A Class Apart: The Relevance of the EU Preventive Restructuring Directive for Small and Medium Enterprises

Abstract

This article critically evaluates the significance of the recent EU Preventive Restructuring Directive for small- and medium-sized enterprises (SMEs). Considering the prevalence of SMEs across European economies, it stands to reason that the policy objectives of the Directive were grounded in facilitating the accessibility of restructuring and rescue procedures for such enterprises. However, there is a risk that the very distinct considerations involved in SME restructuring cases could be disregarded by the approach espoused within the Directive. The article proceeds to set out the procedural aspects of the Directive in respect of their putative suitability for the needs of SMEs. Class formation, confirmation of restructuring plans and creditor cram-downs are given particular attention since the Directive expressly includes safeguards for SMEs within these features of the Directive. The article assesses whether the preventive restructuring procedures envisaged by the Directive can truly offer a paradigm for SME restructuring. Even though the Directive accords flexibility to EU Member States as to transposition of these measures into national law, are there more specialised steps which ought to be taken when efficiently addressing the restructuring needs of SMEs?

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Notes

  1. 1.

    European Commission Recommendation 2003/61/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises [2003] OJ L 124/36.

  2. 2.

    Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 [2019] OJ L 172/18.

  3. 3.

    Commission Recommendation of 12 March 2014 on a new approach to business failure and insolvency (2014/135/EU). On Member States’ responses to the Recommendation, see European Commission (Directorate-General Justice and Consumers) (2015).

  4. 4.

    Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings [2015] OJ L 141/19.

  5. 5.

    Directive 2019/1023, Art. 34. On the provisions for the use of electronic means of communication between the parties to a restructuring, Art. 28 (a)–(c) must be transposed by 17 July 2024 and point (d) to be transposed by 17 July 2026.

  6. 6.

    Directive 2019/1023, Art. 34(2). Member States should notify the Commission of the need to use this option of an extension by 17 January 2021.

  7. 7.

    Directive 2019/1023, Art. 33.

  8. 8.

    See European Commission (2018), and European Commission, Small Business Act Fact Sheet for EU-28, 2018, available at: https://ec.europa.eu/growth/smes/business-friendly-environment/performance-review_en#sba-fact-sheets.

  9. 9.

    On the Small Business Act and the annual performance reviews of SMEs across EU Member States, see: https://ec.europa.eu/growth/smes/business-friendly-environment/small-business-act_en.

  10. 10.

    See European Central Bank (2018) in which it is stated that the value of outstanding NPLs decreased by €94 billion in the first three quarters of 2018 alone.

  11. 11.

    See European Central Bank (2018), para. 3.1.

  12. 12.

    Directive 2019/1032, Recital 2.

  13. 13.

    Directive 2019/1023, Recital 24.

  14. 14.

    Directive 2019/1023, Recital 24 and Art. 4(1).

  15. 15.

    For an assessment of the provisions of the Directive in terms of their likely effects in transposition into Irish law, see McCarthy (2019a).

  16. 16.

    Directive 2019/1023, Art. 8(2).

  17. 17.

    Directive 2019/1023, Recital 17.

  18. 18.

    Directive 2019/1023, Recital 7. As but one initial example of the European Commission’s emphasis on developing the exporting activities of SMEs, see European Commission (2010).

  19. 19.

    Directive 2019/1023, Art. 4(8).

  20. 20.

    Directive 2019/1023, Art. 5(1).

  21. 21.

    Directive 2019/1023, Art. 5(2).

  22. 22.

    Directive 2019/1023, Art. 5(3).

  23. 23.

    See, for example, Mokal (2005). On the ‘resource-based strength’ of a company’s management in contributing to its viability, see Cook et al. (2011).

  24. 24.

    Directive 2019/1023, Recital 59.

  25. 25.

    On this plurality which arises under the SME definition, see European Parliament Policy Department for Citizens’ Rights and Constitutional Affairs (2017).

  26. 26.

    See European Law Institute (2017), at para. 758.

  27. 27.

    Directive 2019/1023, Art. 9(4).

  28. 28.

    Directive 2019/1023, Art. 9(6).

  29. 29.

    Directive 2019/1023, Art. 9(4).

  30. 30.

    The most well-known American work on this includes Bebchuk and Fried (1996), and LoPucki (1994). For an exploration of the issues relating to a preferential ranking for SME creditors, see Symes (2008). On the extent to which trade creditors could be construed to be ‘voluntary’ or ‘adjusting’, see Finch and Milman (2017), pp 81–84.

  31. 31.

    On such trade credit practices, see further Petersen and Rajan (1997) and Armour (2006), p 215.

  32. 32.

    Directive 2019/1023, Art. 9(4).

  33. 33.

    Directive 2019/1023, Recital 45.

  34. 34.

    Directive 2019/1023, Recital 45.

  35. 35.

    Directive 2019/1023, Art. 10(1).

  36. 36.

    For examples, see Mokal and Tirado (2019); de Weijs et al. (2019a, b).

  37. 37.

    Directive 2019/1023, Art. 11(1)(c).

  38. 38.

    Directive 2019/1032, Art. 2(1)(6).

  39. 39.

    Directive 2019/1032, Art. 11(2).

  40. 40.

    Mokal and Tirado (2019).

  41. 41.

    See Directive 2019/1032, Recital 58.

  42. 42.

    For a review of the considerations favouring and opposing the use of the absolute priority rule in Chapter 11 proceedings, see McCormack (2008), pp 266–275. For an assessment of absolute priority’s shortcomings and a submitted alternative model, see Casey (2011).

