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Contractualised distress resolution in the shadow of the law

Patrizia Riva, Nigel J. Balmer, Francesca Burigo, Alessandro Danovi, Amber Darr, Francesco D’Angelo, Iacopo Donati, Marta Flores, Ilaria Forestieri, Clarisa L. Ganigian, Silvia Giacomelli, Diletta Lenzi, Paola Lucarelli, Monica Marcucci, Cristiano Martinez, Alfonso S. Nocilla, Tommaso Orlando, Giacomo Rodano, Wolfgang Zenker, Andrea Zorzi
Best practices in european restructuring
Wolters Kluwer - 2018-12

In recent times, national legislators and policymakers have been increasingly seeking to facilitate contractual and quasicontractual agreements between distressed businesses and their creditors, with no or very limited court involvement. The same trend is now embraced by the forthcoming Directive on preventive restructuring, which looks set to be approved shortly.
This move away from traditional, formal insolvency proceedings, upon which States had been relying for several centuries, opens up a vast area to private ordering, with all the associated opportunities and risks. Businesses and their advisors would have access to new tools to deal with distress and insolvency and to enable a faster and more effective restructuring. At the same time, the reduction of court involvement and of procedural formalities creates new risks for participants and third parties, and, perhaps, for the economic system as a whole.
In the near term, the cost of entering into this ‘New Deal’ to address financial distress is a higher degree of uncertainty for all concerned, with the usual costs of additional advice, new drafting, higher risk premia, and foregone opportunities. Over this period, the reduction of uncertainty would be of paramount importance and of significant value. Member States’ domestic laws would need to respond. This presents national legislators with a delicate challenge. They should not be overly prescriptive and should effectively delegate decision-making to stakeholders and expert professionals, who together are likely to be better informed and better incentivised. By the same token, however, national legislation must put in place the background conditions essential to the collation and dissemination of information and the creation of the right incentives.
Against this background, guidance on best practices can be if value to legislators and direct stakeholders alike. It may assist policymaking in one jurisdiction by drawing attention to successes and failures in others. And it may allow professionals, advisors, debtors, creditors and, if necessary, courts to find common ground, e.g. in identifying the moment at which the debtor should start preparing for a restructuring, in helping to draft high-quality plans, and, ultimately, in distinguishing viable from non-viable distressed debtors.
We have taken up the challenge of unearthing and crystallising some of the most critical best practices in the domain. The project has been carried out by a partnership of several universities: Università degli Studi di Firenze (Project Coordinator), Humboldt-Universität zu Berlin (Partner) and Universidad Autónoma de Madrid (Partner), supported by the Consejo General del Poder Judicial (Associate Partner), Banca d’Italia (Associate Partner) and OCRI-Entrepreneurship Lab Research Center at the University of Bergamo (Associate Partner).
The research is undergirded by a carefully constructed conceptual framework and enriched by broad and deep empirical evidence from four EU jurisdictions (Germany, Italy, Spain, and the UK) gathered between 2016 and 2018. The project also addresses several key issues highlighted both in the Recommendation on a new approach to business failure and insolvency (2014/135/EU), and, more importantly, in the proposed Directive on preventive restructuring [COM(2016) 723 Final].
This work has been made possible by a generous grant by the European Commission (JUST/2014/JCOO/AG/CIVI/7627). The research is based on the analysis of thousands of court files and on hundreds of interviews with a wide range of stakeholders – lawyers, accountants, financial advisors, bank officers, and judges – in multiple jurisdictions. We are grateful to all of them for having contributed with their diverse and valuable experiences to our project.
This Final Report is the primary output of our research. It consists of eight chapters, each addressing key aspects of a typical restructuring: timely identification of and response to the crisis, the fairness of the process, the typical structure of a restructuring plan, drafting high-quality plans, negotiating plans, confirming, implementing and monitoring plans. The document concludes with a chapter dedicated to micro, small, and medium enterprises, which are the heart and soul of most European economies yet whose needs are often neglected in
policy and legislation.
In each chapter, the commentary identifies and explicates the main issues; conclusions take the form of ‘Guidelines’, addressed to key players in the restructuring process (in-court and out-of-court procedures and measures); and ‘Policy Recommendations’, aimed for policymakers at the European and national level, are also included. They are separately numbered in each chapter, and are also grouped together for
easier reading in the Appendix.
The Final Report is supplemented and enriched by several additional outputs of the research, which are freely available at the website
- The National Findings for each jurisdiction, which, with a wealth of qualitative and quantitative data, conform the basis for the Final Report.
- The comments on the Proposal for a Directive on Restructuring [COM(2016) 723 Final], which purport to
contribute to the current debate surrounding the European effort to introduce a common framework for restructuring
financially distressed but economically viable businesses. This document embodies the main recommendations addressed to European policymakers, transforming them into fully fledged proposals for amendments to the draft that was published on 22 November 2016, the only one publicly available.
The research output is the joint effort of a large team. We wish to thank here, in alphabetical order, Nigel J. Balmer, Francesca Burigo, Alessandro Danovi, Amber Darr, Francesco D’Angelo, Iacopo Donati, Marta Flores, Ilaria Forestieri, Clarisa L. Ganigian, Silvia Giacomelli, Diletta Lenzi, Paola Lucarelli, Monica Marcucci, Cristiano Martinez, Alfonso S. Nocilla, Tommaso Orlando, Giacomo Rodano, Patrizia Riva, and, in a particular way, Wolfgang Zenker and Andrea Zorzi for the outstanding quality of their work and their tireless dedication to the project.
We would also like to thank the external speakers of the conference held at the Centre for European Policy Studies in Brussels on 5 July 2018, where the project team presented the main preliminary results of the research with a view to disseminating its findings and recommendations as well as to receiving a final round of feedbacks. The speakers, Américo Carola, Mihaela Carpus Carcea, Andrea Csőke, Alexander Klauser, Stephan Madaus, Stathis Potamitis, Nico Tollenaar and Ondřej Vondráček, dedicated their precious time to reading parts of this document in draft and providing insights and critical comments that helped make it better.
Valuable comments also came from the attendees, among whom it is fair to mention Reinhard Dammann, Matti Engelberg, Luciano Panzani, Jennifer Payne, Michael Veder and Bob Wessels. Last, and importantly, we would like to pay
respectful tribute to Dr. Shinjiro Takagi, who honoured us by travelling from afar specially to participate in the conference. This proved amongst the last public events of Takagi Sensei's full and outstanding life.
The video of the conference is freely accessible at the YouTube channel of the research project Contractualised
Distressed R esolution (www. UCo2dZ_ZL-lde28il4Ub7zTw).
An incredibly valuable contribution, far beyond their institutional tasks, was given throughout the project by the Oversight Committee composed by Charles G. Case III, Irit Ronen-Mevorach, and Jean-Luc Vallens. We wish to acknowledge their enthusiastic participation in our work, done out of pure passion for the topics.