Opening the Door for Opportunistic Use of Interim Financing. Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

42 Pages Posted: 15 Dec 2017

See all articles by Roelf Jakob de Weijs

Roelf Jakob de Weijs

University of Amsterdam - Centre for the Study of European Contract Law (CSECL)

M.E. Baltjes

Houthoff Buruma

Date Written: December 14, 2017

Abstract

The draft of the EU Directive on Preventive Restructuring Frameworks and Second Chance (the "Directive") provides rules for adopting reorganisation plans in order to avoid insolvency. The draft Directive also provides rules on the related problem of interim financing. According to the draft Directive, interim financing should be encouraged and not be made subject to clawback unless parties have committed fraud or acted in bad faith. The Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing which will reduce the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross-collateralisation and aggressive loan-to-own strategies under the guise of interim financing.

There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Directive into a fully-fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Directive to cases of new security against new money necessary and used for the continuation of the business.

Keywords: DIP finance, interim financing, preventive restructuring

JEL Classification: K11

Suggested Citation

de Weijs, Roelf Jakob and Baltjes, M.E., Opening the Door for Opportunistic Use of Interim Financing. Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks (December 14, 2017). Amsterdam Law School Research Paper No. 2017-47, Available at SSRN: https://ssrn.com/abstract=3087961 or http://dx.doi.org/10.2139/ssrn.3087961

Roelf Jakob De Weijs (Contact Author)

University of Amsterdam - Centre for the Study of European Contract Law (CSECL) ( email )

P.O. Box 1030
Amsterdam, 1000 BA
Netherlands

M.E. Baltjes

Houthoff Buruma

Amsterdam
Netherlands

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