
cannot be fully satisfied, they are satisfied proportionally.
Claims against a separate estate relate to the separate estate. The insolvency
practitioner satisfies claims against the separate estate on an ongoing basis; if
claims of the same ranking against the separate estate cannot be fully
satisfied, they are satisfied proportionally.
SI The level of priority of creditors in insolvency proceedings is determined in ZFPPIPP (in descending
order) is:
 creditors with secured claims (creditors with a right to separate satisfaction) and exclusionary creditors
(creditor with an exclusion right),
 creditors with unsecured priority claims (salaries, compensations, taxes etc.),
 creditors with unsecured ordinary claims and,
creditors with unsecured subordinated claims.
ES Once insolvency proceedings are opened, the claims of all of the creditors, whether unsecured or
preferential are included among the debtor’s liabilities. The purpose here, based on the principles of
parcondicio creditorum (pari passu) and compliance with the ‘dividend law’, is to give all claims equal
treatment in the context of the debtor’s verified insolvency and when it comes to settling all of its debts.
There is a difference in creditors and their respective claims:
Claims with special preference (Article 270) include:
 Claims secured with a real estate mortgage, a chattel mortgage, or with a registered lien on the
mortgaged or pledged assets or rights;
 Claims secured by the pledging of income from encumbered property;
 Loan claims on fixed assets, including the claims of workers on the objects manufactured by them
while they are the property or in the possession of the debtor;
 Claims on financial lease payments or purchase at fixed prices of movable or immovable assets, to the
benefit of the lessors or sellers and, if applicable, the financial backers, on assets leased or sold with
reservation of title, with a prohibition on disposal or with a condition subsequent in the case of non-
payment;
 Claims guaranteed with securities represented in account entries, on the encumbered securities;
 Claims secured by a pledge established in public documents, on pledged assets or rights that are in the
possession of the creditor or of a third party.
Claims with general preference (Article 280) include:
 Wage claims;
 The amounts corresponding to tax and social security withholdings owed by the debtor in compliance
with a legal obligation;
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 Claims of natural persons arising from freelance work and those that correspond to authors for the
assignment of the exploitation rights of works subject to intellectual property protection, accrued
during the six months prior to the insolvency order;
 Tax claims and other public law claims. This preferential right may be applied to up to 50 % of the
overall claims of the tax authority and the overall claims of the social security system, respectively;
 Claims for non-contractual civil liability;
 Claims arising from new cash income granted in the context of a refinancing agreement that meets the
conditions laid down in Article 71(6) and of the amount not recognised as a claim against the
insolvency estate;
 Up to 50 % of the amount of the claims held by the creditor that applied for the insolvency
proceedings and which are not considered subordinate.
Subordinate claims (Article 281) include:
 Claims that have been communicated late, except where these relate to claims under forced
recognition or due to court decisions;
 Claims that, on the basis of contractual agreement, are subordinated;
 Claims for surcharges and interest;
 Claims for fines and penalties;
 Claims held by any persons with a special relationship with the debtor under the terms established in
this Law;
 Claims arising from revocatory actions due to a person having been declared to have acted in bad faith
in the contested act;
 Claims arising from contracts with reciprocal obligations or, in the case of reinstatement, in the
situations laid down in the provision.
SE The Preference Act regulates the entitlements of the creditors to receive payment in the event of
bankruptcy. Creditor with preference is either special or general.
A special preference relates to certain property (examples being a right of pledge, a right of retention, or
a mortgage on immovable property).
A general preference relates to all property included in the debtor’s bankruptcy estate.
A special preference takes precedence over a general preference. Any claims that do not enjoy a
preference have the same rights among themselves. It may also have been provided in an agreement that
a creditor is entitled to payment only after all other creditors have been satisfied
A preference continues in being even if the claim is transferred or attached or otherwise passes to another
party. If a claim enjoys a special preference with respect to certain property, but the property in question
is insufficient to satisfy the claim, the remainder is treated as a claim without preference.
Source: Deloitte/Grimaldi (2022)
4.2 Creditor committees
In all insolvency proceedings, it is essential to ensure a fair balance between the interests
of the debtor's business and those of the relevant creditors. In order to ensure that the
common interest of creditors is adequately protected (and, therefore, regardless of
individual subjective positions that are protected based on the ranking of claims), almost
all Member States provide for the establishment of committees representing creditors315
.
These committees are responsible for verifying that collective insolvency or restructuring
proceedings are managed in a way that protects their interests and ensures the
involvement of individual creditors, who might otherwise not participate in the
proceedings due to their lack of importance in the decision-making process. Although
creditors' committees are provided for in almost all Member States, the rules for them do
315
The establishment of committees is left to the decision of the general meeting of creditors, which
expresses its will, to the debtor or to the Court, to have its interests represented by such a committee. The
establishment of such a committee has no purpose in the event that the insolvency office holder is able to
adequately guarantee the interests of the creditors, and in all cases where participation of such a committee
is not justified by the complexity of the procedure (e.g. in case of restructuring procedures regarding
SMEs). ELI Instrument - Rescue of Business in Insolvency Law, Wessels, Madaus, Boon, 6 September
2017, paragraph 4.4.3, no. 438.
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not appear to be standardized, either in terms of their constitution and composition, or in
terms of their powers and voting rules.
Creditors can be a diverse group and creditors’ committees can help make their interests
heard in an insolvency proceeding, including minority creditors lending cross-border, as
well as allow for decision-making. If given a proper mandate, a creditors’ committee can
help especially cross-border creditors exercise their rights and ensure their fair treatment,
hence make cross-border lending more attractive. The role given to creditors’ committees
in an insolvency regime is directly linked with the roles attributed to other actors (courts,
insolvency practitioners) – and ensure altogether the appropriate balance between the
interests of creditors and debtors.
