Scrutiny of EU Legislative Proposals

We have a quorum. I thank Deputies Chambers and O'Callaghan and Senator Black for attending on time. Apologies have been received from Deputies Clare Daly and Mick Wallace and Senator Lorraine Clifford-Lee.

I welcome Ms Madeleine Reid from the Department of Justice and Equality who is with us again this morning, and Ms Helen Curley and Ms Deirdre O'Higgins from the Department of Jobs, Enterprise and Innovation. I thank them for their attendance.

The purpose of the meeting is to have a discussion on COM (2016) 723, a proposed directive on insolvency and restructuring.

The committee requested submissions from a number of stakeholders on this proposal and following this engagement and receipt of submissions, the committee will make a decision on whether it is necessary that a reasoned opinion be sent to the Dáil. Our meeting this morning will help to inform that. We have received a couple of responses, is that the case? Excuse me, I am informed it is just one at this time.

How many people did we write to?

I am told we wrote to five stakeholders but the deadline for receipt of submissions will close at the end of the day. There is still a possibility that we will get more feedback. I thought we had received two but we have received one reply.

That is disappointing.

Of course it is disappointing in the context of the importance of the issue.

Before we begin I want to draw the attention of our witnesses to the situation in relation to privilege. Please note that witnesses are protected by absolute privilege in respect of the evidence they are to give to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person or persons or entity by name or in such a way as to make him, her or it identifiable. Members should be aware that under the salient rulings of the chair, members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

The format of the meeting is that I will invite both Ms Reid and Ms Curley to make opening remarks. Is that the agreed position or will Ms O'Higgins be involved as well? I will leave it open to the witnesses to make any such contribution. This will be followed by a questions and answers session. Would the witnesses like to indicate how they themselves would like to proceed?

Ms Madeleine Reid

I thank the Chair and the members of the committee for this invitation to contribute. Both of our Departments are working on this proposal, the Department of Jobs, Enterprise and Innovation on company insolvency and the Department of Justice and Equality on personal insolvency and bankruptcy. We have prepared a joint opening statement and we believe the easiest course would be if I briefly present the key points of the opening statement and then we will both respond to questions, depending on members' preferences.

That is absolutely fine.

Ms Madeleine Reid

The proposal was published last November and meetings were held to discuss in the Justice and Home Affairs Council's working group on civil law. The first meeting took place on 16 January. It was a fairly exploratory meeting. A lot of member states were still analysing the proposal. We are expecting eight meetings altogether by the end of the Maltese Presidency at the end of June. The main activity for our Departments at the moment in preparation of our response has been the launch of a joint public consultation after the proposal came out in mid December. We have allowed until the end of January for submissions to reach us but we have had a number of indications that stakeholders would like more time to prepare their submissions. We are very pleased to have that level of engagement. We would prefer to get reflective submissions, so we will be extending time to facilitate them coming in to us.

In common with other member states, Ireland has not adopted a position on the Commission initiative as of yet. We are still examining the proposal and its supporting documents. Along with other member states in the Council working party, we are clarifying certain aspects with the Commission. We are anxious to have the results of the consultation with stakeholders before we work on finalising our initial views on the proposal. We have some initial concerns which will inform some of the questions we are asking and we have drawn attention to those in the scrutiny note which was submitted to the Oireachtas before Christmas.

Looking at the legal context of the proposal, essentially this is a directive to harmonise the substantive law of member states in relation to insolvency law for the first time. There is existing EU legislation but it is limited to regulating cross-border aspects of insolvency law. It does not try to harmonise member states' national law. It is also relevant to note that the Commission produced a recommendation on restructuring and second chance in 2014 which put forward a number of non-binding recommendations to member states covering a lot of the ground now covered in this proposal. The Commission was not happy that member states did not change their laws immediately in response to that. Most member states were still heavily involved in negotiations on the cross-border insolvency regulation which was being recast at that stage.

