Impact case study database

The research enabled EC policy-makers to make the case to the European Parliament for taking a new approach to business failure, restructuring, insolvency and a second chance for insolvent debtors within Europe. Key beneficiaries to date, therefore, include policy-makers, advisors, and legislative drafters. The three dimensions of impact are:

(i) Informing the drafting of the European Directive

While undertaking the EC study [a], the research team engaged with the EC and discussed, received, and actioned feedback on the team’s interim research findings with EC officials in Brussels in two face-to-face meetings (14 April 2015; 8 October 2015). As a direct result of the research, the EC were able to make a case for binding legislative action in the form of the 2019 Restructuring and Second Chance Directive [A]. The research was pivotal in the EC’s determination of whether, and how, to propose an appropriate legislative response to restructuring and insolvency issues, as manifested by the fact that the researchers’ report [1] is the only document referenced as underpinning research on the EC website's introduction to the new law. The study convinced the EC that insolvency reform should come in the form of a legal instrument leaving more, rather than less, choice to member states. A former legislative assistant of the EC Justice and Consumers Directorate-General explained: ‘Indeed, the study has shown that the divergence between national insolvency laws would make it difficult to propose an instrument such as a Regulation. Instead, a Directive focusing on minimum standards would be more feasible…’ [D]. The EC Staff Working Document, which made nineteen distinct references to the Leeds report, confirmed: *‘This need for current action [Directive] is evidenced by…the independent external evaluation of the implementation of the Recommendation on restructuring in the Study on a new approach to business failure and insolvency performed by the University of Leeds (January 2016)*’ ( [B] p. 105). All EU member states are required to implement the terms of the Directive in their own domestic laws by mid-2021, subject to a possible one-year extension. The EC predicts that implementation of the Directive will lead to the creation of 3 million new jobs and positively affect 50,000 businesses [E].

In addition to making the case for the Directive, the research provided a robust evidence base for the Directive’s provisions [A]. The research [1] informed the EC Expert Group on Restructuring and Insolvency’s consideration of the issues surrounding insolvency and the advice they gave on drafting the proposed Directive. A member of the EC Expert Group (appointed to advise the EC and to assist in formulating a proposal for legislation) confirmed: ‘[the] Study has… framed and influenced several of the most important discussions that took place within the Expert Group, not only with regard to the legal nature of the instrument but also to its substantive content’ [C]. The adopted Directive includes three key elements: i) common principles on restructuring frameworks for financially distressed businesses (Articles 4-18 of the Directive); ii) rules to allow natural debtors to benefit from a second chance (Articles 20-23); iii) targeted measures for EU Member States to make insolvency, restructuring and debt discharge procedures more efficient (Articles 25-27) [A]. The member of the EC Expert Group went on to state: ‘Key provisions of the proposal were analysed and designed under the influence of the Study e.g. on the moratorium on creditor actions, debtor-in-possession restructuring, directors' duties, classification of creditors, or new financing’ [C]. The former legislative assistant of the EC Justice and Consumers Directorate-General confirmed: ‘[T]he findings of the comparative study were used by the Commission services to justify both the form of the legislative instrument [the Directive] and particular provisions to be included in that instrument… the study has had a clear impact on the choice of the EU policy makers to focus on the rules to facilitate debt discharges for entrepreneurs rather than to cover all individuals. This explains the choice in the final text of the Directive to exclude binding rules on consumer over-indebtedness’ [D]. This last comment means that it is left to individual member states to decide whether and how to apply the provisions of the Directive to deal with debts owed by consumers.

