Documents considered by the Committee on 13 November 2017 Contents

2Insolvency, Restructuring and Second Chances for Business and Entrepreneurs

Committee’s assessment

Legally important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the Business Energy and Industrial Strategy Committee

Document details

(a) Proposed Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU;
(b) Opinion of the European Central Bank on the proposal

Legal base

(a) Articles 53 and 114 TFEU; ordinary legislative procedure; QMV; (b)—

Department

Business, Energy and Industrial Strategy

Document Numbers

(a) (38313), 14875/16 + ADDs 1–2; (b) (38828), 10182/17, COM (16) 723

Summary and Committee’s conclusions

2.1Document (b) consists of the opinion of the ECB on a proposed EU Directive on restructuring and insolvency proceedings (document (a)).

2.2Existing EU insolvency legislation, the 2002 EC Regulation on Insolvency Proceedings and the 2015 recast EU Regulation on Insolvency Proceedings (which comes into effect on 26 June 2017) provides a framework for mutual recognition and judicial co-operation of cross-border insolvency proceedings within the EU. The regulations do not harmonise national insolvency laws and there are wide-ranging differences between Member States’ insolvency regimes. Clarity on the allocation of jurisdiction and mutual recognition and enforcement of orders made in cross-border insolvency proceedings within the EU is considered vital not only for debtors and creditors but for the continued success of the UK’s insolvency sector.

2.3In November 2016, the Commission published document (a), a proposal for a Directive to harmonise aspects of insolvency laws across the EU to support business rescue and a second chance for entrepreneurs. It has since been the subject of our predecessors’ scrutiny. The aim of the Directive is to ensure that Member States have effective restructuring procedures in place to help viable businesses in distress to survive, allow honest entrepreneurs to have a second chance after failure and reduce differences in restructuring and insolvency regimes across the EU. A summary of the proposal’s main provisions is provided in our predecessor’s previous Reports and outlined in paragraph 0.9 below.

2.4The Government now provides us with an update on the proposed Directive and an Explanatory Memorandum on the ECB opinion.16 Even though it seems very likely that the UK would not have to implement the proposed Directive given the anticipated Brexit timetable, the Government provides its view on the opinion. It says that the push from ECB for more harmonisation might cause more difficulties for the UK if it were to “implement the Directive”. But the suggestion that Member States follow the UNCITRAL Model Law on Cross-Border Insolvency is welcomed by the Government because that wider option would make recognition of cross-border insolvency proceedings easier.

2.5We thank the Ministers for the comprehensive Explanatory Memorandum on document (b), the ECB Opinion and update on the proposed Directive (a) respectively. We continue to note that it is highly unlikely that the UK would have to implement the proposed Directive before UK withdrawal from the EU, though we ask the Government whether any possible implementation/transitional arrangements would change that position.17

2.6We remain interested in whether the UK would seek to align voluntarily with the proposal in the future once free of any obligation to implement it. The Minister for Small Business Consumers and Corporate Responsibility (Margot James) told our predecessors in her letter of 24 February 2017 on proposal (a)18 that it was too early in terms of the negotiations relating to the UK’s withdrawal to answer that question. We expect to be kept informed once the position on alignment becomes clearer.

2.7We also draw to the House’s attention that another chapter of this Report19 provides very general Government comment on the question of how cross-border insolvencies will be governed by both UK law and the domestic law of each Member State after Brexit.

2.8In the meantime, we retain both documents under scrutiny, but draw them to the attention of the Business, Energy and Industrial Strategy Committee.

Full details of the documents

(a) Proposed Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU: (38313), 14875/16 + ADDs 1–2; (b) Opinion of the European Central Bank on the proposal for a Directive of the European Parliament and the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU: (38828), 10182/17, COM (16) 723.

Summary of the Directive

2.9The proposed Directive contains ten main proposals for Member States to implement:

Background to ECB involvement

2.10The ECB considers that the proposed Directive is relevant to the ECB’s areas of interest in relation to monetary policy and freeing up regulatory capital of banks and increasing lending, and although financial and credit institutions are excluded from the scope of the Directive, there is potential for the Directive to impact banks and other financial institutions in relation to the automatic stay. It also considers the Directive falls within its area of competence in accordance with Articles 127(4) and 282(5) TFEU.

2.11In February this year, the ECB therefore requested permission from the Council to be granted observer status at EU Working Group meetings to consider the draft Directive. The Council view is that the Directive does not relate to the objectives and tasks of the ECB and nor does it relate to a matter for which the ECB has exercised its right of initiative. It therefore rejected the ECB’s request for observer status at Working Group meetings. The ECB is therefore exercising its rights under Article 127(4) of the TFEU to submit an opinion to the appropriate EU institution on matters in its field of competence.

Summary of the ECB’s Opinion

2.12The ECB makes a number of observations on the proposed Directive. It considers that:

2.13The ECB also makes two drafting proposals: (i) to widen the scope of contracts which would be affected by the stay of enforcement and (ii) to provide that other EU legislation affecting the stability of financial markets would prevail over the proposed Directive.

