Opinion of the European Central Bank of 5 November 2013 on financial restructuring of companies (CON/2013/75)

OPINION OF THE EUROPEAN CENTRAL BANK of 5 November 2013 on financial restructuring of companies (CON/2013/75) Introduction and legal basis

On 21 October 2013, the European Central Bank (ECB) received a request from the Slovenian Ministry of Justice for an opinion on a draft law amending the Law on financial operations, insolvency proceedings and compulsory dissolution (hereinafter the ‘draft law’). On 25 October 2013, the ECB received a revised version of the draft law. The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the sixth indent of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft law relates to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The existing Slovenian Law on insolvency regulates two types of court proceedings applicable to insolvent companies: (a) compulsory settlement proceedings aimed at restructuring insolvent entities by, inter alia, restructuring their liabilities; and (b) bankruptcy proceedings aimed at their winding up. The main aim of the draft law is to amend the Law on insolvency with a view to improving financial restructuring of distressed companies as well as the efficiency of insolvency proceedings in general. 1.2 To this end, the draft law (a) proposes certain amendments to the general rules on compulsory settlements, including an explicit reference to the ‘absolute priority rule’ pursuant to which the compulsory settlement as a restructuring proceeding shall be carried out in a way that reflects the burden-sharing rules among shareholders and different classes of creditors as applicable in bankruptcy proceedings ; (b) broadens the scope of simplified compulsory settlement proceedings

to make them available to both micro companies and small companies and further simplifies the prerequisites in the application of those proceedings; (c) amends some other existing rules of the Law on insolvency to improve the bankruptcy proceedings and to streamline the role of the courts in insolvency proceedings; and (d) introduces regulations for a new form of restructuring proceeding for large or medium-sized companies , as briefly described below. 1.3 For large or medium-sized companies that are not yet insolvent but are likely to become insolvent within a year, the draft law enables such companies to apply new preventive restructuring proceedings proposed by the draft law . The aim of such proceedings is to facilitate early restructuring and to eliminate the causes for the insolvency of distressed companies by, inter alia, extending the binding effects of a concluded restructuring agreement that has been confirmed by the court to creditors who have not entered into the restructuring agreement, subject to having a certain majority of creditors supporting the agreement. The preventive restructuring proceedings are focused on the restructuring of financial claims , so that binding effects of the restructuring agreement may be imposed only on dissenting creditors holding that type of claim. Where the restructuring agreement provides for the restructuring of unsecured financial claims, such restructuring may entail the reduction of the principal or the extension of the maturity of the claims. If the secured financial claims are to be restructured as well, only their maturity may be extended or the interest rate modified. 1.4 Where companies are already insolvent, they may be restructured within compulsory settlement proceedings, rather than liquidated in bankruptcy proceedings, if the former would likely result in better repayment conditions for creditors than the latter. To facilitate the restructuring of insolvent large and medium-sized companies within the compulsory settlement proceedings on the basis of, inter alia, the required majority vote in relevant creditor classes, the draft law introduces certain special rules . Pursuant to those special rules, it will be possible, among other things, to provide for the restructuring of only unsecured ordinary financial claims rather than all ordinary claims, as well as the restructuring of secured claims, the pooling of collateral and spin-offs. If secured claims are to be restructured, such claims may be split and converted into two new claims, a secured and an unsecured claim, based on the market value of the assets, subject to security as determined within the compulsory settlement proceedings. The secured claims may be restructured by way of extension of the maturity or modification of the interest rate. Since the restructuring of insolvent large or medium-sized companies within the compulsory settlement proceedings may have significant effects to the stability of banks, Banka Slovenije shall be notified on the initiation of the proceedings.

2. General observations

2.1 The ECB welcomes the draft law as it broadens and strengthens the procedures and tools available for the restructuring of Slovenian companies. The new amendments should provide more efficient options for preserving as a going concern companies that are in distress or already insolvent, but are deemed economically viable upon potential debt restructuring. Especially in connection to the latter case, the clearer stipulation of the absolute priority rule and the premise that creditors of failing companies would be better off with a restructuring rather than a winding up of insolvent companies, as required by the draft law, should contribute to the successful execution of corporate restructuring procedures. 2.2 The draft law contains provisions that attempt to reasonably and proportionately balance the interests of both the debtor and its creditors in a restructuring process. Nevertheless, the ECB considers that the proposed significant changes to the existing regime could be accompanied by an economic and legal impact assessment that would inform authorities about the potential implications of applying the restructuring procedures provided for in the draft law on the economy in general and, in particular, on the balance sheets and profitability of credit institutions in their capacity as creditors of companies availing of the new procedures. 2.3 Furthermore, the impact of the new procedures should be monitored on a continuous basis and in the event that risks to financial stability emerge, the framework should be revised to address potential adverse impacts. Such monitoring appears warranted, specifically as the draft law regulates several new restructuring solutions, including the preventive restructuring proceedings and special rules for compulsory settlement proceedings applicable to large and medium-sized companies that specifically relate to credit and other financial institutions as holders of financial claims as defined under the draft law.

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 5 November 2013.

[signed]

The President of the ECB

Mario DRAGHI