As a result of the research, EC officials were better able to understand and explain how restructuring procedures should be crafted and nuanced, as evidenced by the EC impact assessment of the Directive ( [B] p.17). For example, the researchers’ definitions of concepts in the study, such as ‘bankruptcy’ and ‘going concern value’, were adopted in the proposal ( [B] pp.193-96). Officials also gained an understanding of how new legislative developments at the EU level could be formulated and adopted for optimum innovation and change. For instance, the EC used the research:

1. as the foundation for its arguments that there was a clear need to develop procedures designed specifically for insolvent small and medium sized enterprises (SMEs) and as to how such procedures might be advanced ( [B] pp. 28, 172-174 and contained in, for example, Directive articles 8(2), 11(1) and 12(3) **[A]**);

2. to support proposals for discharge of natural persons (both entrepreneurs and consumers) from debt obligations ( [B] pp. 26, 40-41, 106 and contained in, for example, Directive articles 20-22 **[A]**);

3. to determine whether rescue plans (i.e. plans to restore the financial viability of the debtor’s business) should divide creditors into classes for voting purposes, and whether (and to what extent) consent of creditors within each class is necessary for a court or administrative authority to approve restructuring plans ( [B] p.18 and contained in, for example, Directive articles 9-11 **[A]**).

The Directive is a game-changer, bringing about business rescue for financially distressed businesses, and relieving highly indebted individuals of their debts, giving them a ‘fresh start’ free from debt. The Directive will create and preserve jobs and foster economic growth, support cross-border cooperation and economic integration, facilitate access to credit and build a more economically inclusive society [D]. This is encapsulated in the statement of Josef Moser (Austrian Justice Minister) when speaking on behalf of the EU Council of Ministers in December 2018 in relation to the Directive: ‘Every year, 1.7 million people lose their jobs because their company goes bankrupt. We must therefore have robust insolvency rules in place across the EU to reduce the number of bankruptcies, and ensure that reputable entrepreneurs are offered a second chance. I am glad we have reached an agreement with Parliament so quickly so the new rules can be adopted …’ ( EU Council Press Release, 2018).

(ii) Framing policy and legal change in EU member states

The Directive requires fundamental change for some member states, who must make substantial amendments to their laws. By clarifying concepts and providing a theoretical framework, the underpinning research [1] has assisted national policy-makers and their advisors in responding to the Directive. For example, a member of the EC Expert Group explained: ‘the Study is…very useful at a national level to facilitate the implementation of the Directive. Since many of the provisions included in the Directive are relatively new in several Member State [sic] , like Spain, the Study is one of the main references used by experts and stakeholders to set the conceptual and policy frame when advising local authorities in the implementation process’ [C]. The research has been used in a report by the Public Policy and Management Institute (PPMI), a leading European research and policy analysis centre, advising the Lithuanian Government on how insolvency law reforms need a wider, complementary institutional framework supporting business restructuring [F].

The main features of the Directive were used to inform recent changes to the UK’s corporate restructuring and insolvency laws (Corporate Insolvency and Governance Act 2020). They were discussed in a House of Commons briefing paper used by MPs and those that work for them [G] and subsequently embraced in the terms of the Act, such as the introduction of a new insolvency process allowing for a standalone stay (a temporary pause) in relation to credit enforcement actions.

(iii) Raising awareness of the need for further legislative and regulatory action

The research [1]:

1. provided the EC with a base for analysing whether general insolvency law reform and harmonisation measures should also be applied to bank insolvencies, as provided for in the tender for a ‘Study on differences between bank insolvency laws and on their potential harmonisation’ [H].

2. was used in an Opinion by the European Central Bank to demonstrate the need for a pan-European regime for bank insolvencies, setting trigger points for opening restructuring proceedings and building on common underlying concepts and harmonised key elements [I].

3. was used by the Conference of European Restructuring and Insolvency Law (CERIL), an independent and influential lobby group, to argue for the harmonisation of European law on the avoidance of pre-insolvency transactions (which may undermine the principle of equality of treatment of creditors and make business rescues more difficult) [J].

The research has had a timely and extensive influence on a major area of EU commercial life, namely the problems of debt, and the resultant Directive has ushered in a new era in the EU for addressing insolvency and its effects on all companies and individuals with significant debts.