How Will the New European Insolvency Framework Affect Lending and Investment in Europe?

1 A Single European Insolvency Framework

The EU is currently putting the finishing touches on its first insolvency directive. The regulatory framework, as we have previously discussed, is intended to strengthen the capital market and provide efficient and predictable rules for the recovery of assets and the distribution of proceeds among creditors. We take it for granted that the framework will be implemented in Norway, resulting in significant changes to Norwegian insolvency law - but also greater predictability for Norwegian businesses with cross-border activity in Europe.

EU Member States will have two years and nine months to transpose the directive’s requirements into national law, and hopefully Norway will not lag far behind. We have examined what is coming and how we believe it will affect the market for loans and investments in Norway and Europe more broadly.

2 Insolvency Law – A Cornerstone of the Capital Market

The new directive must be understood in light of the role insolvency law plays in the capital market. One of the greatest challenges in the EU and EEA has been creating a truly common market among 30 countries that have each developed separate national rules and that often regard their own rules as particularly well-designed. But in the field of insolvency law - just as in financial regulation - national rules create barriers to trade, investment, and lending. Such rules drive up costs, create uncertainty, and favour domestic over foreign actors. Additionally, some national frameworks result in lengthy insolvency proceedings and low dividend payouts from bankruptcy estates. The result is fewer market participants and higher price premiums for customers and borrowers.

The lack of harmonised rules for handling insolvent companies and businesses has long been identified as one of the central obstacles to the free movement of capital in Europe and to further integration of European capital markets. The objective of the new directive is therefore to create a coherent and predictable insolvency framework that strengthens investor protection, reduces costs, and simplifies cross-border investment. At the same time, it aims to make risk capital more attractive and accessible for European businesses across jurisdictions.

Previous attempts to align national rules for conducting insolvency processes into common European regulations have not succeeded. Although we have had Regulation (EU) 2015/848 on jurisdiction and the opening of insolvency proceedings in cross-border cases, and Directive (EU) 2019/1023 concerning, among other things, pre-insolvency restructuring, neither provides substantive rules for the actual insolvency process, including how the estate’s assets should be realised and distributed.

As the first common regulation in the area, this new directive is naturally a cautious one. It addresses several key topics in substantive insolvency law, but far from all. Furthermore, it is a minimum directive aimed at establishing minimum harmonisation in line with the principle of proportionality in EU law.

3 What Can Lenders and Investors Expect from the New Framework?

A final directive text has not yet been published following negotiations between the European Parliament and the Council. However, after following the various proposals and amendments, we believe that the main elements of the upcoming framework are now sufficiently clear.

The three overarching objectives guiding the legislative work show what the directive aims to achieve and form the basis for the review below.

3.1 Measures for Improved Asset Recovery

The framework introduces a clearer obligation to initiate insolvency proceedings - in other words, to file for bankruptcy - and codifies civil liability where business operations continue at the creditors’ expense. Such liability follows from unwritten law in Norway. By codifying the liability, the criteria become more precise and easier to apply  -  including a three-month deadline from the point at which the company’s insolvency becomes known, although the rules have been softened somewhat during negotiations in the European Parliament and the Council. The liability targets the management of the business and may extend further than the board liability traditionally applied in Norway.

The new framework will also make it easier for courts, authorities, and insolvency practitioners to identify which assets an insolvent company possesses. To facilitate this, access will be required to specified information in national bank account registries (BARIS), company and beneficial ownership registries (BRIS, BORIS, and IRI), and asset registries - including cross-border access where the bankruptcy estate is located in one European country and the assets in another. A key purpose is to ensure that insolvency administrators from other Member States have the same access and rights as domestic actors.

The directive also sets requirements for avoidance actions in each Member State to prevent asset stripping ahead of insolvency. Norwegian law has long included avoidance rules, and many principles will be recognisable - such as the avoidance of gifts, preferential treatment of creditors, and fraudulent acts against the creditor community. However, the details will differ, and actions previously permissible under Norwegian law are unlikely to remain so under the new common rules.

3.2 Measures for More Efficient Recovery Processes

Perhaps the most significant change introduced by the insolvency directive is the requirement for Member States to implement a pre-pack regime. A pre-pack involves negotiating the sale of a business before bankruptcy proceedings begin, with the transaction then formally executed by the bankruptcy estate. In Norway, numerous pre-pack transactions have taken place, though without anchoring in insolvency legislation.

With statutory regulation, the rules will become clearer and more robust. The directive provides for a preparatory phase before the opening of insolvency proceedings, during which sale of all or parts of the debtor’s business is prepared and negotiated. During this phase, the debtor retains control over assets and day-to-day operations, allowing the business to be maintained as a productive economic unit. This normally preserves higher value on realisation than in an ordinary bankruptcy. The framework also allows interim financing with priority coverage from the estate, similar to solutions available under restructuring legislation. Ongoing agreements may also be maintained even if counterparties oppose this, and burdensome contracts may be terminated where necessary to secure a viable transfer of the business.

After bankruptcy is opened, a brief liquidation phase follows, in which the sale is formally completed and the proceeds distributed among creditors. To ensure proper implementation, the process must be supervised by an independent monitor and an insolvency practitioner, both of whom may be held personally liable for losses resulting from improper handling.

The Commission’s initial proposal also included simplified insolvency procedures for micro-enterprises to reduce processing costs for this group, as well as rules that, under certain conditions, could exempt owners from personal liability after bankruptcy. Although well-intentioned, these proposals faced criticism in the European Parliament and the Council, partly because they were deemed insufficiently protective of creditors. It now appears unlikely that such a simplified process for micro-enterprises will be included at this stage, beyond an encouragement to Member States to consider introducing their own national simplified procedures.

3.3 Measures for More Predictable and Fair Distribution of Recovered Amounts Among Creditors

In addition to the mechanisms discussed above, which will indirectly contribute to a more efficient and fair distribution of recovered assets, the directive also contains rules on appointing creditor committees. These committees must safeguard the collective interests of creditors and operate independently of the insolvency practitioner, ensuring that the insolvency process protects creditor interests. Committees must be composed in a balanced manner, using transparent decision-making processes, and include representatives from different creditor groups, including cross-border creditors. However, it appears there will be exceptions so that a committee will only be required for larger companies and not where its disadvantages exceed its benefits.

Furthermore, each Member State must make information on insolvency proceedings easily accessible in a predefined format. The information must be published on the EU’s e-justice portal in English, French, and German, in addition to the national language.

4 Will a Common Insolvency Law Improve the Capital Market?

Investments and lending are primarily motivated by potential financial gain. How insolvency law is structured for cases where the investment or loan fails is necessarily a secondary concern. However, greater transparency and predictability in the insolvency framework will, over time, build trust in the capital market, including in cross-border transactions. We believe this will lead to increased access to capital for businesses at a lower cost, enabling further development of enterprises.

We perceive national requirements and special regulations as dampening interest in investment and financial services, and more coordinated rules - at least in the field of insolvency - will be positive.

We also welcome more efficient insolvency processes. At the same time, the issue is complex. Delays in winding up bankruptcy estates in Norway often stem from factors outside insolvency law itself, such as long case-processing times in the courts or slow administrative procedures.

A well-developed pre-pack model will likely make such cases more attractive investment prospects. More businesses can be preserved, and knowledge, value, and jobs can be saved.