Research Law

A New European Directive Proposal Changing Insolvency Regulations

, by Andrea Costa
An interview with Cesare Cavallini about the turning point of insolvency regulations between national and EU rules.

The European Union is moving on several fronts for removing the sticking points in national laws and strengthening the single capital market in order to revitalize the entire Eurozone economy. A significant aspect, even if it is rarely discussed, is the protection of the assets of the distressed company.

We asked Cesare Cavallini, professor of Civil Procedure and Insolvency Law and director of the Department of Legal Studies at Bocconi, whose article "The Protection of the Default Company's Assets and the New Demands from Europe. First Reflections" will be published later this year.

Professor Cavallini, is it fair to say that we are at a transitional stage, as far as regulations about companies in crisis are concerned?
Yes, you can say it. The push for a uniform (or less fragmented) European regulation launched by the European Union continues without any break. After the enactment of the new Italian Bankruptcy Code – that known a long time to be formulated- and after a pursued (and only partially gained) balancing between the principles of the Delegated Law and the 2019 European Insolvency Directive, the member states' lawmakers will soon have to deal with another influential directive (2022/0848), currently at the proposal stage, substantially and functionally distinct from the previous one.

But why do we need further intervention? What improvements are needed? Where do we stand in Italy?
The need for a second Directive, soon after the now well-known 2019 Insolvency Directive, stems from an awareness of the difficulty for member states to implement it in practice, at least for the time being. An example of this is the Italian case, precisely due to the new Bankruptcy Code, which replaced substantially and significantly the previous Bankruptcy Law. To this effect, it has often been stressed that one of the cornerstones of this Directive - the provision of a preventive restructuring plan intended for companies in imminent, but not occurred, insolvency - has meant, in practice, mainly the introduction of negotiated crisis resolution tools also applicable to distressed companies. Aside from being a typically less than satisfactory compensation for many creditors, this aspect represents an implementation of the Delegated Law. However, it does not fully comply with the Directive, which on the contrary, was centered on the tools aimed at addressing a distressed company to avoid the insolvency (i.e., irreversible illiquidity). On the contrary, once the judge states the insolvency of the company, the need to reshape the provisions on the company's assets protection should be weaponized, assuring the creditors' protection.

What is the reasoning adopted by the European Union?
Europe is once again pushing for greater compliance with its directives and, above all, greater standardization of domestic legislation. This time the issue of bankruptcy is approached quite differently, and, in some respects, by (necessarily) framing the perspective and impact of its intervention in a broader context, in coordination with other measures and actions on other fronts.
Indeed, the main (but not the only) point of the new European intervention is the need to maximize the assets of the companies' insolvency, focusing essentially on more effective implementation of the various types of clawbacks, with stark sanctions and compensation measures in favor of the creditors in addition to the recovering function traditionally pursued by the clawbacks claim.

It seems, then, that a paradigm shift is necessary, not just a simple regulatory adjustment.
With this new directive proposal, the creditor is again the hub of the bankruptcy legislation. Instead of being the party often liable to bear the cost of business continuity (as it was typical with the previous Bankruptcy Code), the creditor becomes again the crucial party to be satisfied as fully as possible. And above all, it returns to being so in a consistent European action, assisted by economic analysis that is perhaps straightforward but an expression of pragmatic and political efficiency of the highest order.

Indeed, suppose the company creditor knows that it can rely, in each member state, on a system of recovery that is effective, speedy, and forceful. In that case, it will be incentivized to invest, bearing a lower capital cost risk. The origin of the proposed directive as an instrument of implementation of the European Action Plan for a Single Capital Market is not unplanned. Indeed, it is deliberate. It makes for "fair competition" of domestic legislation precisely in a sensitive regulatory moment: when invested capital is lost in insolvency capital.