The EU Seeks to Bring Harmony to Insolvency
On 12 June 2025, the EU Council agreed its position on a directive harmonising certain aspects of insolvency law and published a draft directive.
The stated aim of that directive is to bring national insolvency regimes closer to each other so that barriers to the internal market which reduce the attractiveness of cross-border investments will be removed and the EU will become more attractive for foreign and cross-border investors who (it is said) will no longer have to concern themselves too much with differences in local insolvency regimes. However, as the proposal itself makes clear, it is a “compromise” text which it has taken a long period of time to reach and which (as we shall see) contains options because no fundamental agreement could be reached in certain respects.
The proposal endorsed by the Council runs to 137 pages of text but the two main points of interest to investors are as follows.
Harmonised Pre-Pack Mechanism
Title IV (entitled “Pre-pack Mechanism”) will require all member states to ensure that debtor companies are able to access a regime which is similar to the well-known pre-pack administration regime in England and Wales.
In very short summary, the debtor will be supervised by a “monitor” who is an insolvency practitioner. All enforcement actions will be stayed during the process and the relevant business will be sold on the recommendation of the monitor. Once sold, the business will be free of all previous liabilities.
Unlike the regime in England and Wales, however, creditors appear to have a greater potential influence on events (if that is what member states legislate). Creditors in England and Wales often complain – and with good reason – that their ability to influence events is non-existent. Under the proposed directive, however, EU creditors may have the right to challenge the sale proposed by the monitor on the basis it is not in the best interests of creditors and to force a public auction rather than a private sale. There is also uncertainty in the text about member states’ obligations to legislate in connection with the transfer of contractual obligations.
Harmonised Creditors’ Committees
The second main change is contained in Title VII (entitled “Creditors’ Committee”) which requires creditors’ committees to be established in corporate insolvencies if the creditors request it.
Such committees must represent the varying classes of creditor fairly and ensure that crossborder creditors can participate. They will have the power to require information from insolvency practitioners and to be consulted on major decisions.
As noted above, the proposed text is a compromise and it is clear that certain issues were obviously not capable of agreement. For example, whether members of the creditors’ committees have personal liability or not is left to the member states. Further, member states can limit the right to establish a creditors’ committee depending on the size of the debtor business and if the nature and scope of the debtors’ business means that the costs involved would outweigh any benefits. There could be considerable national variation in such rules.
None of this is law yet. Further, since the EU has chosen the directive mechanism rather than the more direct regulation mechanism (which worked well, for example, in the question of jurisdiction in civil and family claims), it will be up to member states to legislate if it becomes law. It is clear that there is considerable scope for variation within member states’ implementation of the directive, for the reasons given above, and so the ultimate effect of this particular round of single market harmonisation may be more limited in effect than it appears.
Contrary to the stated aim of the directive, this is likely to remain a barrier to intra-EU investment because investors will still need local law advice for the foreseeable future.
Simon Winter, Partner