The Stay Procedure in the proposed Directive Professor Jennifer Payne, University of Oxford

Introduction -A restructuring moratorium can be beneficial -it can prevent creditors disrupting the restructuring by asserting their claims against the company -it can enable the business and assets of financially distressed but viable companies being kept together long enough for the restructuring to be effected -They involve significant creditor constraints and bring dangers for creditors, in particular -they may be used by managers to prop up unviable businesses -they can be used by managers of viable businesses to “shake off” liabilities that they are capable of meeting -Any legislation introducing a statutory stay needs to balance these concerns

The Stay Procedure in the proposed Directive: Overview -Stay of individual enforcement actions to be made available by MS to debtors undergoing restructuring: Art 6(1) -all creditors to be included but MS decide if it should be general or limited (Art 6(2)) -effect on employee claims (Art 6(3)) -Scope -temporary suspension of the right to enforce a claim by creditor against debtor: Art 2(4) -a general stay prevents creditors opening insolvency procedures: Art 7(2) -obligation on debtor to file for insolvency suspended: Art 7(1), but see Art 7(3) -effect on executory contracts: Art 7(4)-(5) See Prof Ignacio Tirado’s comments -Maximum duration: no more than 4 months (Art 6(4)) but extendable to twelve months by judicial or administrative authorities at request of debtor or creditors: Art 6(5)-(7) -The stay may be lifted in whole or part by judicial or administrative authorities: Art 6(8), Art 6(9)

Comments on the proposed Directive The level of detail -Much of the detail of the provisions in the proposed Directive is missing or unclear -In part this is because much of the detail of how the stay will operate is left to Member States to determine (eg Art 6(2)) -much will depend on the decisions taken by MS -In part this is because key concepts and terms lack clarity -Eg what does a “stay of individual enforcement actions” (Art 7, Art 2(4)) encompass? -Eg will the stay apply to guarantors?

Comments on the proposed Directive The relevant triggers -Art 6(1) simply states that debtors should have the benefit of the stay “if and to the extent such a stay is necessary to support the negotiations of a restructuring plan” -No requirement that debtors should demonstrate from the outset that there is a reasonable prospect that the restructuring can be agreed with its creditors (cf where debtors seek to extend the stay: Art 6(6)) -What is to prevent managers of an unviable company using the moratorium? -no requirement for the managers to demonstrate eg that they have sufficient funds to carry on business during the moratorium -no requirement for a supervisor to have oversight of the business during the moratorium -What about managers of a viable company using it to shake off the liabilities that it can service (but would prefer not to)? -no requirement that the company be insolvent, or for insolvency to be imminent, to make use of the stay -How are stays to be commenced?

Comments on the proposed Directive The role of the court -In general the proposed Directive seeks to minimise the role of “judicial or administrative authorities” in the restructuring process -this is a concern given the significant creditor constraints that the proposed Directive introduces -The stay procedure is one of those areas in which the proposed Directive acknowledges that “judicial or administrative authorities” do need to be involved: Arts 6(2), 6(5)-(6), 6(8), 6(9) -There is a lack of clarity in some respects -Eg how are courts to determine whether to extend the stay beyond the 4 month maximum period in Arts 6(5)-(6). What does “relevant progress” mean? How will the court deem that there is a “strong likelihood” that the plan will be adopted? -Courts can play an important role in protecting creditor rights