The Second Company Law Directive
and the protection of corporate creditors
Diederik BRULOOT
ECLE meeting Cologne - 27 September 2012
OVERVIEW
• Second Company Law Directive (2nd CLD)
‧ Public companies
‧ Creditor protection
• Latest developments in the 2nd CLD-debate
‧ Is there still a debate?
• Possible future approach
ECLE meeting Cologne - 27 September 2012
2nd CLD: IS THERE STILL A DEBATE?
• 2005-2006
‣ “Efficient creditor protection in European company law”
‣ Even the Lutter Group concluded:
“legal capital does not prevent the insolvency of companies and
hence does not afford ultimate protection to creditors”
“The balance sheet sets the standard for distribution possibilities,
but due to dangers an additional solvency test is required”
• September 2006
‣ Directive 2006/68/EC (= Amending Directive)
ECLE meeting Cologne - 27 September 2012
AMENDING DIRECTIVE
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•
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Selected topics
Baseline of individual amendments
Optional character of amendments
Actual design of amendments
Contributions in kind
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‣ Baseline: no expert report if no added value, BUT
‧ Only 3 specific cases
‧ Only audited accounts
‧ Some member states: expert = auditor only
‧ Re-use option = alternative road, but technical issues
ECLE meeting Cologne - 27 September 2012
AMENDING DIRECTIVE
• Share buybacks
‣ Abolishing unnecessary limitations, BUT
‧ Reintroducing (10)%-threshold as an optional rule
Germany
Belgium
Netherlands
UK
Luxembourg
10 %
20%
50% OR
100%-1
100%-1
100%-1
‧ =DISHARMONISATION
‧ Art. 19, (v): “the acquisition shall not prejudice the satisfaction of
creditors‘ claims”
ECLE meeting Cologne - 27 September 2012
AMENDING DIRECTIVE
• Financial assistance
‣ Replacing absolute ban by conditional permission, BUT
‧ Detailed rules aimed at neutralising conflicts of interest
– Fair market conditions, investigation of credit standing,
disclosure (a.o. risk for liquidity & solvency).
‧ “Overruled” by rough net-assets limitation (art. 15 2nd CLD)
Implemented
Partially
Implemented
Not Implemented
Belgium
Netherlands
UK
Luxembourg
Germany
France
ECLE meeting Cologne - 27 September 2012
2nd CLD: IS THERE STILL A DEBATE?
• 2006 Amending Directive as a 1st step?
• Feasibility study (January 2008):
‣ Unclear results
‣ EC position:
“the current capital maintenance regime […] does not seem to cause
significant operational problems for companies. Therefore no follow-up
measures or changes to the Second Company law Directive are foreseen in the
immediate future.”
ECLE meeting Cologne - 27 September 2012
2nd CLD: IS THERE STILL A DEBATE?
• European Private Company proposal (June 2008)
‣ Flexible rules on creditor protection
‣ Presidency compromise proposals: back to the 2nd CLD
• Public consultation (2012)
‣ “In your opinion, should the Second Company Law Directive be
reviewed?”
‧ YES: minimum capital requirement, introduction of a solvency test, use of
IFRS for distribution purposes, clarifying regime of abstention vote
‧ NO: current rules are flexible and leave a significant margin for Member
States, current rules have stood test of time, compliance costs for
companies are not excessive
ECLE meeting Cologne - 27 September 2012
2nd CLD: IS THERE STILL A DEBATE?
• Public consultation
‣ Results: July 2012
‧ 496 responses
– 115 Spain – 86 Germany – 54 Austria – 41 France -30 UK
– 30% lawyer – 11 % university – 11% business federation
‧ Should the Second Company Law Directive be reviewed?
75% Answered
25% No answer
²/3 No
1/
Lawyers & business federations
Universities,
think tanks &
trade unions
ECLE meeting Cologne - 27 September 2012
3
Yes
2nd CLD: IS THERE STILL A DEBATE?
• Public consultation
‧ New EC action plan before end 2012
• European Parliament resolution (June 2012)
‧ “possible reforms of the Second Company Law Directive should focus
on further simplification instead of introducing an alternative regime
for capital formation and maintenance”
• Future approach?
ECLE meeting Cologne - 27 September 2012
2nd CLD: FUTURE APPROACH?
• Legal capital
‣ ≠ 1970’s German legal capital system
‧ = set of rules of conduct attached to capital concept
• 2nd CLD as a directive on
‧ Shareholder & creditor protection
‧ Rather than legal capital as such
• Creditor protection
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‧
‧
‧
Vicinity of insolvency
Distributions to shareholders
Company formation and considerations
Others?
ECLE meeting Cologne - 27 September 2012
2nd CLD: FUTURE APPROACH?
• Vicinity of insolvency
‣ Gambling for resurrection
‣ Art. 17 2nd CLD
‧ Call a general meeting: inappropriate action
‧ Loss of ½ capital: inappropriate criterion
‣ National law: rule implementing art. 17 2nd CLD is necessarily
completed by other rules, e.g. Belgium:
‧ Duty to motivate going concern accounting in case of consecutive losses
‧ Auditor warning is case of serious and corresponding facts endangering
company’s going concern
‧ Directors liability for insolvent trading
ECLE meeting Cologne - 27 September 2012
2nd CLD: FUTURE APPROACH?
• Vicinity of insolvency
‣ Rule redirecting directors’ incentives in the interest of creditors =
desirable
‣ Wrongful trading can serve as a model for a European rule
‧ But differs not fundamentally from functional equivalents
‣ No link to concept of legal capital necessary
• Distributions to shareholders
‣ Art. 15 2nd CLD: net-assets test
‧ + bright line rule
‧ + long term obligations taken into account
ECLE meeting Cologne - 27 September 2012
2nd CLD: FUTURE APPROACH?
• Distributions to shareholders
‣ Art. 15 2nd CLD: net-assets test
‧ -- results outdated
‧ -- liquidity aspect neglected
‧ -- IFRS: issue of distributable non-realised fair value profits
‣  combination of balance sheet test + liquidity orientated solvency test is
preferable
‣ Introducing this combination on the level of 2nd CLD:
‧ Increases level of creditor protection
‧ Resolves IFRS-issue on a European level
‧ Follows and confirms clear trend in member states’ company laws
‧ Can with or without reference to the concept of legal capital
ECLE meeting Cologne - 27 September 2012