The EU Directive on restructuring and insolvency was published in the OJEU on Wednesday. Members states have until 17 July 2020 to implement it, and this includes the UK as it stands: the UK has much – but not all – of it already. The UK Government has its own plans for reforming insolvency law of course, including to re-introduce Crown Preference. It is mostly about creating a rescue framework. Two aspects of the Directive may particularly interest finance lawyers:
- It requires EU states to have a stay of enforcement rights of up to 4 months, extendable to up to 12 months, to support negotiations of a restructuring proposal. Does this cut across the Financial Collateral Directive? No it doesn’t. Article 31 baldly states that the FCD overrides it, and Recital (94) explains that:
“The stability of financial markets relies heavily on financial collateral arrangements, in particular, when collateral security is provided in connection with the participation in designated systems or in central bank operations and when margins are provided to central counterparties. As the value of financial instruments given as collateral security may be very volatile, it is crucial to realise their value quickly before it goes down. Therefore, the provisions of [amongst others, the Financial Collateral Directive] should apply notwithstanding the provisions of this Directive. Member States should be allowed to exempt netting arrangements, including close-out netting, from the effects of the stay of individual enforcement actions”.
- Article 7(4) requires ipso facto clauses to be banned. Outlawing these – save for derivatives close-out netting – is a bit of a zeitgeist. In the US this is already done by Section 365(1)(e) of the US Bankruptcy Code, which some readers will remember came under the spotlight in the 2009 NY Lehmans-related judgment in Metavante. The UK seems like to follow suit: it is one of the government’s current proposals.