Tripping the Light Fantastic: A Comparative Analysis of the European Commission's Proposals for New and Interim Financing of Insolvent Businesses

Abstract

The European Commission published a draft Directive in November 2016, with the aim of ensuring that all Member States have in place an effective mechanism for dealing with viable, but financially distressed, businesses. The draft Directive includes provisions designed to encourage financing for the debtor company, both interim financing to “keep the lights on” for a brief period while the debtor negotiates with its creditors for a resolution to its financial distress, and where possible, to finance implementation of a restructuring plan, called “new financing” in the draft Directive. Creating such a financing regime is a complex and difficult issue, as the law’s intervention in this area often involves constraints on the rights of existing creditors, requiring that a careful balance is maintained between existing creditors’ rights and the rights of the interim financier. This paper examines the underlying policy rationale and benefits of having new and interim financing available to financially distressed debtor companies, and discusses the risks involved. It examines the EU Commission’s proposals in light of the experience of jurisdictions that have already tackled these issues, notably the United States and Canada, or have developed a market-based solution to this problem, such as the UK. While the European Commission’s wish to include such measures in its restructuring proposals is laudable, the measures as drafted raise concerns, particularly regarding risks associated with priority for the grantors of such finance. The authors suggest that there are four fundamental aspects of such financing on which the Directive could give guidance to Member States, namely, effective notice to pre-filing creditors, thresholds for the debtor to qualify, a menu of relevant criteria to balance benefit and prejudice, and a role for the court in resolving disputes, ensuring fairness to stakeholders, and serving as an accountability check on interim financing arrangements, all aimed at maintaining the integrity of the insolvency process.

Keywords: New Financing, Interim Financing, European Commission Proposals, Debt Restructuring

JEL Classification: G33, K22