It is widely recognised that the interests of relevant creditors may be best served by
coordinating their response to a debtor in financial difficulty through the establishment of
(at least) one representative committee of creditors.316
The establishment of such a
committee is held to facilitate the active participation of creditors in insolvency
proceedings, and to ensure fairness and integrity of proceedings.317
Creditors’
committees also contribute significantly to the supervision of the activity of the
insolvency practitioner or so-called ‘debtor in possession’, considering the progress and
quality of their work while at the same time avoiding wasteful interferences.
Rules relating to creditors’ committees in insolvency proceedings are very different
across Member States, these rules diverge as to the role attributed to the committees, the
grounds for establishing them, their structure, form, powers, majority requirements etc.318
These differences result in various levels of the actual input the creditors may have in the
development of the insolvency procedure.
However, irrespective of any differences in individual national laws, an adequate
participation of committees in insolvency and restructuring proceedings appears to be
necessary for the purpose of maximising the recovery. At the same time, the participation
of committees in proceedings should not hamper swiftness of the proceedings. In fact,
being an instrument apt to guarantee one of the subjective positions involved, i.e. the
creditors’ position, its existence shall be adequately balanced with the other subjective
positions involved and, more generally, with the effectiveness of the procedure. In this
sense, it is worth mentioning that there are those rules that tend to exclude or limit the
presence of such a body when the company is small and/or the number of creditors is
limited. In such cases, the position of the creditors does not require any guarantee body,
as it is already subject to protection by ordinary means.
Creditors’ committees help find solutions that maximise the recovery value, but could
give rise to hold out problems and delays. The existence of creditor committees widens
the options of what can be done with the defaulted company, increasing the probability of
remaining a going concern or selling assets at higher values to some creditors. Creditor
316
Principles of European Insolvency Law (2003), Principle 2.4; see also INSOL International Workout
Principles II (2017), Principle 4, and Asian Bankers Association’s Workout Guidelines (2013) for informal
workouts.
317
UNCITRAL Legislative Guide (2004), Recommendation 129, and World Bank Principles (2016),
Principle C7.1
318
See mapping of these differences in Leeds Study, pp. 192.
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committees allow creditors to cooperate, which is important given that multi-creditor
lending relationships are common in the EU.319
Negotiations with creditors can be costly
for both the debtor and the insolvency practitioner tasked to liquidate a company.
Creditors may have different views about the best way forward, face collective action
problems and can generate holdout problems that may prevent the insolvency
practitioners from achieving an agreement that maximises the collective interest of all
creditors. Foreign investors may feel disadvantaged by language barriers and
unfamiliarity with the proceedings. Unless they hold a sizeable claim against the
defaulting company, foreign creditors are likely to face information disadvantages and
are less familiar with the position of other creditors, therewith face a higher threat of
collusion. Well-specified rules are therefore important for them.
A further cost element originates from the activities required to recover some value from
a defaulting investment, such as representation in a creditor committee and the
bargaining with the debtor, other creditors and insolvency practitioners. Foreign lenders’
lack of familiarity with the rules may also raise concerns about having one’s interests
adequately represented in the process. Representation in creditor committees is more
costly for foreign investors and bargaining with other foreign creditors is more difficult
for them.
Table A5.9 Rules and practices in EU Member States on creditors’ committees
AT A creditors’ committee is not necessarily to be always appointed in insolvency proceedings. In some
case is mandatory and in general where it seems advisable on account of the nature or the particular
scale of the business. If the sale or lease of the business or part of the business is pending (Sec 117(1),
number 1, AIA), a creditors’ committee must always be appointed. It serves to supervise and assist the
insolvency administrator (Sec 89(1) AIA). The administrator must consult the creditors’ committee in
respect of important arrangements (Sec 114(1) AIA). For certain important transactions (e.g. sale of the
business), the consent of the creditors’ committee is a precondition for validity. A creditors’ committee
consists of three to seven members. The appointment is made by the court of its own motion or on
application. Not only creditors, but also other natural or legal persons may be appointed as members.
BE General Creditors’ committees are not defined. However, creditors influence certain
aspects during proceedings as an assembly. For example, under Art. XX.37 of the
BCEL, all creditors or at least two of them may accept the debtor’s proposal to
conclude an amicable agreement. They can also cast a vote upon the
reorganization plan, in accordance with Arts. XX.67 to XX.83. of the BCEL.
Voting rights According to Art. XX.78 of the BCEL, ‘the reorganization plan is deemed to have
been approved by the creditors when it obtains the favourable vote of the majority
of them, represented by their claims and half of all the sums due in principal
(double majority).’ The creditor can take part in the vote in person, by written
power of attorney, deposited in the register, or through their lawyer who can act
without a special power of attorney. For the calculation of the majorities, the
creditors and the amounts due appearing on the list of creditors filed by the
debtor in accordance with article XX.77 (only the suspended creditors whose plan
affects the rights can take part in the vote) are taken into account, as well as the
creditors whose claims have subsequently been provisionally admitted in
application of Articles XX.68 and XX.69. Creditors who did not take part in the vote
and the claims they hold are not considered for the calculation of majorities.
319
The analysis of bank data by Fell et al (2021) reveal that large firms have on average 2.7 lenders,
medium size enterprises 2.5 and small firms on average 2.1. Moreover, their data shows that multi-bank
credit relationships are overrepresented in non-performing loans.
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BG Appointment According to Art. 672 of the BCA, the first meeting of creditors shall elect a
creditors’ committee comprising at least three and not more than nine members.
The creditors’ committee must comprise members who represent the secured and
non-secured creditors, except those referred to in Article 616 2co of the
Commerce Act.
The creditors’ committee duties are (Art 681 BCA):
 to assist and supervises the actions of the receiver in relation to the
management of the debtor’s assets;
 to conduct checks on the commercial records of the debtor and available
cash funds;
 to give opinions on the continuation of the business of the debtor’s
enterprise and on the remuneration of the provisional and ex officio
receiver, the actions taken in relation to estate conversion into cash and
on the liability of the receiver in other cases.
