Discharge and entrepreneurship in the preventive restructuring directive

• Author: Johanna Niemi,F. Javier Arias Varona,Tuomas Hupli
• DOI: http://doi.org/10.1002/iir.1369
• Date: 01 May 2020
• Published date: 01 May 2020

RESEARCH ARTICLE

Discharge and entrepreneurship in the

preventive restructuring directive

F. Javier Arias Varona

1

| Johanna Niemi

2

| Tuomas Hupli

2

1

Rey Juan Carlos University, Madrid,

Spain

2

University of Turku, Turku, Finland

Correspondence

F. Javier Arias Varona, Rey Juan Carlos

University, Madrid, Spain.

Email: franciscojavier.arias@urjc.es

Abstract

The European Council adopted the Preventive Res-

tructuring Directive (2019/1023/EU) on June 20, 2019,

which must be transposed by July 17, 2021, subject to a

possible extension of a maximum of 1 year for countries

encountering particular difficulties in the implementation.

The Directive signals a paradigm shift in EU policy on

insolvency from the traditional focus on cross-border

issues. The new Directive puts insolvency squarely at the

heart of internal market regulation, following the EU's

policy since the Great Recession of 2008 of promoting and

strengthening the economy. Since 2016, the European

Commission has issued several documents to facilitate

insolvency procedures, leading to the recently adopted

Preventive Restructuring Directive. Besides restructuring,

the Directive promotes the discharge of pre-insolvency

debt for entrepreneurs. The Directive does not require that

discharge be extended to other natural persons but recom-

mends it. This article discusses the relationship between

entrepreneurs and non-entrepreneurs in an insolvency sit-

uation and concludes that a fair interpretation of the new

Directive requires that the situation of the ordinary person

with liability for business debt be closely scrutinised.

1|INTRODUCTION

Insolvency law

1

found its place in the European Union legal arena during the past 10 years.

Since the 2008 “Great Recession”, insolvency law has become part of the market regulation, as

Received: 16 October 2019 Revised: 27 January 2020 Accepted: 31 March 2020

DOI: 10.1002/iir.1369

© 2020 INSOL International and John Wiley & Sons Ltd

8Int Insolv Rev. 2020;29:8–31.wileyonlinelibrary.com/journal/iir

a tool to enhance growth and market efficiency and as an ingredient of the broader stabilisation

of the European capital market.

2

Following its Recommendation of 2014,

3

the Commission pub-

lished a Proposal in 2016 for a Directive on preventive restructuring frameworks, second

chance, and measures to increase the efficiency of restructuring, insolvency, and discharge

procedures,

4

which reflected market promotion approach. The European Council adopted the

Preventive Restructuring Directive on June 20, 2019.

5

The timeframe for Member States to

implement the Directive is July 17, 2021, although those countries encountering particular diffi-

culties in the implementation may use a possible extension of a maximum of 1 year, according

to Article 34.2.

The objective of the Directive is to contribute to the functioning of the internal market and

remove obstacles to the exercise of fundamental freedoms, in particular the free movement of

capital and freedom of establishment.

6

Inadequate insolvency laws and procedures can unnec-

essarily destroy economic value. However, insolvency law's potential to promote market effi-

ciency should not be exaggerated and, in any case, what type of insolvency law best promotes

market efficiency is debatable. Nevertheless, insolvency law includes important considerations

between the substantive rights of the involved parties. In an insolvency situation, the rights of

all parties are, by definition, not fulfilled, and the issue is how the losses should be allocated

equitably among them. The Preventive Restructuring Directive takes a cautious position on sub-

stantial issues, allowing Member States to deviate from several of its articles, which may dilute

the Directive's ambitious goals.

This article focuses on the relationship between individual debtors and their creditors

according to the PRD. In the spirit of market efficiency, the Directive promotes a fresh start for

a debtor who is an entrepreneur.

7

The call for a “second chance”for entrepreneurs has been

part of the EU's policy of promoting small enterprises since 2008, under the initiative of the

Small Business Act.

8

The discussion on discharge

9

has shifted from the classical social policy

discourse that dominated European discussions in the 1990s and 2000s

10

to one of market

efficiency.

Conflict between the rights of the debtor and those of the creditors is inherent to insolvency

law. The rationale of insolvency law is to strike an equitable balance between the rights of the

parties. A creditor's right to payment is the basis of other rights, including rights vis-à-vis other

creditors, such as access to enforcement, priority before other creditors, and the right to partici-

pate in proceedings. However, the right to payment cannot be enforced at any cost but must be

balanced against the basic rights of the debtor, especially when the debtor is an individual

rather than a company, due to the role played by human dignity and human rights in this

context.

Very formalistic views of bankruptcy tend to ignore the rights of the debtor, focusing instead

on the division of property among creditors. In this viewpoint, insolvency is only a tool to maxi-

mise the return to creditors, whose interests are the driving force for insolvency regulation.

Such an approach was common in Europe in the 19th and 20th centuries and is still present in

some jurisdictions.

11

The basic question of whether insolvency law should be “creditor friendly”

or “debtor friendly”has inspired extensive academic discussion.

12

Acknowledging debtor's

rights has recently become more important in the regulation of the company restructuring, but

it has particular relevance for debtors who are natural persons. This view has influenced the

attention on the insolvency of over-indebted individuals, which, in recent decades, has become

common throughout Europe.

13

Because of its market efficiency approach, the PRD limits debt relief harmonisation to entre-

preneurs. This article analyses how limiting the scope of application may thwart the stated goals

ARIAS VARONA ET AL.9