The Government’s view on the ECB Opinion, document (b)

2.14In her Explanatory Memorandum of 22 June, the Parliamentary Under-Secretary of State at the Department of Business, Energy and Industrial Strategy (Margot James) provides a summary of both documents (a) and (b), as set out in paragraphs 2.8 to 2.12 of this chapter. She then addresses the policy implications, principally of document (b) but with necessary reference to (a).

Policy implications

2.15After repeating the standard Government position on UK exit from the EU,20 the Minister helpfully clarifies that because Member States usually have two years to implement a Directive, she does not expect the UK to be required to implement the proposed Directive before UK exit at the end of March 2019. She comments:

“The UK insolvency regime is well regarded internationally and is ranked in the top 10 globally by the World Bank for the speed, low cost and overall amount returned to creditors in an insolvency. It includes rescue procedures, administration and Company Voluntary Arrangements and options for restructuring using a scheme of arrangement under the Companies Act 2006. The UK also has a longstanding regulated insolvency profession, and personal insolvency laws which promote second chance by enabling discharge to occur 12 months after commencement of insolvency. The UK insolvency framework already contains many of the features required by the proposed Directive as it is currently drafted. Our initial analysis is that, if the UK were to implement the proposals, only minimal changes would be required, though some subtle but significant changes would be needed in respect of Title II (preventive restructuring frameworks).

“The ECB opinion seeks to influence the direction of the Directive by putting forward its own observations and suggestions, in particular a call for a more significant degree of harmonisation. In this respect, the ECB approach could potentially have a greater impact on any necessary changes that would be required to the UK insolvency regime, if the UK were to implement the Directive. However, of the proposals put forward by the ECB, the UK has already adopted the UNCITRAL Model Law on Cross-Border Insolvency. We would welcome the wider option of the Model Law, which would make recognition of cross-border insolvency proceedings easier.

“While Member States may wish to consider the proposals of the ECB, it will be for Member States alone to determine and agree the CEU’s position on the Directive. It is therefore not possible to say whether or to what extent the ECB opinion will influence the final form of the proposal. Discussions on the Directive are still at a relatively early stage, but one of the features of the Working Group Discussions has been calls from Member States for a greater degree of flexibility than that currently laid down in the Directive. The recent Justice and Home Affairs Council on 8 June agreed a policy paper to allow Member States greater flexibility in the role of the national courts in restructuring proceedings and mandatory appointment of insolvency practitioners.”

Timing

2.16On timing, the Government expected the Opinion to be considered at the next Working Party meeting on document (a) on 13 and 14 July.

Ministerial letter on proposal (a) of 25 August 2017

2.17The Minister for Universities, Science, Research and Innovation at the Department for Business, Energy and Industrial Strategy (Jo Johnson) provides a further update on the progress of the proposed Directive itself:

“Member States’ consideration of the draft Directive has been ongoing throughout the year. The draft Directive was also discussed by EU Ministers at the Justice and Home Affairs Council meeting in June. The meeting agreed a policy paper that the proposal should give greater flexibility for Member States on the circumstances for court intervention and mandatory appointment of insolvency practitioners. The UK broadly welcomed this initiative.

“The draft Directive is a priority for the Estonian Presidency as part of the measures in the Capital Markets Union Action Plan and we understand it intends to schedule around ten days of meetings during its Presidency to discuss the proposals.

“Officials continue to engage with stakeholders on the draft Directive and also on the proposed reforms to UK corporate insolvency which the Government consulted on in 2016 and which are broadly similar to the Directive proposals.”

2.18The Minister also attaches a copy of a letter which the Government has sent to Lord Boswell, Chair of the Lords EU Select Committee, in response to questions asked by that Committee regarding an academic analysis of the proposed Directive by Horst Eidenmüller, Professor of Commercial Law at Oxford University.21

Previous Committee Reports

(a)Thirty-fourth Report HC 71–xxxii (2016–17), chapter 2 (8 March 2017); Twenty-sixth Report HC 71–xxiv (2016–17), chapter 2 (18 January 2017); (b) None.


16 The ECB is entitled to publish opinions on matters falling within its competence pursuant to Article 127(4) TFEU.

17 See the Prime Minister’s speech in Florence of 22 September 2017.

18 Considered in our predecessors’ Thirty-fourth report HC71–xxxii (2016–17), chapter 2 (8 March 2017).

19 Chapter 8 (38963), 11667/17.

20 “On 23 June, the EU referendum took place and the people of the United Kingdom voted to leave the European Union. The government respected the result and triggered Article 50 of the Treaty on European Union on 29th March 2017 to begin the process of exit. Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the Government will continue to negotiate, implement and apply EU legislation.”

21 The letter to the Lords’ EU Committee is dated 15 August and will be available on their website. The EUC had asked three questions:

- Would the proposed Directive effectively filter out non-viable firms that should be liquidated or would it instead risk action as a refuge where non-viable firms could ‘buy time’?

- Does the proposed Directive give adequate consideration to the possibility of the sale of a business as a going concern?

- Is the Directive clear on the rights of secured creditors, particularly in relation to priority for pay-out and how this will impact financing costs for small businesses?




20 November 2017