Meeting of
creditors
Under Art. 677 of the BCA, the meeting of creditors shall:
 hear a report of the receiver in bankruptcy about his activities;
 hear a report of the creditors' committee;
 elect a receiver in bankruptcy, if none has been elected; in such case Art.
672, Para 2 shall apply;
 pass a resolution for the removal of the receiver in bankruptcy and his
substitution;
 determine the amount of the current remuneration of the receiver in
bankruptcy, any alteration thereof, as well as the amount of his final
remuneration;
 elect a creditors' committee, if none has been elected, or change its
members;
 propose to the court the amount of the support money for the debtor and
his family;
 determine the order and the way of conversion of the property of the
debtor into cash, the method and terms for evaluation of the property, the
choice of assessors and the determination of their remuneration.
Meeting of
creditors
voting rights
According to Art, 676 BCA, the meeting of creditors shall be held, regardless of the
number of persons present and shall be chaired by the judge responsible for the
case. Resolutions shall be passed by simple majority, unless the law prescribes
otherwise.
HR Appointment Creditors committee can be appointed by the court, prior to the first hearing of
creditors. Creditors with the claims with in the highest amount and creditors with
small claims must both be represented in the committee of creditors. Also, a
representative of the debtor’s former employees must be represented in the
committee of creditors unless they as creditors participate in the proceedings with
insignificant claims.
Creditors with the right to seek separate satisfaction (razlučni vjerovnici) and
persons who are not creditors, but who might contribute to the work of the
committee with their expert knowledge, may be appointed members of the
committee of creditors.
The committee of creditors must have an odd number of members, nine at the
most. If the number of creditors is less than five, all creditors are awarded the
powers of the committee of creditors.
Powers The committee of creditors must oversee the liquidator and aid them in pursuit of
business activities, as well as monitor operations pursuant to Article 217 of the
CBL, examine the books and other records related to the business, and order
verification of turnover and the amount of cash.
Among its responsibilities, the committee can:
 examine reports by the liquidator on the course of the bankruptcy
proceedings and on the condition of the bankruptcy estate;
 review business ledgers and the entire documentation that has been taken
over by the liquidator;
 lodge objections with the court against acts of the liquidator;
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 grant approval of the cost estimates for the bankruptcy proceedings;
 give the court an opinion on liquidation of the debtor's assets, at the
request of the court;
 give the court an opinion on the continuation of ongoing business
operations or on the activities of the debtor, at the request of the court;
 give the court an opinion on recognition of justified losses that were
established in the inventory of assets, at the request of the court.
CY Creditors may appoint a ‘supervisory committee’ if they wish to do so. There are certain actions for
which the liquidator needs the permission from the court or from the supervisory committee, and
there are some other actions that remain vested with the court (for instance the preparation of the
contributors list, order a contributor to pay etc.). In addition, a board of creditors may vote upon the
company’s winding up during the voluntary winding-up by creditors procedure.
CZ General Creditor bodies are: the creditors’ meeting; the creditors’ committee (or the
creditors’ representative).
Creditors’
meeting
The creditors’ meeting is responsible for electing and removing members and
alternate members of the creditors’ committee (or a creditors’ representative).
The creditors’ meeting may reserve for its competence anything falling within the
remit of creditor bodies. If no creditors’ committee or creditors’ representative is
appointed, the creditors’ meeting acts in that capacity instead, unless otherwise
provided by law.
If more than 50 creditors are registered, the creditors’ meeting must set up a
creditors’ committee. If it is not obliged to do this, a creditors’ representative may
take the place of the committee.
Creditors’
committee
The creditors’ committee exercises the powers of creditor bodies, except in
matters that are within the remit of the creditors’ meeting or have been reserved
by the creditors’ meeting for its own competence. In particular, the creditors’
committee supervises the insolvency practitioner’s activities and is entitled to
submit proposals to the insolvency court regarding the insolvency proceedings.
The creditors’ committee protects the common interest of creditors and, in
cooperation with the insolvency practitioner, helps to achieve the purpose of the
insolvency proceedings. The provisions on creditors’ committees apply mutatis
mutandis to creditors’ representatives.
DK In bankruptcy proceedings, a qualified minority of creditors may require the formation of a creditors’
committee, consisting of up to three members.
The insolvency court decides how the members of such a committee are to be elected, in order to
ensure a diverse representation of the general body of creditors.
The trustee must inform the creditors’ committee of any significant actions taken and of any
particularly significant actions that are planned to be taken, unless doing so would be detrimental for
the estate.
The creditors’ committee is strictly of an advisory nature to the trustee and the insolvency court, and
has no special powers.
In addition, where a consensual restructuring is feasible, major creditors can form an ad hoc ‘steering
committee’, as the success of the restructuring is dependent upon all creditors acceding to the
restructuring plan.
EE Not per se. There is a general meeting of creditors, who participates in the conduct of bankruptcy
proceedings
The general meeting of creditors can decide to elect a ‘bankruptcy committee’.
In accordance with BA, the bankruptcy committee shall protect the interests of all the creditors,
monitor the activities of the trustee and perform other duties provided by law in bankruptcy
proceedings.
FI General The most important decision-making body is the creditors’ meeting, but other
decision-making procedures may also be applied.
The court may appoint a committee of creditors to represent the creditors and to
act as an advisory body to assist the insolvency practitioner in the performance of
their duties.
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The committee represents all groups of creditors, and its duties are to assist the
insolvency practitioner in the performance of their duties and to monitor the
activities of the insolvency practitioner on behalf of the creditors. The committee
makes its decisions by simple majority.
Voting rights Under Sec 52 of the Restructuring Act (RA), the restructuring programme is
confirmed by a majority vote in each class of creditors. The programme may be
confirmed even if minority creditors vote against it. Generally, a class of creditors
is deemed to have approved the restructuring programme, if the programme is
supported by:
 more than 50% of the creditors that took part in the vote in a class of
creditors; and
 creditors representing more than 50% of the total monetary value of the
claims represented in the vote for that class of creditors.
