Temporarily relax insolvency regulations

14.06.2020

In March 2020, due to the COVID-19 pandemic reaching Europe, the Conference on European Restructuring and Insolvency Law (“CERIL”) released an Executive Statement urging European legislators to adapt insolvency legislation due to COVID-19. CERIL was “deeply concerned with the ability of existing insolvency legislation to provide adequate responses to the extremely difficult situation in which many companies find themselves as a result of the spread of the COVID-19. It calls upon EU and European national legislators to take immediate action and adapt insolvency legislations where necessary in light of the current extraordinary economic situation and to prevent unnecessary bankruptcies of entrepreneurs”. CERIL recommends two steps to be taken by European national legislators:

  1. To suspend the duty to file for insolvency proceedings based on over indebtedness. CERIL argues that the current uncertainty and distressed market conditions hamper the test to determine whether a business is still viable or not and whether it ought to initiate insolvency proceedings; therefore, in these circumstances, companies which would be viable in normal market conditions, might be forced to file for insolvency unnecessarily; and
  2. To respond to the illiquidity of businesses. CERIL holds that those businesses with limited cash reserves, due to lockdown measures and other governmental restrictions, may be approaching a situation of illiquidity that qualifies as the “inability to pay”, thereby risking being considered as legally insolvent, while they would have probably remained viable in a normalised market situation

Some European countries already prepared  new laws, others are still working on it. For example in the Netherlands, it is still a concept.  It is very likely that this new (temporary) law will come into effect shortly. A temporarily law will be valid until 30 September and can be extended if necessary due to the circumstances surrounding the COVID-19 pandemic.

The proposed Payment Delay Act (Tijdelijke Betalingsuitstel-wet) has major consequences for bankruptcy filings, seizures and execution of judgements. A short overview:

The temporary act is intended to protect entrepreneurs from 'unnecessary' bankruptcies and recoveries from creditors and to limit the damage resulting from the pandemic where possible. 

It should be noted that the scheme refers to debtors, in principle healthy companies, who have run into liquidity problems as a result of restrictive measurs imposed by the government due to COVID-19, i.e. the closure of non-essential shops, hospitality and the events industry. The temporarily liquidity problems must therefore have been caused by restrictive government measures.

In short, the Payment Delay Act includes that:

-an enterprise can request the court to hold a bankruptcy petition against it temporarily. The judgement is valid for a period of maximum two months and can be extended no more than twice (for another two months) ;

-a company whose assets are seized or executed on the basis of a security right or measure can apply at court to suspend the execution or to lift the attachment.

In the situation of an appeal for bankruptcy request by the debtor, the latter has the option to have the bankruptcy filing suspended in case all of the following requirements are met: 

-It appears that the company is in a situation in which it has been unable to continue as usual, solely or mainly because of the restrictive government measures related to COVID-19, and is therefore temporarily unable to meet its debts and

-This is the situation if the debtor is able to provide financial information showing that a) before the restrictive measures were announced, the company had sufficient income to pay its debts and b) there has been a loss of turnover of at least 20% since the restrictions were implemented

- The prospect is that the debtor will be able to satisfy its creditors after a deadline, set by the court

-The creditors by whom the petition for bankruptcy has been filed will not be materially and unreasonably harmed in their interests by the suspension

SUSPENSION OF EXECUTION OF SECURITY RIGHTS DUE TO COVID-19 CIRCUMSTANCES

Suspension of an enforceable judgment is a drastic measure, especially for the creditor. Basically, a debtor might apply for lifting of measures due to the same conditions as mentioned above, PLUS an extra condition, being that the debtor also has to demonstrate that the attachment or suspension of an execution is to be continued in order to continue its business.

If the conditions are not longer met, or the behaviour of the debtor is in disadvantage to the creditor, the court can decide to lift the arrest of the bankruptcy petition or even revive the attachment in favour of the creditor.

The regulations may vary per EU country. Please ask for more specific information on the applicable jurisdiction.

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