This blog entry provides a brief introduction to my doctoral research, which I presented at the last BWILC PhD Workshop on European and International Insolvency Law, held in Vilnius (Lithuania) in April 2024. It offers an overview of the three core elements of my thesis: (i) The rise of international/transnational insolvencies, (ii) the advent of pre-insolvency/reorganization proceedings, and (iii) the EU approach to these issues.
Transnational insolvencies
The existence of transnational insolvencies, where international elements are present (e.g., the presence of foreign creditors or assets of the debt or being located abroad), is not a new phenomenon. Yet, in an increasingly globalised and interconnected society, the number of international insolvencies has exponentially increased, along with the uncertainty and the challenges these pose. Said challenges include: parties potentially being subject to different insolvency regimes, various jurisdictions claiming competence to open insolvency proceedings, (significant) coordination costs if proceedings are ongoing in several jurisdictions, etc.
Restructuring proceedings
At the same time, a paradigm change has taken place regarding insolvency proceedings. Traditionally, insolvency law was associated with liquidation procedures aimed at maximising the value of the assets of non-viable businesses in order to repay the creditors the highest percentage of their claims in accordance with a legally prescribed priority order. However, over the last decades, there has been a growing line of thought advocating that (some) debtors may experience financial (or operational) difficulties which, if surmounted, may allow them to continue viable activities. Thus, alternative ways of dealing with insolvencies have emerged, notably, “pre-insolvency” or “restructuring” proceedings, which offer a structured framework under which (part or all of) the debt may be renegotiated. These alternative procedures help debtors to avoid the reputation and operational damage that liquidation proceedings may entail in reputational and operational terms. Likewise, they differ from traditional insolvency regimes in other features, such as:
- They may only affect a specific number of creditors.
- They allow for differentiated treatment of creditors who would otherwise receive identical treatment in traditional insolvency proceedings.
- They are debt-based instead of asset-based (i.e. they focus on the right side of the balance sheet rather than on its left side).
- They allow parties to overcome several obstacles that might hamper a company’s rescue (such as free-riding and holdouts) through debtor protection mechanisms and the possibility of binding dissenting creditors.
The European Union (EU) approach
The European legislator has long been aware of the challenges posed by international insolvencies. After several failed attempts to create an international rule on the matter, it managed (after 40 years!) to establish a common set of private international law rules by way of the Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (“2000 EIR”). This regulation was passed in the 2000s and it laid down a uniform set of rules on international jurisdiction, applicable law, recognition and enforcement of decisions, and cooperation mechanisms for traditional insolvency proceedings opened in one of the Member States over debtors established in the EU.
Unfortunately, the 2000 EIR suffered from two major shortcomings: it did not deal with the new types of pre-insolvency proceedings that had started to develop in Europe, and it neglected the problems that arise when groups of companies face insolvency. Furthermore, the divergences between the insolvency systems of Member States were still unaddressed, so the private international law framework remained of key importance.
Faced with this situation, the European legislator undertook two major actions.
Firstly, it rekindled its attempts to substantively harmonise insolvency law. In contrast to the insolvency conflict-of-laws approach, this process is being implemented through de minimis Directives, with the first result being the Directive (EU) No. 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) No. 2017/1132, which intended to ensure all Member States have restructuring proceedings in place. However, the great discretion Member States have enjoyed in its transposition has meant that, in practice, noteworthy differences continue to exist between their insolvency regimes. This, in turn, reinforces the need for an efficient private international law one.
Secondly, the EU legislator reformed the 2000 EIR with the adoption of the Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (“2015 EIR”). The 2015 EIR, unlike its predecessor, extended its scope to encompass restructuring proceedings. At the same time, it introduced a specific coordination procedure for groups of companies which has not hitherto been used. Leaving aside these two major changes and some minor/anecdotal ones, the remaining rules are largely the same, so the differences between restructuring and traditional insolvency proceedings continue to be unaddressed.
Implications and research question
Restructuring proceedings are now a reality in all Member States. Although they differ from one another, they all break away from many fundamental notions that underpin traditional insolvency law, such as the need to realise the debtor’s assets or the involvement of all creditors.
These major changes have not been accounted for when expanding the scope of the 2000 EIR (whose provisions were devised for traditional liquidation-oriented proceedings) to include restructuring proceeding within the 2015 EIR. This results in the inadequacy of several of its rules for restructuring. An example may be found in Article 8 of the 2015 EIR, which isolates in rem rights over assets located in a Member State from the insolvency proceedings opened in other Member States. This rule clashes head-on with the need to (sometimes) suspend individual enforcement against the debtor’s assets/rights to ensure the success of a potential restructuring.
In light of these findings, is it appropriate to continue applying rules of private international law specifically built on the foundations of liquidation-oriented proceedings to restructuring proceedings? If not, should we apply “general” private international law rules, or are new, specific ones, adapted to restructuring procedures, required? And how should these considerations be reflected in EU law?
Conclusions and thesis goal
The EU has managed to provide a regional instrument dealing with international insolvencies (i.e. issue 1) and has set out restructuring proceedings in all Member States to ensure a level playing field (i.e. issue 2). Nevertheless, the EU has failed to capture the interrelationship between both, in particular, the divergencies between the above-mentioned proceedings and liquidation-oriented ones, subjecting both to a set of conflict-of-laws rules that seems inadequate for the former. Exploring how to adequately solve said issue (a major obstacle that the European legislator will have to face) is the main goal of my thesis.
*This research blog was written by Jaime Vázquez García, Conflict of Laws Ph.D. candidate at the Autonomous University of Madrid.
End note: The project that has given rise to this entry receives the support of a fellowship from Fundación Ramón Areces.
About BWILC and the PhD Workshop
This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.
Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised in alternately in Leiden and another city, prizes are awarded for the best presentations.