In terms of the scope of the proposal and who is affected by it, it would cover both company and personal insolvency law to some extent and also bankruptcy law in Ireland. It applies to an individual entrepreneur, which is defined widely and would include any person carrying on a trade, business, craft or profession. It does not cover what one might describe as pure consumers with insolvency debts, but member states have the option to include them if they so wish. The directive focuses on substantive insolvency law in relation to restructuring, second chance and the effectiveness of restructuring procedures. It adopts a fairly detailed, and at times very prescriptive, approach to many of those aspects. It does not just set out general principles that member states can decide how to apply in practice in their own national legal systems. The objectives that the Commission's proposal refers to include facilitating capital markets union. The Commission has stated that it intends to address barriers to the free flow of capital. The objectives also include the Single Market strategy, which advocates a better second chance opportunity for entrepreneurs, and perceptions that differences between national insolvency laws are creating difficulty for saving businesses that are in trouble and keeping businesses afloat.

I will briefly look at the main issues that we are addressing in our ongoing examination. The objectives of the proposal, such as avoiding unnecessary insolvencies, saving jobs and promoting second chance, are clearly worthy of support, and Irish law is relatively advanced in the EU in that respect. The means that the proposal has chosen have to be seen in the context of other member states' insolvency frameworks. Most members states still have a much more penal approach to companies recovering from debt. The proposal does not always seem particularly suited to Irish national laws and frameworks. We are looking at whether the proposal overall would add value or reduce the effectiveness of Irish insolvency law. We already provide for much of what is proposed but some of the detailed requirements, as currently drafted, do not seem to fit with some important provisions of Irish law which are working well. We see some difficulties in the approach to organisation of the courts. The directive sets rules which might be difficult to reconcile with the independence of the Judiciary. There are some very cumbersome data requirements which would be quite onerous, and we wonder whether they are proportionate in the light of overall priorities in the area of insolvency.

The last point I would draw attention to is that this proposal is based on Internal Market articles of the treaty, so while it is being dealt within the framework of Justice and Home Affairs, unlike most such proposals, it does not afford Ireland the right to opt out of this legal instrument if it so wishes. This would be governed by the normal qualified majority voting in Council.

That is our initial presentation, and we would be very happy to respond to questions.

Thank you, Ms Reid, and to each of your colleagues. We will open it up to the floor.

Do the witnesses think the intention behind this directive to try to introduce into Irish law an examinership type protection for smaller businesses and individuals? Is that what this seeks to do?

Ms Deirdre O'Higgins

I think that they are not looking at this in the context of Irish law because a lot of what is in the proposed directive is fairly similar to what is in Irish law already, and it would appear that the drafters, in considering this, have looked at Irish law to a significant extent. They are looking significantly at countries that do not have that type of rescue mechanism. They want to ensure that all countries have rescue mechanisms and that the rescue mechanisms they have are broadly similar in order that a supplier in one country knows what to expect when trading into a different member state. That is the reason for European action in this area.

The witnesses will know the companies can go and get examinership. They go to the court because they cannot pay their debts but they do not want to go into liquidation so they get the protection of the court and their loans are restructured, subject to the views of the creditors. Is this proposed directive similar in terms of an individual availing of that process, or does that process already exist for individuals under the Personal Insolvency Act 2012?

Ms Madeleine Reid

Yes. Under section 115 of the Personal Insolvency Act 2012 there is a restructuring which can be imposed by the court for individuals in the same way that examinership can. It has the limitation that it only applies where the person's family home forms part of the debts that are being restructured.

Am I correct in stating that this directive will only apply to what are defined as entrepreneurs? An entrepreneur appears to be defined as a natural person exercising a trade, business, craft or profession. That could exclude a lot of people. Would that not be so?

Ms Madeleine Reid

This is a facultative measure so it would not require us to stop offering the existing personal insolvency protection to individuals. There is no problem with member states doing more than the directive requires. Where we might see some difficulties is that the proposal seems to be influenced primarily by Chapter 11 bankruptcy in the United States. That seems to have been taken as a familiar model, and I would agree with my colleague that the commission seems to be looking primarily at a large number of member states which do not have anything like this sort of restructuring. The difficulty is that Chapter 11 does not sit entirely with aspects of our examinership and personal insolvency court review which we think are working well, and we have some concerns about that.

