The European Parliament and the Council adopted Directive 2019/1023 on June 20, 2019, with the framework of preventive restructuring, for the purpose of financial recovery of companies and entrepreneurs who may find themselves in certain financial difficulties, which often result from over-indebtedness, technical-technological obsolescence, inadequate organizational structure, too many employees, all of which together, more or less, affect their productivity, profitability and economy.
Restructuring implies the application of preventive measures such as debt forgiveness (which frequently includes their write-off or reprogramming), as well as the implementation of reorganization aimed at changing the composition and structure of assets and capital, maintaining control over current operations and optimal regulation of redundant employees. The application of the Directive contributes precisely to the realization of the plan of economic consolidation and social cohesion within and outside the European Union.
In the first place, the Directive envisages restructuring measures through a change in the capital structure, which should enable the continuation of operations, and in this sense, it implies negotiations with creditors whose ultimate goal is debt relief for the purpose of creating a positive capital value. In addition, restructuring includes the regulation of ownership relations that can lead to a change in the debtor’s organizational structure through status changes, i.e., through separation, merger, or acquisition of independent business units. In order to optimize the operations of business entities, the number of employees is operationally harmonized in accordance with national law. The goal of such regulatory approaches is to reduce costs and optimally protect the rights and interests of all subjects in the restructuring process.
This Directive insists that regulatory frameworks on preventive restructuring at the national level must be available to all debtors who fall into financial difficulties. This is because in the early stage of financial instability it is possible to prevent their insolvency and ensure their business viability. The examination of sustainability is in the exclusive competence of the member states, which should carry it out in a way that does not cause damage to their assets and property. At the same time, states have the possibility to extend their regulatory frameworks to economic entities that fall into non-financial difficulties.
For cases where there is a substantial risk of insolvency of economic entities, the Directive stipulates that states are obliged to ensure the implementation of preventive restructuring procedures. With regard to business entities that have been convicted of serious violations of financial regulations, the Directive foresees access to the framework for preventive restructuring only if these entities have implemented appropriate measures to eliminate the causes of such behaviour. The goal of this solution is to provide creditors with the necessary information for conducting restructuring negotiations. The Directive allows member states to maintain or introduce legislative measures to examine the viability of business operations of economic entities.
According to the Directive, states are obliged to enable companies encountering difficulties to manage their assets and current operations partially or fully. Courts and administrative bodies will assess, in accordance with their competences, whether it is necessary to appoint a restructuring manager. In certain cases, states reserve the right to mandate the mandatory appointment of a restructuring manager to assist business entities and their creditors in negotiating a restructuring plan. These cases include situations when the court or administrative authority decides that the appointment of a manager is necessary to protect the interests of the parties, then when the said authorities approve the restructuring plan and when the business entity itself or the majority of creditors requests it (in which case the creditors bear the costs of hiring the manager).
Member states are obliged, according to the Directive, to provide business entities with the possibility of delaying certain enforcement actions in order to support the negotiations on the restructuring plan. In this sense, the courts or administrative authorities can reject the request for such a suspension if they consider that the postponement of execution is not necessary. States can prescribe that such delays apply to all types of claims (except employee claims), to all creditors or only some of them, with the fact that the creditors must be notified in a timely manner. In addition, if it is justified, states can prescribe that certain categories of claims are not subject to decisions related to the postponement of execution actions. The initial duration of the postponement of execution is limited to a maximum period of four months. However, states have the possibility to extend this period at the request of the economic entity, creditor, or restructuring manager. Extension or approval of a new postponement of execution by the competent authorities, which cannot be longer than 12 months, is possible only if there are justified circumstances.
In situations in which the conditions for the initiation of bankruptcy proceedings according to the national legislation of the member states are fulfilled during the postponement of execution, the initiation of bankruptcy will not occur as long as the postponement lasts. However, if the business entity is not in a position to pay off its and outstanding debts, the states have the possibility to deviate from the mentioned rule. The expiration of the deadline for delaying execution, in a situation where no restructuring plan has been adopted, does not automatically lead to the initiation of bankruptcy proceedings of the business entity, unless the conditions prescribed by national legislation are met.
According to the Directive, for small and medium-sized enterprises, states have the option not to treat the affected parties as a separate category of creditors. Competent state authorities of the member states examine whether the prescribed conditions regarding voting for restructuring plans have been met. Particular attention should be directed to determining the necessary majority for the adoption of the restructuring plan. The usual quota in this sense is up to 75% of the total amount of claims in each creditor category determined by the restructuring plan. The Directive allows states to provide in their legislative framework the possibility of replacing the official vote on the restructuring plan with an agreement that requires a qualified majority of creditors’ votes. Obligations from the restructuring plan may refer to new financing, plans that foresee a reduction of employees in a percentage higher than 25%, provided that such a solution is allowed by national legislation.
According to the Directive, states are obliged to take measures to protect financing, as well as other transactions related to restructuring. The Directive stipulates that states have an obligation to enable business entities to participate in procedures, the implementation of which can lead to debt forgiveness. At the same time, the states assert the right to request that the business activity of those entities be prohibited during the period of implementation of the debt forgiveness. A business entity whose debt has been forgiven can use the existing national frameworks that allow the continuation of business activities. If debt forgiveness is conditional on partial repayment, states must consider the debtor’s situation, debtor’s interests, and available assets, as well as the interests of the creditor.
According to the Directive in question, preventive restructuring assumes the adoption of legislative solutions at the national level that provide for debt forgiveness, as well as the implementation of organizational measures aimed at changing the composition and structure of assets and capital of business entities, maintaining control over current operations, and optimally regulating redundant employees.
The mentioned solutions in the Directive can be of importance for Bosnia and Herzegovina due to the fact that it provides, in an innovative way, a series of remedial measures that should contribute to the settlement of creditors, and on the other hand, it enables the reported survival of companies and entrepreneurs on the market, unlike bankruptcy, which leads to their elimination. The adoption of the envisaged solutions would enable better and more efficient functioning of the internal market and therefore better economic stability.
Author: Milica Crnic
E-mail: [email protected]