FR Where the debtor has a workforce of more than 150 employees and turnover exceeding EUR 20
million, a creditors’ committee is set up which will give its opinion on the draft plans to clear the
liabilities. The court may also decide to apply these provisions below those thresholds.
The creditors’ committees convene different categories of creditors at separate meetings in order to
submit to them proposals which they will be able to discuss and on which they will decide collectively,
i.e. minority creditors will have to abide by the decision of majority creditors.
There is a credit institutions committee composed of finance companies and credit or similar
institutions, and a committee composed of the principal suppliers of goods or services. Where there
are bondholders, a general meeting of all creditors holding bonds issued in France or abroad is
convened in order to discuss the draft plan adopted by the creditors’ committees.
Creditors’ committees must be consulted by the court-appointed administrator on the draft plan and
vote in favour of a plan before the court can take its decision.
Where creditors’ committees exist, any creditor who is a member of a committee can propose
alternatives to the draft plan presented by the debtor.
DE General The Insolvency Code grants considerable influence over the insolvency proceedings
to the creditors.
The creditors exercise their rights through the creditors’ meeting (Sections 74 et
seq. GIC) or a creditors’ committee (Gläubigerausschuss) that may optionally be
set up by the creditors’ meeting (Sections 68 et seq. GIC).
Whereas the creditors’ meeting is the central body through which the creditors
take their decisions, the creditors’ committee is a body through which they
exercise supervision. The creditors’ meeting is convened by the insolvency court
(Section 74(1), first sentence, GIC), which also chairs it (Section 76(1) GIC).
All preferred creditors, all ordinary creditors, the insolvency administrator, the
members of the creditors’ committee and the debtor are entitled to attend the
creditors’ meeting (Section 74(1), second sentence, GIC). If an enterprise exceeds
certain size criteria, the insolvency court has to appoint a provisional creditors’
committee even before the opening of the insolvency proceedings (Section 22a
GIC). This committee is involved in the appointment of the insolvency
administrator and plays a role in any decision on the ordering of debtor-in-
possession management (Sections 56a and 270b(3) GIC).
Voting rights
creditors’
meeting
Decisions of the creditors’ meeting are in principle adopted by simple majority,
with the majority being decided not by the number of votes, but by the sum of the
claims held by the creditors voting (Section 76(2) GIC).
EL General Not existent.
Voting rights For creditors’ meetings, in order to conclude an agreement on Pre-insolvency
business recovery process, 50% consent of each category of creditors is required
(secured and other claims), with the possibility of bypassing these majorities under
certain conditions. Creditors’ consent can also be provided through electronic
voting.
HU General Creditors may form creditors’ committees or elect a representative of the creditors
with whom the liquidator must consult and whom the liquidator is obliged to
inform and whose implicit or explicit consent must be obtained for certain
measures.
If the creditors have formed a creditors’ committee the liquidator shall be required
to obtain the consent of the committee for continuing business operations of the
debtor. The same rule applies if the creditors have selected a creditors’
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representative.
Voting rights The liquidator may lease or transfer the debtor's assets only with the approval of
the creditors 'committee or the creditors' representative or two-thirds of the
creditors to a person or entity who, at the time of order of liquidation or within
one year, was the executive officer of the debtor, or the debtor's sole or majority
owner.
IE Not existent. However, in certain liquidations there is a requirement for the creditors to form a
committee of inspection which consists of representatives of the creditor group. The committee of
inspection has a supervisory role (once reserved to the High Court) in the conduct of the liquidation
and has the power to authorise certain acts of the liquidator and the liquidator's remuneration, costs
and expenses.
IT The creditors' committee is composed of three or five creditors and appointed by the delegated judge,
after hearing the curator and the creditors. The appointment is made within 30 days of the bankruptcy
sentence, and within 10 days of the appointment the committee appoints the chairman. The creditors'
committee performs:
 Management functions:
 authorizes all acts of extraordinary administration to be carried out by the curator;
 authorizes the new curator to propose the action of responsibility against the
revoked curator;
 authorizes the receiver to take over pending contracts in place of the bankrupt;
 approves the liquidation program presented by the liquidator.
 Advisory functions:
 in all cases provided for by law (necessary advisory activity);
 when the court deems it appropriate (possible advisory activity).
 Control functions:
 must endorse the register kept by the liquidator ;
 may make comments on the summary report on the activities carried out and
drawn up every 6 months by the receiver;
 has the right to view any deed or document contained in the bankruptcy file;
 is informed by the receiver on the outcome of the sales carried out.
LV There is no creditors’ committee. Other key players in insolvency proceedings in Latvia are the
insolvency court (and the insolvency judge), the insolvency administrator, creditors acting at a
creditors’ meeting, the debtor’s representative, the insolvency administration and the Latvian
Association of Certified Administrators.
LT Creditors convene at a general assembly to decide on the establishment (and members) of the
creditors’ committee, to investigate any creditors’ complaints regarding the conduct of the insolvency
administrator, to request any reports from the insolvency administrator and to determine the level of
the insolvency administrator’s fees.
The creditors’ committee supervises the activities of the insolvency administrator and protects the
interest of the creditors. Its rights and duties, as a general rule, are established by creditors as a whole
at their general meeting.
LU General On the basis of the debtor's proposed composition, the juge délégué issues a
notice to attend to the creditors by means of a publication in the daily newspapers
and by registered letter at least 8 days before the meeting is held. The juge
délégué ensures that the composition procedure is carried out correctly and chairs
the meeting of creditors. On the day of the meeting, the juge délégué reports on
the state of the debtor's affairs. The debtor then presents the proposed scheme of
composition directly to the creditors. The creditors are then invited to declare the
amount of their claims in writing and to declare whether or not they agree to the
composition. The composition may only be established with the approval of the
majority of the creditors, representing 3/4 of the total claims accepted definitively
or provisionally. A creditor may be represented by an authorised representative.
