Hamilton Perspectives Nyhetsbrev

Strong criticism of the rule on relative priority in the EU Restructuring Directive

The European Parliament and Council Directive on a Framework for Preventive Restructuring, a se­cond chan­ce and me­a­su­res to ma­ke re­structu­ring, in­sol­ven­cy and debt can­cel­la­tion pro­ce­du­res mo­re ef­fecti­ve and amen­ding Directive 2012/30/EU (the ”Restructuring Directive”) are ex­pec­ted to be ad­op­ted short­ly. Following ad­op­tion, the directi­ve shall wit­hin two ye­ars be trans­po­sed in­to the na­tio­nal laws of the mem­ber sta­tes (or wit­hin th­ree ye­ars if ex­ten­sion is re­ques­ted by a mem­ber sta­te and gran­ted). In Sweden, the Retructuring Directive will en­tail ex­ten­si­ve le­gis­la­ti­ve amend­ments, espe­ci­al­ly in the Act (1996: 764) on cor­po­ra­te re­or­ga­ni­sa­tion.

In re­cent weeks, se­ve­ral ac­a­de­mics and practi­tio­ners ha­ve strongly cri­ti­ci­sed the re­la­ti­ve pri­o­ri­ty ru­le in the la­test ver­sion of the directi­ve text. (See, for ex­amp­le, the ar­tic­le ”The Imminent Distortion of European Insolvency Law: How the European Union Erodes the Basic Fabric of Private Law”). by Allowing ’Relative Priority’ (RPR) ’by Roelf Jakob de Weijs, Aaart Jonkers and Maryam Malakotipour at the University of Amsterdam, https://pa­pers.ssrn.com/sol3/pa­pers.cfm?ab­stract_id=3350375).

The cri­ti­cism re­fers to the pre­requi­si­tes for a court to ap­pro­ve a re­structu­ring plan even though a class of cre­di­tors op­po­ses the plan (cross-class cram-down for­ce). It is pro­bably too la­te to ma­ke changes to the directi­ve text and the ru­le of re­la­ti­ve pri­o­ri­ty will the­re­fo­re most li­kely re­main in the fi­nal ver­sion.

The pro­po­sed ru­le on cross-class cram-down in the Restructuring Directive is in­spi­red by chap­ter 11 in the US Bankruptcy Act, whe­re the­re is an ab­so­lu­te pri­o­ri­ty ru­le (“APR”) that li­mits the court’s pos­si­bi­li­ti­es to de­ci­de on cram-down. An APR is al­so in­clu­ded in the pro­po­sed Restructuring Directive. However, in the la­test ver­sion of the directi­ve text, Member States ha­ve the op­tion to im­ple­ment a re­la­ti­ve pri­o­ri­ty ru­le; “RPR”). The cho­ice between APR and RPR is a hot is­sue as it is about the ba­lan­ce between the in­te­rests of the cre­di­tors and sha­re­hol­ders. The APR op­tion is cre­di­tor-fri­end­ly whi­le the RPR op­tion is sha­re­hol­der-fri­end­ly.

In short, the APR op­tion me­ans that all clas­ses of cre­di­tors and sha­re­hol­ders (or ot­her equi­ty hol­ders) must be ranked in the sa­me or­der as in a liqui­da­tion, and in a liqui­da­tion the sha­re­hol­ders ha­ve the lo­west ran­king. Cross-class cram-down of a cer­tain op­po­sing class of cre­di­tors can, ac­cor­ding to the APR op­tion, be im­ple­men­ted on­ly if cre­di­tors with lo­wer ran­king or sha­re­hol­ders do not re­cei­ve any va­lue whatso­e­ver ac­cor­ding to the re­structu­ring plan. The APR op­tion me­ans, for ex­amp­le, that the plan can­not be for­ced through if the plan me­ans that the ex­is­ting sha­re­hol­ders may re­tain their sha­res even though all cre­di­tors are not paid in full. Under cur­rent Swedish ru­les, sha­re­hol­ders are not af­fec­ted by a com­po­si­tion pro­po­sal. The star­ting point ac­cor­ding to the APR op­tion will ac­cor­dingly be the op­po­si­te. If all cre­di­tors can­not re­cei­ve full pay­ment (100 per cent), the va­lue of the ex­is­ting sha­res shall be com­ple­tely era­sed by pro­vi­sions in the re­structu­ring plan. The ex­is­ting sha­re­hol­ders will re­cei­ve va­lue on­ly if the af­fec­ted cre­di­tors ac­cept it.

In short, the RPR op­tion me­ans that it is be pos­sib­le for a court to ap­pro­ve a re­structu­ring plan de­spi­te that the ran­king between cre­di­tors and sta­ke­hol­ders is not strict­ly ad­he­red to in the plan. According to the RPR op­tion, it is on­ly requi­red that the hig­her ranked class re­cei­ves a gre­a­ter va­lue than the lo­wer ranked class re­cei­ves. This me­ans, for ex­amp­le, that if the va­lue of the as­sets co­vers 100 per cent of the claims in a cer­tain class of cre­di­tors, it should ne­vert­he­less be pos­sib­le for the court to  ap­pro­ve a plan that gi­ves cre­di­tors in that class a pay­ment of on­ly 50 per cent (or ot­her per­cen­tage) of the amount of the cre­di­tors’ claims as long as the va­lue re­cei­ved by a lo­wer ranked cre­di­tor class or sha­re­hol­ders amounts to a va­lue that is lo­wer than the va­lue the op­po­sing hig­her ranked class re­cei­ves. This pos­si­bi­li­ty of trans­fer­ring va­lue from hig­her ranked clas­ses to lo­wer ranked clas­ses or sha­re­hol­ders incre­a­ses the hig­her ranked cre­di­tors’ cre­dit risk and can the­re­fo­re ma­ke it mo­re dif­ficult for com­pa­ni­es to ob­tain bank and sup­pli­er cre­dits.

The pos­si­bi­li­ty for mem­ber sta­tes to choo­se between the APR op­tion and the RPR op­tion may le­ad to com­pe­ti­tion between mem­ber sta­tes whe­re so­me sta­tes may want to at­tract in­ter­na­tio­nal re­structu­ring pro­ce­du­res by choo­sing to im­ple­ment the sha­re­hol­der-fri­end­ly RPR op­tion, whi­le ot­her sta­tes may pre­fer it mo­re cre­di­tor-fri­end­ly APR op­tion. One idea with the Restructuring Directive was to re­du­ce com­pe­ti­tion between the mem­ber sta­tes’ dif­fe­rent re­structu­ring re­gi­mes and fo­rum shop­ping. However, the cho­ice between the APR op­tion and the RPR op­tion can le­ad to incre­a­sed com­pe­ti­tion and fo­rum shop­ping.