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.