Creditors who are unable to present themselves beforehand may submit any
claims to the court clerk, along with the supporting documentation, during the
week following the meeting of creditors and prior to the final deliberation
meeting. They will then be required to accept or refuse the composition. Following
the meeting of creditors, the court convenes another meeting in order to
definitively approve the composition.
Voting rights A successful application requires the consent of a majority of creditors
representing 75% of the outstanding debt. Creditors with claims which are secured
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by priority rights, mortgages or pledges can only vote if they waive those rights.
The court will not ratify the application if the legal provisions are not met or for
reasons of public interest or the interests of creditors. If the court deems that the
conditions are not met, it declares the company bankrupt.
MT No creditors’ committee exists per se. A creditors’ meeting does exists and has the following
responsibilities. In a court winding up, creditors can make submissions to the court on the hearing of a
winding-up application. In a creditors’ voluntary winding up, following the resolution for winding up,
the directors must call a meeting of the creditors and submit to them a full statement detailing the
position of the company’s affairs, together with a list of the company’s creditors and the estimated
amount of their claims. The creditors may also nominate the liquidator. If the creditors and the
company nominate different persons, the person nominated by the creditors will be liquidator. The
creditors may also form a liquidation committee.
If the winding up continues for more than 12 months, the liquidator must summon a general meeting
of the company and a meeting of the creditors at the end of the first 12-month period and each
succeeding 12-month period, during which he or she must submit an account of his or her acts and
dealings and the conduct of the winding up during the preceding 12 months, including a summary of
receipts and expenditure.
NL If desired by the creditors, the court may nominate a committee of creditors to advise the trustee.
However, the trustee is not bound by the committee's recommendations. In practice, the nomination
of a creditors’ committee is uncommon.
PL The participation of the creditors in the bankruptcy proceedings is governed by Articles 189-213 of the
Bankruptcy Act. Creditors whose claims have been admitted are entitled to take part in the creditors’
meeting and vote.
The bankruptcy judge, acting ex officio or on request, establishes the creditors’ committee and
appoints and dismisses its members. The committee assists the receiver, controls his actions, examines
the state of the funds forming the bankruptcy estate, grants permission for actions that may be
performed only with the permission from the creditors’ committee and expresses its opinion on other
matters if requested by the bankruptcy judge or receiver. The creditors’ committee may request the
bankrupt party or the receiver to provide clarification and it may examine books and documents
concerning the bankruptcy in so far as that does not infringe business confidentiality.
PT Once the insolvency proceedings are held open, the court shall appoint the members of a creditors’
committee, comprising between three and five creditors representing different ranking claims,
presided over by the debtor’s major creditor. This committee shall cooperate with the insolvency
administrator and is responsible for supervising the performance of the duties of the latter.
RO After the first meeting has been convened the delegated judge and then the creditors may appoint a
creditors committee, which is made up, depending on the number of creditors, of three or five
creditors from among those with the right to vote, with preference claims, budgetary claims and
unsecured claims in order of value. The creditors’ committee (comitetul creditorilor) has the following
terms of reference:
 to review the debtor’s situation and to issue recommendations to the creditors’ meeting with
regard to the continuation of the debtor's business and proposed reorganisation plans;
 to negotiate terms of appointment with the administrator or liquidator whom the creditors
wish to see appointed by the court;
 to take notice of the reports prepared by the court-appointed administrator or liquidator, to
review them and, where applicable, to file objections thereto;
 to prepare reports to be presented at the creditors’ meeting in regard to the measures taken
by the court-appointed administrator or liquidator and their effects, and to propose other
measures, giving reasons;
 to request the removal of the debtor’s right to manage its affairs;
 to file legal actions for the annulment of certain fraudulent acts or transactions performed by
the debtor to the detriment of creditors when such legal actions have not been brought by the
court-appointed administrator or liquidator.
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SK Duties and
powers
Committee’s duties:
 instructs and makes recommendations to the insolvency practitioner
concerning managing the assets, running the debtor’s enterprise or a part
thereof, and realising the assets. This also includes hiring out the assets or
a substantial part thereof (with restrictions when the enterprise is in
operation).
 concludes an agreement on the temporary provision of funds in
connection with running the debtor’s enterprise;
 continues the running of the enterprise if the debtor is a particular type of
financial institution;
 establishing a lien on the debtor’s assets;
 concludes an agreement in connection with running the debtor’s
enterprise, in which the insolvency practitioner undertakes to continue
performance beyond a particular time period or a particular percentage of
turnover;
SI The creditors' committee shall be formed:
 in compulsory settlement proceedings, and;
 in bankruptcy proceedings, if the formation of a creditors' committee is requested by the
creditors.
The number of members of the creditors' committee shall be determined by the court. The number of
members of the creditors' committee must be odd and may not be less than three, unless the number
of creditors is less than three, and not more than 11. In determining the number of members of the
creditors' committee, the court must take into account the total number of creditors.
The number of members of the creditors' committee shall be determined by the court:
 if it is competent to decide on the appointment of the members of the creditors 'committee: by
a decision appointing the creditors' committee,
 if the members of the creditors' committee are elected by the creditors: by a decision on the
election of the creditors' committee.
In compulsory settlement proceedings, the court appoints the members of the creditors' committee by
a decision on the institution of these proceedings. The court must appoint creditors as members who
are the holders of ordinary claims against the debtor in highest total amount.
ES In general, creditors are represented in the creditors' committee, which will be considered validly
constituted when the following quorum is reached:
 claims for an amount of at least half of the ordinary aggregate liabilities; or
 creditors who represent at least half of the class of claims that could be affected by the
contents of the proposed Company Voluntary agreement (CVA).