  43. 43.

    De Weijs et al. (2019a).

  44. 44.

    See American Bankruptcy Institute (2014).

  45. 45.

    Loan Syndicating and Trading Association (2015).

  46. 46.

    Defined in Part VII of the ABI Report as a business debtor with: (i) no publicly traded securities in its capital structure or in the capital structure of any affiliated debtors whose cases are jointly administered with the debtor’s case; and (ii) less than $10 million in assets or liabilities on a consolidated basis with any debtor or non-debtor affiliates as of the petition date.

  47. 47.

    See Loan Syndicating and Trading Association (2015), pp 71–74.

  48. 48.

    See Lewis (2015).

  49. 49.

    Directive 2019/1023, Art. 2(1)(7) defines new financing as ‘any new financial assistance provided by an existing or a new creditor in order to implement a restructuring plan and that is included in the restructuring plan’.

  50. 50.

    Directive 2019/1023, Art. 2(1)(8) defines interim financing as ‘any new financial assistance, provided by an existing or a new creditor, that includes, as a minimum, financial assistance during the stay of individual enforcement actions, and that is reasonable and immediately necessary for the debtor’s business to continue operating or to preserve or enhance the value of that business’.

  51. 51.

    Directive 2019/1023, Art. 17(4).

  52. 52.

    See de Weijs and Baltjes (2018).

  53. 53.

    See Payne (2018), p 147.

  54. 54.

    Directive 2019/1023, Recital 22.

  55. 55.

    Directive 2019/1023, Art. 3(2)(a).

  56. 56.

    Directive 2019/1023, Art. 3(2)(b).

  57. 57.

    Directive 2019/1023, Art. 3(2)(c).

  58. 58.

    Directive 2019/1023, Art. 3(4).

  59. 59.

    Directive 2019/1023, Art. 3(3). Under Art. 3(5), Member States may also provide support for employees’ representatives for the assessment of a debtor’s economic situation.

  60. 60.

    McCormack (2008), p 10.

  61. 61.

    See Baird (1998), p 581.

  62. 62.

    Directive 2019/1023, Art. 2(1)(1).

  63. 63.

    Especially among financial institutions through using Altman’s Z-score model. See Altman (1968).

  64. 64.

    On such challenges in cultivating prediction models for SME bankruptcies, see El Kalak and Hudson (2015).

  65. 65.

    Milman (2013), p 37.

  66. 66.

    See Finch and Milman (2017), pp 124–131.

  67. 67.

    Finch and Milman (2017), pp 131–135.

  68. 68.

    Day and Taylor (2001), pp 105–106. For a similar study of US firms, see Carter and van Auken (2006).

  69. 69.

    See Milman (2013), p 36.

  70. 70.

    On the costs obstacles confronting SME companies seeking to enter the Irish company rescue and restructuring process of examinership, see McCarthy (2019b).

  71. 71.

    Paterson (2017).

  72. 72.

    Paterson (2017), p 610.

  73. 73.

    Korobkin (1994), p 424.

  74. 74.

    Korobkin (1994), p 428.

  75. 75.

    Korobkin (1994), p 431.

  76. 76.

    Directive 2019/1023, Art. 2(2).

  77. 77.

    Directive 2019/1023, Art. 4(3).

  78. 78.

    European Central Bank (2017).

  79. 79.

    Directive 2019/1023, Art. 6(1).

  80. 80.

    Directive 2019/1023, Art. 6(6).

  81. 81.

    Directive 2019/1023, Art. 6(7)–(9). The total duration of a stay should not exceed 4 months if the centre of main interests of a debtor has been transferred from another Member State within 3 months of filing for request of the procedures.

  82. 82.

    Directive 2019/1023, Art. 6(9). As well as where undue prejudice results, a stay may be lifted if it no longer fulfils the objective of supporting negotiations when it is clear that a requisite proportion of creditors will not consent to further negotiations. It may be lifted at the request of the debtor or of an appointed practitioner. A stay can also be lifted when it would bring about the insolvency of a creditor.

  83. 83.

    Eidenmüller (2017), p 288.

  84. 84.

    See further Tollenaar (2017).

  85. 85.

    European Parliament Policy Department for Citizens’ Rights and Constitutional Affairs (2017), p 6.

  86. 86.

    See Stanghellini et al. (2018), Chapter VIII: ‘Special Considerations for Micro, Small, and Medium Enterprises’; and Davies et al. (2018).

  87. 87.

    See Paterson (2016), p 721.

  88. 88.

    For the seminal work on the subject, see Schumpeter (1934, 1942). For a review of modern perspectives on Schumpeterian theories of ‘creative destruction’, see Dal Pont and Hagemann (2017).

  89. 89.

    Haltiwanger (2012), p 18.

  90. 90.

    See Adalet McGowan and Andrews (2016); Bricongne et al. (2016); Andrews and Petroulakis (2019).

  91. 91.

    Garrido (2014), p 47.

  92. 92.

    On ensuring that viability tests should be at the forefront of SME debt resolution, see also Bergthaler et al. (2012).

  93. 93.

    Directive 2019/1023, Art. 4(5).

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McCarthy, J. A Class Apart: The Relevance of the EU Preventive Restructuring Directive for Small and Medium Enterprises. Eur Bus Org Law Rev (2020). https://doi.org/10.1007/s40804-020-00192-x

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Keywords

  • SMEs
  • Restructuring
  • Insolvency
  • Rescue
  • Company law
  • Economics