MFA Outlines Suggestions for EU Insolvency Framework
The Managed Funds Association ("MFA") expressed general support for and responded to questions from a European Commission ("EC") consultation document concerning an effective insolvency framework within the EU. The MFA emphasized an effective restructuring regime as a key consideration for investment into European companies because it increases the likelihood of enterprise value being preserve in a distress scenario.
In response to the consultation document, The MFA offered the following suggestions:
- Scope: Although distortions between certain national insolvency rules can adversely affect the function of the Internal Market, some national provisions are less suited to being harmonized at the EU level than others.
- Saving Viable Businesses in Difficulty: Flexibility in the restructuring process, combined with legal tests based on fairness, is more desirable than a detailed and formal test of viability. Accordingly, the EC should utilize an approach where a court hearing is not automatically required, but is required if: (i) creditor approval is marginal; or (ii) requested in certain circumstance by the debtor or by affected stakeholders. Directors of distressed business should not be subject to "onerous obligations" to file for insolvency proceedings within an "arbitrary time period" from a company becoming insolvent. Instead, that culpability and personal liability should be imposed based on whether the directors have acted in the interests of the company, having regard to the interests of creditors where the company is insolvent or close to insolvency.
- Second Chance: It is beneficial for and attractive to potential investors if both entrepreneurs and consumers are able to restructure and obtain a one year discharge of their debts. However, there must be effective safeguards against abuse.
- Increasing the Efficiency and Effectiveness of the Recovery of Debts: The harmonization of ranking of claims and avoidance procedures must be prioritized.