SE In case of Business Reorganisation, the committee consists of no more than three members. In some
cases, employees will also have the right to appoint a representative as an additional member of the
committee. The court may appoint further members if there are particular grounds for doing so. The
business reorganisation officer must consult the creditors’ committee with regard to matters of
importance if there is nothing to prevent this. In Bankruptcy the creditors have no formal role in the
bankruptcy procedure. The administrator must consult creditors that are particularly affected if there is
nothing to prevent this. The creditor are also entitled to receive information from the administrator,
and to attend the taking of the oath, for example. A creditor may request that a supervisor be
appointed to monitor the administration of the bankruptcy estate on the creditor’s behalf.
Source: Deloitte/Grimaldi (2022).
230
ANNEX 6: RECENT INSOLVENCY-RELATED REFORMS IN MEMBER
STATES
Insolvency reforms in the Member States were often implemented in the context of either
an economic adjustment programme or following targeted country specific
recommendations in the European Semester context. The reforms described below extend
beyond in-court corporate insolvency proceedings and in many cases also covers reforms
to restructuring and out-of-court enforcement procedures.
1. Insolvency reforms introduced in the context of economic adjustment
programmes of Greece, Portugal, Cyprus, Romania and Latvia320.
In Greece, a series of legislative initiatives taken in 2015-2018 improved collateral
auction procedures and introduced the option and, soon after that, the mandatory conduct
of electronic auctions for foreclosures of movable and immovable property, while setting
up a mechanism for out-of-court debt settlement for indebted businesses and
professionals, with limited results321
. Given that the actual implementation of
foreclosures and insolvency procedures remained fragmentary and complicated and the
relevant conduct of judiciary procedures overly lengthy, a new integrated corporate and
personal insolvency framework was adopted in October 2020 and fully entered into force
in June 2021. Pre-bankruptcy proceedings are available under the new code, including an
automated out of court process and a prepack business recovery process contingent to
court ratification. The platforms under the new insolvency framework have started
gradually bearing results, particularly with respect to out-of-court settlements and further
improvements are continuously being developed.
In Portugal, the amendment of the insolvency law was introduced in spring 2012. Later
in the year, both in-court fast-track mechanisms and out-of-court tools were made
operational to facilitate the solution of the insolvency cases. However, the insolvency
framework required further amendments to improve the corporates' rescue and
restructuring process. As a result, it was followed-up in the European Semester process:
Portugal has received country specific recommendations (CSRs) linked to these issues
(2014, 2017, 2018, 2019), following its exit from the Programme. As a consequence,
further amendments have been introduced in the insolvency framework. In 2017, the use
of electronic means was broadened, while the possibility of creditors to choose the
insolvency practitioner was restricted to complex cases. In 2022, Law 9/2022 was
adopted in January and entered into force in April, which aims at simplifying the
insolvency and civil enforcement judicial procedures. The amendments to the insolvency
code, in particular, are expected to simplify the processing of verification and ranking of
creditor claims. Furthermore, the creditor rights will be strengthened with the revision of
the preferential regime for the right of retention in relation to mortgage credit. Other
320
In the case of Romania and Latvia, reforms were enacted in the context of the Balance of payments assistance
programmes of 2013-2015 and 2009-2011 respectively.
321
In parallel, various amendments were introduced throughout the Greek programs to the problematic personal
insolvency law, which was initially adopted in 2010 with the intention to enable the restructuring of personal debt and
protect vulnerable primary residence owners but resulted in procedural abuses by strategic defaulters.
231
legislative procedures are also scheduled to enter into force in the coming months and are
expected to streamline and speed up insolvency processes in Portugal. The revision of the
legal framework for insolvency and recovery forms also part of a wider reform envisaged
under the country’s national Recovery and Resilience Plan.
In Cyprus, a legislative package with regard to the insolvency and foreclosure
procedures was introduced in 2015 but once again, amendments were required. As a
result, a new legislative package was introduced in July 2018 in order to make the
measures more effective. E-auctions were introduced in 2019 but additional amendments,
which were introduced in 2019 and entered into force in 2020, may create some delays in
the foreclosure process for new NPLs. The need for further improvements was also
reflected in the CSRs received by Cyprus following its exit from the program in 2016,
2017 and 2018. More recently, the Recovery and Resilience Plan of Cyprus has included
a reform to reinforce and strengthen the insolvency framework by enhancing the
functionality of existing systems and introducing new ones in order to create efficiencies
through automation.
Romania adopted a new law regarding insolvency and bankruptcy in June 2014 while in
May 2015 a new personal insolvency law was introduced, which entered into force in
December 2015, drawing upon good international practices and including more balanced
provisions for both debtors and creditors.
In Latvia, a new insolvency law came into force in 2010, concerning both legal and
natural persons, following international best practices. The law was further amended in
2015, in an effort to reduce the length of insolvency proceedings, when electronic
auctions were introduced. A revision in the legal framework in 2016 aimed at improving
the accountability and public oversight of insolvency administrators, in line with country
specific recommendations (CSRs) received by Latvia in the period 2013-2015, following
its exit from the balance of payments assistance program.
2. Insolvency reforms introduced in the European Semester context
The push for streamlining insolvency procedures has not been associated only with
countries under a macroeconomic adjustment program. Several countries facing
challenges with their stock of non-performing loans received country specific
recommendations (CSRs) in the past to expressly enhance the efficiency and speed of
their insolvency and recovery proceedings and facilitate debt restructuring and/or out‐of‐
court settlement. Apart from countries already mentioned above, these included Croatia
(2014, 2015), Bulgaria (2014-2018, 2020), Italy (2016-2018322
), Slovenia (2013, 2014),
Spain (2013, 2014) and Hungary (2014), without taking into account CSRs referring to
the need to enhance the efficiency of the judicial system as a whole. This has led to
certain insolvency reforms being implemented in many of these Member States. For
example:
 In Croatia the Bankruptcy Act (BA) is the main law governing the insolvency of
businesses (including individual entrepreneurs) in Croatia and came into force in
322
A reference to insolvency is also included in the 2019 CSR4 for Italy: “Reduce the length of civil trials at all
instances by enforcing and streamlining procedural rules, including those under consideration by the legislator and with
a special focus on insolvency regimes.[…]”
232
2015. The adopted BA also improved the pre-insolvency procedure. More recently,
the Recovery and Resilience Plan of Croatia has included a reform to amend in 2022
the Bankruptcy Act and the Consumer Insolvency Act with the aim to ensure greater
efficiency of insolvency proceedings.
