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13 January 2020

cee overview - insolvency & restructuring

Increased Need for Restructurings on the Horizon?

Economic growth was relatively stable this past year in the CEE region. Despite global economic uncertainties caused by Brexit and trade disputes, businesses still benefited from high consumption and the availability of low-interest loans.

The latter not only allowed new investments to be financed but also helped keep vulnerable business models alive.

Yet it seems this favourable economic environment will soon end. A slowdown in economic growth is already here and is expected to continue. While an uptick in insolvency proceedings has been witnessed in parts of the CEE since late 2018, some jurisdictions are still seeing decreases in this area. In any case, the expected slowdown in economic growth may reveal the weaknesses of those business models that are for now still benefiting from the favourable economic situation.

Restructurings on the agenda
During the economically bumpy years following the 2008 global economic crisis, out-of-court restructurings were a popular alternative to insolvency proceedings. They provided more flexibility and confidentiality than in-court insolvency proceedings and allowed debtors to continue their business activities while avoiding troubles and stigma of insolvency proceedings.
However, the absence in most jurisdictions of a legal framework for out-of-court restructurings also led to legal problems, such as single creditors blocking restructuring agreements or risks of civil or criminal liability with regard to bridge financing in situations close to insolvency. At least in some jurisdictions out-of-court restructurings could be based on (non-binding) guidelines for restructurings that took account of previous practical experiences and international standards.

European legal framework
Since 2014, the European Commission has been working to introduce a European legal framework for preventive restructurings. Finally, in June 2019, Directive (EU) 2019/1023 on restructuring and insolvency was adopted, which Member States must (mostly) implement by summer 2021.
For the first time, uniform rules for preventive restructuring frameworks aimed at avoiding (the stigma of) insolvency proceedings will be established. The starting point for preventive restructurings is the "likelihood of insolvency", a term to be defined by national law, but in any case, describing a point in time before a company becomes insolvent under respective national insolvency law. It is still too early to get a picture of the implementation of the Restructuring Directive into national law, as it provides not only various restructuring tools but also plenty of options for Member States to choose from.

Flexibility, confidentiality and swift implementation
The success of restructurings depends on several factors, but in most cases the creative, flexible and confidential use of restructuring tools within a short period of time is essential to ensure sustainable and fruitful restructurings. Member States should implement the Restructuring Directive wisely providing a useful toolkit considering well-established practical experiences and addressing problems faced in the past. It should be ensured that preventive restructurings can be initiated as early and confidentially as possible.
Unlike insolvency proceedings, publicity and the involvement of courts or authorities should be minimised to avoid adverse consequences for the debtor's business due to negative media reports, loss of (customer) trust or delays in the implementation of restructuring measures.

CEE region: First movers?
It might be prudent to take a closer look at some CEE jurisdictions which already provide legal frameworks for restructurings in case of imminent insolvency. Even if these legal frameworks do not cover the full scope of the Restructuring Directive, other Member States could consider some of their practical experiences (both positive and negative) when implementing the Restructuring Directive. In any case, national implementation should be pushed forward to be ready for the expected deterioration of the economic environment. The next wave of restructurings is already on the horizon.