European Commission presents draft EU Directive – German Bundesrat has reservations about the introduction of simplified winding-up proceedings for insolvent microenterprises.
On 7 December 2022, the European Commission published a “Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law” (COM(2022) 702 final). The proposal seeks to advance the implementation of the Capital Markets Union, which is considered a key project to further financial and economic integration in the European Union. So far, the European Economic and Social Committee, the European Data Protection Supervisor, and two EU Member States (Portugal and the Czech Republic) have issued opinions on the proposed Directive. The first reading in the European Parliament is yet to be held.
The proposed Directive (Articles 4 et seq.) contains detailed minimum requirements for avoidance actions. The relevant time period for avoidance actions in respect of legal acts against no or a manifestly inadequate consideration is proposed to be one year, and the limitation period for claims resulting from legal acts that can be declared void is proposed to be three years from the date of the opening of proceedings. The four-year period stipulated in Section 134(1) of the German Insolvency Code and the three-year limitation period according to Sections 146 of the German Insolvency Code, 195 and 199 of the German Civil Code (calculated from the end of the year in which proceedings are opened) exceed the minimum requirements stipulated in the proposed Directive. It is, therefore, unlikely that any adjustments will be made to the avoidance provisions set out in Sections 129 et seq. of the German Insolvency Code.
The proposed Directive (Articles 13 et seq.) provides for cross-border rights to access registers to trace the assets belonging to the insolvency estate (“asset tracing”). Insolvency courts are to be given the power to search the national bank account register and, upon request of the insolvency practitioner, access bank account registers in other EU Member States where necessary for the purposes of tracing the assets belonging to the insolvency estate. The insolvency practitioner is to be given access to the national beneficial ownership register and to asset registers in other EU Member States (for example, land registers or vehicle, ship and aircraft registers). Certain adjustments can be expected in this respect, as the German Insolvency Code does not provide for any such access rights to date.
One of the key issues of the proposed Directive (Articles 19 et seq.) is the introduction of pre-pack proceedings, which are intended to facilitate the sale of the debtor’s business or part thereof as a going concern and largely reflect current M&A practice. The purpose of pre-pack proceedings is to allow contracts to be negotiated and the takeover to be prepared prior to the opening of insolvency proceedings (“preparation phase”) so that the transfer of the business can be carried out in a shortened process immediately after the opening of insolvency proceedings (“liquidation phase”). Adjustments to the German Insolvency Code can be expected.
According to the proposed Directive (Articles 36 et seq.), a legal entity’s directors are to be obliged to submit a request for the opening of insolvency proceedings with the court no later than three months after the directors became aware or can reasonably be expected to have been aware that the legal entity is insolvent. The proposal further provides for liability of the directors if they fail to comply wit the obligation to submit a request for the opening of insolvency proceedings. The provisions of Sections 15a(1), second sentence, 15b(4) of the German Insolvency Code correspond to the minimum requirements so that no adjustments to the German Insolvency Code are expected in this respect.
Another key issue of the proposed Directive (Articles 38 et seq.) is the introduction of simplified winding-up proceedings for insolvent microenterprises, i.e. enterprises which employ fewer than ten employees and whose annual turnover or balance sheet total does not exceed two million euros (2003/361/EG, Articel 2). The insolvency court is to conduct the proceedings electronically using standard forms. Such proceedings are to be opened even if the debtor has no assets or its assets are not sufficient to cover the costs. According to the proposed Directive, an insolvency practitioner may only be appointed if the debtor, a creditor or a group of creditors requests such an appointment and if the costs of the intervention of the insolvency practitioner are covered by the insolvency estate or by an advance on the costs. The creditors’ claims indicated by the debtor in the request for the opening of simplified winding-up proceedings are to be considered as lodged and deemed to be undisputed, as a rule. The assets are to be realised by the insolvency court through electronic auctions.
The proposed Directive (Articles 58 et seq.) defines minimum requirements for the working methods, function, rights, duties, powers, expenses and remuneration and liability of creditors’ committees. According to the current legal situation, the members of the creditors’ committee can already be held liable in cases of simple negligence, whereas the proposed Directive only provides for liability in cases of gross negligence or intent. Stricter liability provisions are permissible, however, as the proposed Directive only contains minimum requirements. Those minimum requirements are covered by the provisions of Sections 56a(2), 67 et seq., 160 of the German Insolvency Code. Consequently, no adjustments to the German Insolvency Code are expected in this respect.
Finally, the proposed Directive (Article 68) provides for the provision by each EU Member State of a key information factsheet written in clear, non-technical and comprehensible language and containing essential information about such Member State’s national insolvency law (opening of insolvency proceedings, lodging and verification of claims, ranking of claims, distribution process, duration of the proceedings), which will be published on the European e-Justice portal.
In its opinion dated 30 March 2023 (BR-Drucksache 25/23), the German Bundesrat welcomed the harmonisation objectives sought to be achieve by the proposal, as well as the regulatory approach of defining minimum requirements, expressing, however, reservations in particular about the introduction of simplified winding-up proceedings and opposing such proceedings using primarily the following arguments:
The EU Directive will probably not be adopted in its current draft version. There are likely to be amendments to it. The actual content of the adopted EU Directive remains to be seen. The German legislator will then have to transpose the adopted EU Directive into national insolvency law. It will be interesting to see how it uses its leeway in doing so.