 Bulgaria has introduced new legislation on business restructuring which entered into
force on 1 July 2017, although some important elements remain missing. To tackle
with those, a Roadmap on the insolvency and stabilisation framework for bankruptcy
was adopted in June 2019, aiming for an amendment of the Commercial Law and the
relevant by-laws323
. However, the work on the legislative amendments to the
Commercial Act and other relevant primary and secondary legislation in line with
the requirements of Directive (ЕС) 2019/1023 is still ongoing. The Bulgarian
authorities have committed to complete this reform by July 2022, in line with
Bulgaria’s commitments following its ERM II entry. This has also been reflected as
a distinct reform in the country’s national Recovery and Resilience Plan.
 Slovenia completed the reform of its insolvency framework in 2014, allowing more
restructuring opportunities to companies in financial difficulties.
 Hungary reformed its personal insolvency legislation in 2015 in order to address the
issue of personal over-indebtedness and to protect the home of indebted persons
from enforcement.
 In Italy, alternative in-court and out-of-court workout arrangements had been
introduced over the previous years, with a rather muted impact. The government
finalised in early 2019 the reform of the insolvency framework but its entry into
force was postponed to 2022 due to the impact of the pandemic. Further
improvements in the insolvency framework were incorporated as a deliverable under
the Italian Recovery and Resilience Plan, following a staggered approach. A new
out-of-court settlement arrangement was introduced, the so called “Composizione
negoziata”. The new arrangement introduces the possibility for the entrepreneur to
use an independent expert to propose a negotiated procedure with creditors.
Moreover, between August and December 2021, Italy took various legislative and
administrative decisions to flank the new out-of-court settlement arrangement. As a
result, an online platform for the out-of-court resolution of disputes was put in place
in November 2021, allowing exchanges of documents between debtors and creditors,
and pre-approved automated restructuring procedures were introduced for debts
below EUR 30.000.
 Because of the financial crisis, Spain reformed its bankruptcy code four times (once
in 2009, once in 2012 and twice in 2014) with the aim of decreasing the duration of
bankruptcy procedures and increasing the percentage of successful reorganisations.
In 2015 another reform of the code was approved with the purpose of solving the
over-indebtedness problems of individuals, by granting them a second chance by
323
The planned legislative changes included the introduction of early warning systems for businesses and debt
forgiveness procedures for entrepreneurs, easy and fast access to insolvency proceedings, stabilisation procedures for
legal entities and entrepreneurs, accelerated procedures for small businesses and shortened procedural deadlines in the
insolvency proceedings.
233
means of the cancellation of the debts that they are unable to pay if some
requirements are met. More recently, Spain has included in its national Recovery and
Resilience Plan further changes to the Insolvency Law, to be completed in 2022,
which aim to set-up a more efficient second chance procedure for natural persons,
allowing for debt relief without prior liquidation of the insolvent party's assets, and
at the same time establish a swifter and more cost-efficient special procedure for
micro SMEs, fully processed by electronic means.
 Malta324 reformed its insolvency legal framework in 2017 in order to reduce the
costs and duration of relevant procedures and increase the availability of qualified
practitioners. It adopted legislative measures to facilitate company restructurings,
allowed for a Second Chance for honest directors who have concurred with the law
and introduced voluntary mediation procedures in insolvency, so that professional
mediators could amicably resolve matters, if agreed by at least 60% of the
companies’ creditors. There are also legislative measures to facilitate company
restructurings.
3. Insolvency reforms announced in introduced in Member States’ Recovery and
Resilience Plans
The table below lists what Member States committed to undertake in the area of
insolvency in their recovery and resilience plans. Many of the reform elements relate to
the transposition of the Restructuring Directive (EU 2019/1023), the creation of early
warning tools, out-of-court procedures and areas out of scope of the EU initiative such
as regulation of insolvency practitioners and specialisation of courts. The right-hand
column informs about reform measures that cover items in direction of the measures
pursued with this initiative.
Measures outside the scope of the targeted
harmonisation
Measures in a similar direction
BG Transposition of Directive (EU) 2019/1023, provide for
stricter regulation of the profession of insolvency
practitioners, early warning tools, legal guarantees for
traders to register the actual management addresses when
registering companies.
Use of electronic means in insolvency,
restructuring and discharge of debt
procedures, duties of the directors in
case of likelihood of insolvency
EL Upgrade of the early warning and the preventive debt
restructuring mechanism
Digitalisation
ES A more efficient second chance procedure for natural
persons, allowing for debt relief without prior liquidation
of the insolvent party's assets, restructuring plans as a
new pre-insolvency instrument
Establish a special procedure for
micro SMEs
HR Amendments to the Bankruptcy Act and the Consumer
Insolvency Act which shall ensure greater efficiency of
insolvency proceedings, improve the system of
organization and appointment of insolvency practitioners
and supervision of the performance of the service,
Amendment of Article 212 of the
Bankruptcy Act relating to avoidance
proceedings
324
Malta received in 2013 a Country Specific Recommendation on the overall efficiency of the judicial system, which
included, for example, a reference to the need for speedier resolution of insolvency cases.
234
implement Directive (EU) 2019/1023 (Restructuring
Directive)
IT Review out-of-court settlement arrangements; put in
place early warning mechanisms and access to
information prior to the insolvency phase; shift towards
specialisation of courts (commercial law, insolvency
division/chamber) as well as pre-court institutions to
manage insolvency proceedings in insolvency; allow
secured creditors to be paid first (before tax claims and
employee claims); allow businesses to grant a non-
possessory security right.
