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RESEARCH PRODUCT

Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks

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The draft of the EU Directive on Preventive Restructuring Frameworks and Second Chance (the "Directive") provides rules for adopting reorganisation plans in order to avoid insolvency. The draft Directive also provides rules on the related problem of interim financing. According to the draft Directive, interim financing should be encouraged and not be made subject to clawback unless parties have committed fraud or acted in bad faith. The Directive thereby fails to recognise that finance transactions are too diverse in nature to provide the company and its financial creditors with a transaction avoidance free period. If the Directive is adopted in its current form, it will open the door for opportunistic use of interim financing by both debtors and professional lenders. It will allow debtors to make final bets with other people's money and will also allow for conduit pipe financing which will reduce the exposure of existing shareholders. Lenders will also be able to make opportunistic use of the rules, most notably in the form of cross-collateralisation and aggressive loan-to-own strategies under the guise of interim financing. There are several possible solutions to the potential for opportunistic use. The courts could be involved ex ante. This would, however, turn the Directive into a fully-fledged court supervised procedure instead of the currently intended preventive restructuring procedure which avoids such court procedures. An alternative would be to simply take out the provisions on interim financing. Another possibility would be to limit the protection offered in the Directive to cases of new security against new money necessary and used for the continuation of the business.