In the presentation it was mentioned that it may impact on the independence of the Judiciary. Is that because of Article 24, which mentions that they will have to have certain expertise in respective areas? I may be wrong, but I am just wondering.

Ms Madeleine Reid

Even in Irish legislation we do not normally put in provisions requiring members of the Judiciary to have specific training. It is a little difficult for us to do that. It is not considered consistent with judicial independence. There are other provisions which would raise questions as well. For example, there is a provision requiring cases to be heard in a timely manner. Again, in Irish legislation, even where we consider that cases are really priority cases, we do not give a direction to the court as to how they are to organise their business. We put in timelines for the parties, but we do not direct the Judiciary as to how they are to organise their lists.

My apologies for missing the start of the contributions. My understanding of what this proposal would do is to reduce the protections that are currently enjoyed by entrepreneurial people through Irish legislation. Is that a correct interpretation?

Ms Deirdre O'Higgins

That is the fear we would have. There are certain areas of examinership law that we consider offer better protections. That is our initial view at this point. We are currently engaging in a consultation and we are interested in what our stakeholders will say to us. We do have concerns. We have a viability test at the outset of an examinership where, before we will appoint an examiner, we ask if there is a realistic or reasonable chance of survival. We brought that in in 1999, when we evaluated how examinership had been operating for the first ten years of its life. We found out that the success rate was not as high as it should be. Our view would be that if there is going to interference with the legitimate expectations of creditors to be paid and to be paid on time, it should only be done where it is proportionate. In the current version of the draft proposals - we stress that they are draft proposals and may not have any resemblance to what will come out of concluded negotiations when member states and Parliament take a view on things - we would be concerned about the testing of viability at the end of a process, which under the current directive may take up to a year. Creditors could be waiting for a year to be paid. We have not heard from stakeholders that they share those concerns as yet. Our consultation closed yesterday. We will be evaluating what our stakeholders are saying to us and we will be engaging bilaterally with them afterwards to see if it is something that is of concern to them.

There is a key element of having stakeholder consultation, but if there is a perceived risk, that is something that I would be very worried about. I want to understand where this is coming from. The gist of the presentation was that due to an underlying, inherently poor system of dealing with this across the EU, the Commission's proposal is a harmonisation proposal . The problem for us as a State is, having progressively implemented in recent years the more advanced process of dealing with it through legislation, ironically the harmonisation process will dilute the value of some of what we have only recently implemented. Having gone through a process of recently implemented legislation which most of us are happy with and proud of, we are at the risk of regressing, from the point of view of the Commission, to take account of member states who have made no effort to move in this direction.

That to me makes this inherently a very negative proposal for Ireland in terms of how it will impact us. I am particularly worried in the context of our own national situation on this. If a large number of EU states with very poor regulation or legislation in this area latch onto this as a step forward, ironically they get their step forward, but we by default get a step back. That is why I raised the initial concerns about this. Ms Reid's answer to Deputy O'Callaghan in terms of court and everything else really copperfastened my view that there is very little that is positive in this from an Irish perspective as it stands in terms of enhancing the current legislative way we deal with the situation. I do not think that there is anything for us in this at all because Chapter 11 is a weaker model than what the EU and Ireland would have looked at in the past. I am surprised that they have defaulted to a Chapter 11 model for their suggestions. I just want to confirm that it is a weakening for Ireland, no matter which way we look at this.

Ms Deirdre O'Higgins

Yes, in aspects it would appear to be that way. In the initial meeting we have had at Council working party level a number of member states that have advanced systems mentioned similar things.

Given that insolvency is not harmonised at an EU level, the way we all treat it is different. It is adapted to our own national criteria and requirements. A number of member states with advanced systems would be concerned that this as currently worded - and I stress "currently worded" - could detract from well-functioning systems. They would be arguing with the Commission that this should not be the case and inserting proposed amendments to ensure that it changes.

I thank the witnesses for coming in. We know it is vital that companies can continue trading and providing employment across member states. I wanted to know if the increased priority given to restructuring will result in a higher burden being placed on creditors and employees in terms of wage cuts following restructuring. Could the lack of court involvement lead to abuse of the new framework? There was a recent paper published by the Faculty of Law at the University of Oxford. It raised concerns about this potential abuse where companies are rerouting investment to avail of the favourable conditions of the framework. It raised questions as to why sale as a going concern where proceeds would be shared among investors was not considered as a favourable insolvency method by the Commission. What are the witnesses' thoughts on that?