Digitalisation of restructuring and
insolvency proceedings
CY Modernising the Cyprus Companies Law by using best
practices from other common law jurisdictions, the law
review shall include the insolvency proceedings under
the Companies Law, which are Liquidations,
Receivership and Examinership.
LT A digital tool (a wizard) helping to draw up a
restructuring plan of a company
Insolvency portal, a digital tool (a
wizard) helping in the process of asset
valuation to apply international
valuation standards by providing best
practices, examples and explanations
in one place; a tool to perform
comparisons of asset and transaction
valuation
PT In and out-of-court settlements, legal framework for
voluntary administrative arbitrage, and the creation of
specialised chambers in superior courts, review of the
legal framework strengthening the rights of the lender,
and introduce compulsory partial apportionment in
specific cases
Establishment of purely electronic
proceedings strengthening of the role
of insolvency practitioners
SK Early warning tools and specialisation in business courts Digitalisation
235
ANNEX 7: SME TEST
1. Identification of affected business
SMEs are within the scope of this legislative initiative and would be impacted
directly and indirectly since they face a hightened risk of failure, which may lead
to a business being wound down through an insolvency procedure.
SMEs constitute a large part of the enterprise population and have a higher exit rate
than larger enterprises. The discrepancy between exit and insolvency statistics,
which are sourced from different reporting entities, suggest that only a small share
of business exits are due to insolvency and this is likely also the case for SMEs.
For example, the large number of business exits of firms that have no employee
suggests that many firm are closed because the entrepreneur found employment or
the firm had fulfilled its function.
While data on SMEs as subjects of insolvency proceedings is scarce, the available
observations from Member States suggest that 80 to 95% of all insolvency cases
concern entities with fewer than 10 employees (data from DE, ES, FR and SE).
99.5% of insolvency cases in France concern SME if the definition of a firm with
less than 250 employees is used, 100% in Sweden. For other Member States, the
number could not be found
Problems (2.12),
drivers (2.3.2) and
options (5.2)
2. Consultation of SME Stakeholders
Efforts have been made to consult SMEs (and insolvency experts well-acquainted
with their situation) through the consultation and study. Specific outreach to SMEs
was not done as this was considered too time-consuming in the light of very little,
if any, negative impacts expected and positive impacts materialising for resource-
strained SMEs that are in the process of business exit, which would likely not have
capacity to interact with the Commission services.
Only one business association that represents SME interests participated in the
public consultation. It expressed the status quo as representing a problem that
warranted policy action and flagged most of the issues addressed through this
initiative as obstacles (rating of 5 on a scale 0 to 5). The submission of this
association was more supportive to the initiative than those of other business
associations. Another business association that represents business at large,
including many SMEs was less critical on the status quo and the need for policy
action, but emphasised it would “favour of a sound insolvency framework that
strengthens the position of SMEs regarding recovery.”
The low participation of SMEs in the consultation could also to some degree be
interpreted as a sign that SMEs generally have little or no (sophisticated)
knowledge of insolvency proceedings since their details and complexities exceed
their capacities to assess burden and costs and most currently do not make use of
such procedings. The smaller a company the more cumbersome insolvency
proceedings become and the proposal to introduce a specific insolvency regime for
MSEs aims to address this issue. Since this proposal for an MSE regime was
developed at a rather late stage, it did not feature in the public consultation.
Members of the Expert Group with experience on SME insolvencies however
supported this element.
Stakeholders’
perspective (section
2.1.3)
236
3. Assessment of the impact on SMEs
The conditions under which SMEs are wound down has an impact on their
recovery value as gone concern as well as on their financing conditions and their
capacity to build business relationships when solvent. The initiative would
primarily improve the business environment for SMEs. By increasing expected
recovery rates for creditors exposed to SMEs and other businesses, the initiative
would reduce perceived risk of investing in SMEs, which is expected to be
reflected in lower funding costs for SMEs, ceteris paribus.
Meanhile, the initiative does not impose obligations or compliance costs for SMEs
that are economically active and simplifies procedures for those who face
insolvency. Entrepreneurs would benefit from a quicker realisation of a second
chance, i.e. to be discharged from the debts of the previous undertaking and make a
fresh start.
The cross-border dimension related to access to funding from non-domestic
sources is likely to be relevant for only some SMEs. Foreign creditors invest in
small firms only rarely and tend to focus on innovative enterprises with high
growth potential. While debt issuance of medium-sized firm is negligible, some
issue shares, which are also held by foreign investors, which take into
consideration how the firm is wound down when deciding on their investment.
The initiative aims to introduce a special procedure for MSEs to facilitate and
speed up their winding down. This would lower judicial costs and shorten the time
for the second chance. The MSE regime would moreover support the orderly
winding down of “asset-less” MSEs, addressing the issue that some Member States
reject access to an insolvency proceeding if the projected recovery value is below
the judicial costs.
The impact assessment used SME specific information to the extent they were
available, for example recovery rates, time and judicial costs of SME loans from
the EBA benchmark exercise and indications by insolvency practitioners about the
cost savings of an MSE insolvency regime.
Specific analysis covers the benefits and costs of such a dedicated insolvency
regime for MSEs. It finds that cost savings for insolvent SMEs are 12% according
to the survey for those that have access to insolvency proceedings. While the
possibility for asset-less MSEs to access insolvency proceedings will be beneficial,
it can entail costs for the public sector, for which a range was estimated using a
number of assumptions.
Impacts (sections
6.1.2, 6.13 and 6.2.3,
annex 4 [section on
MSE loans])
4. Minimising negative impacts on SMEs
The absence of compliance costs and the overall beneficial effects for SMEs made
it unnecessary to design mitigating measures for SMEs
237
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