Ms Deirdre O'Higgins

Could we deal with the first issue about wage demands and the situation of workers? The Commission's intention was that workers' rights are not impacted and their wage demands and entitlements would not be affected by the directive. In fact, it has excluded this from the final articles of the directive. We are looking at that in detail to see that that is exactly what has happened because sometimes when one looks at the wording of a piece of legislation and how it interacts with another, one can find that it can have unintended implications. It is an area that we are examining. We would be concerned for constitutional reasons about any attempt to remove the courts from the process where any decisions are being made about the rights to private property. Private property is constitutionally protected, and we would be scrutinising any proposals in that area intently. The one thing I would point out though is that the directive allows that, where there is a stay on enforcement proceedings, each member state has a right to ensure that the courts are there. From that point of view, there is at least some protection in that area. As the proposal goes forward, it is certainly an issue that we would be dealing with and scrutinising in detail.

Can I ask just one quick question on the answer given to Deputy Brophy? If this directive is introduced and transposed into Irish law, is Ms O'Higgins saying then that that will diminish the protections that Irish people have under the legislation on examinership or under the legislation on personal insolvency?

Ms Deirdre O'Higgins

Depending on the wording in the directive, it could have the implication of requiring us to not have a test for people going into the process. My opinion is that that is wide open to abuse. It is something many member states will have concerns about.

The directive sets out the minimum requirements that we must transpose into Irish law. If we go beyond that as we have done already in the legislation on examinership and personal insolvency, why would that undermine the directive?

Ms Deirdre O'Higgins

We would have to look at the detailed wording of the text of the directive. If they say that a person in financial difficulty must have access to certain procedures that have the following components in them, one could find that certain aspects of examinership law would have to be looked at to ensure that they were not stopping people going into examinership, which could cause difficulty.

My understanding is that this is coming in under a harmonisation proposal in the markets area. So effectively, if we put a proposal, even if we deem it an enhancement in Irish legislation, either further in or as it exists at the present, it could be open to challenge that, effectively under the markets area, we were putting an impediment to the harmonisation process across the markets. Therefore it could be found to be illegal because it would be a barrier to market or a differentiation between the markets and that is why it is critical that we could get this kickback on our own legislation out of this, primarily because of who is originating this. One of the key things in Europe is to watch where it comes from as much as what it says, because of how it will be interpreted if it ever goes to the court.

I thank Deputy Brophy. Would anyone like to respond?

Ms Madeleine Reid

I suppose there is one concern in the response to the points made by both Deputies. I agree with the concerns expressed by Deputy Brophy about the possible implications of the proposal. While a directive normally sets general principles and gives member states the discretion about how they arrive there, the difficulty is that this directive does not take that very general approach. It is setting quite prescriptive conditions at times and while the mechanisms we have in place offer protection, it is all about how one strikes the exact balance between protecting the situation of debtors and protecting the situation of creditors. Some of the very prescriptive conditions that are set out in the directive might affect the way that balance is struck in Irish law currently. It may be reworded as discussions go on but in some situations that balance is struck in a way which refers to specific cultural, social and economic factors within an individual member state. That is why we would be concerned about some of the possible implications of some of the prescriptive conditions which would be set for the conditions in which a court can decide that a restructure should go ahead, for example. It seems to change the balance that exists in our legislation at the moment in a way which could create difficulties.

For my own part, I will ask the always difficult question of measuring the word "sufficient". In the witnesses' opinions, would there be sufficient protections going forward for creditors to be able to challenge second chance or restructuring arrangements? Will there be sufficient protection? Is there a diminution in relation to the current level of protections for creditors' interests? For fear we may not ask all the right questions before we conclude this opportunity, I would like all the witnesses to share, in so far as they are comfortable, if there are any other concerns that our questions might not have shone a light on or elicited a response to. Are there other concerns that the witnesses themselves have that they would like to share with the committee? We would certainly welcome that. Proceed in any order that you choose, please.

Ms Deirdre O'Higgins

I will start. The official position on this directive is not yet finalised. We are still going through it. We are analysing exactly what is there and taking account of views of stakeholders as they come into us. We would have some initial concerns in the area that the European Commission is trying to legislate for things that very often we leave to the discretion of the courts or parties. They are requiring that we put something in our statute to say that new financing is automatically protected. How it operates in practice in an examinership is something that examiners will be the best people to talk about in detail. We do not require in law at the moment that new finance is given automatic protection. If one looks at it practically, with the chances of somebody investing in a company in difficulty and not having any idea that they are going to get that money back, it may not make that much difference in practice but putting it in law straitjackets us into an area that we might not want to be in.

The second area I would have a concern about is the absolute priority test which is required before one can have a cross-class cram-down. Again, in practice, we do not know if that makes much difference. We will be talking to stakeholders about what that actually means. We will be asked to put something into law to say that in the event of an examinership, one cannot seek to get debt write down from dissenting creditors who are higher up the list of rankings of creditors. One has to settle their rights before one could look at offering anything to people lower down the line. We would have a question mark on what impact that might have on examinerships, whether it could force companies into liquidation that might otherwise not go into liquidation. That is something we will be dealing in detail with the stakeholders.

These are two main concerns I would have personally with the directive at this point but let me state that we do not have an official position as of yet.

I thank Ms O'Higgins. Does Ms Reid wish to add to that?

Ms Madeleine Reid

Coming back to one of the points Deputy Brophy raised when he asked us if there was anything good for Ireland in this proposal, I think elements of the proposal are worth looking at. There are some elements that we have already considered as additional measures. One of the possibilities is of access to preventive restructuring before insolvency actually occurs for private individuals. We do not have that in Irish law at present as the personal insolvency legislation applies from the moment one is insolvent. I think there is already some visible stakeholder interest in whether it might be worth looking at setting in motion some sort of process to encourage people to be able to start engaging in restructuring before the moment occurs, although the directive is rather vague as to how that would be done.

The difficulty is that to the extent that the directive is putting forward interesting ideas of that sort, we could do all of that voluntarily. The directive, however, would oblige us to do certain things in a way that would not necessarily sit with our existing legislation and it is for that reason we are scrutinising it carefully, where we feel there might be a negative impact. I suppose it is also worth bearing in mind that we are a common law member state. The negotiations on this are likely to continue for some time in Council. By the time they conclude, we may have no other large common law member state in the European Union. The continental approach to all of these matters differs quite substantially from ours. One of the reasons I think that the provisions about courts are more intrusive than what we are used to seeing is that in many continental member states, judges are civil servants effectively. They are officials of the Government.

Where there might be a negative effect and the Chairman asked about protection of existing rights, I suppose one of the issues we are looking at is the way in which the proposals, as they are drafted at present might change the balance between different types of creditors' protection and between protection of creditors and protection of debtors. A cross-class cram-down effectively occurs where a court is asked to intervene. One has a restructuring plan which has been put forward by the individual, some creditors like it but other creditors do not. It has not got the necessary majority approval under the normal rules. The court is asked, using criteria which generally refer to the overall good of the economy and society, to decide whether the proposal should be imposed over the objection of some of the creditors. The absolute priority rule which is being proposed by the proposal at the moment would seem to mean that in that situation somebody like the secured creditors for example would have to be given a priority, which is arguably higher than they would enjoy under examinership, as we know it in Irish law. That would be quite a significant change but we are looking at the implications of that and what exactly it would entail.

As there are no other questions, I would like to thank Ms Reid, Ms Curley and Ms O'Higgins for their attendance today and for their very forthright responses, opening contribution included. We will of course address this further and decide on what actions we will take.

I will suspend the meeting for one minute to allow our guests to leave and we will resume in private session to deal with some housekeeping matters.

Sitting suspended at 9.45 a.m. and resumed in private session at 9.47 a.m.
The joint committee adjourned at 10.20 a.m. until 9 a.m. on Wednesday, 8 February 2017.