The Insolvency Chapter in the EU Inc Proposal: A Comment

The EU has floated the idea of a 28th regime as an optional legal framework that would operate alongside existing national company laws rather than replace them. As part of this broader initiative, the European Commission has put forward the concept of EU Inc, a proposed supranational company form aimed at start-ups and scale-ups. The proposal includes a dedicated chapter addressing the winding-up of insolvent EU Inc companies, that are innovative start-ups. The proposal takes the form of a Regulation, a ‘hard law’ instrument with the potential to achieve a high degree of legal approximation.

The inclusion of a chapter addressing insolvency reflects a sound underlying assumption, one with which I agree, that insolvency frameworks are central to firm growth and scale-up. Effective insolvency regimes can encourage the early restructuring of viable start-ups while facilitating the efficient liquidation of non-viable firms, thereby enabling the reallocation of resources to more productive uses. However, the current chapter appears to focus primarily on liquidation, a limitation to which I will return. Nonetheless, as a matter of principle, it is correct to recognise that effective, timely, and predictable insolvency systems constitute a critical component of any framework aimed at fostering innovation.

It is also important to situate this insolvency-related harmonisation effort within the broader EU agenda on insolvency law. In addition to the EU Regulation on Insolvency Proceedings 2015, which harmonises private international law rules relating to insolvency, as well as sector-specific instruments addressing the resolution of financial institutions, two directives have pursued elements of substantive harmonisation: the 2019 Preventive Restructuring Directive and the 2026 Harmonisation Directive. Harmonisation in insolvency law has long been contested, and I have also addressed, in The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps, the tensions it may generate with regulatory competition and desirable forms of forum shopping. Nonetheless, it is important to emphasise that, at a conceptual level, these two directives pursue quite distinct objectives.

The 2019 Restructuring Directive can be understood primarily as seeking to ensure that Member States make available effective preventive restructuring frameworks, rather than to harmonise existing procedures as such. By contrast, the 2026 Directive operates more squarely in the realm of harmonisation, aiming to align selected core aspects of insolvency laws already present across Member States, including avoidance actions, directors’ filing duties, and creditors’ committees, alongside additional mechanisms such as pre-packs. This distinction is important for the purposes of evaluation. The 2019 Directive may be broadly commended for encouraging and facilitating the uptake of restructuring frameworks, whereas the 2026 Directive, in pursuing approximation of specific elements of insolvency law, raises further questions, including the rationale for the selection of certain areas for harmonisation while others remain untouched.

Further, whilst it is important to recognise, as argued in ‘Global Competition in Cross-Border Restructuring and Recognition of Centralized Group Solutions’, that regulatory competition is a structural feature of global insolvency law, this phenomenon is particularly pronounced in the context of restructuring and medium to large companies, which typically possess both the means and the incentives to benefit from selecting sophisticated procedures and jurisdictions. By contrast, concerns that harmonisation may unduly constrain beneficial forum shopping are less acute in relation to smaller entities, which tend to require simpler and less sophisticated procedures.

This brings the discussion back to the EU Inc proposal, which is specifically geared towards innovative start-ups and provides a simplified liquidation procedure aimed at facilitating a low-cost exit for such firms. In Micro, Small, And Medium Enterprise Insolvency, we advanced a modular approach to the treatment of MSMEs in distress, incorporating both simplified liquidation and restructuring. This approach envisages flexible, default tools that can be adapted across jurisdictions to accommodate systemic differences, while allowing both creditors and debtors to select from a range of options. In 2021 UNCITRAL published a Part Five to its Legislative Guide on Insolvency Law for Micro and Small Enterprises, which specifies simplified procedures including both liquidation and reorganisation mechanisms within a single, integrated framework.

The insolvency chapter in the EU Inc proposal also exhibits a degree of modularity, but this modularity remains confined to procedural features within liquidation, rather than extending to a choice between liquidation and restructuring. The proposal is modular in at least two respects. First, it is optional and does not seek to displace existing national regimes but instead operates as a stand-alone mechanism that offers a liquidation tool which firms may choose to adopt. Second, there is a measure of internal modularity within the insolvency chapter itself. The proposal provides, as a default rule, for the appointment of an insolvency practitioner. At the same time, it allows the debtor, a creditor, or a group of creditors to request that no practitioner be appointed, subject to specified conditions.

This chapter may represent a useful first step by providing a cost-effective option and potentially fostering constructive regulatory competition. It may also have a self-correcting quality, as Professor Ringe suggests in his article ‘One Size Fails All? EU Insolvency Law between Harmonisation and 28th Regime’: if the regime proves unattractive or dysfunctional, it is unlikely to be used. However, a further note of caution is warranted regarding its focus on liquidation. On the one hand, particularly in the context of tech start-ups, it is sensible to enable and incentivise a quick and simplified exit, allowing such firms to fail fast, redeploy their efforts, and develop new ideas, while ensuring that resources are redirected to more productive uses.

However, a key risk is that the EU Inc 28th regime may channel viable but insolvent start-ups towards liquidation. This concern is particularly relevant for tech firms that, despite financial distress, retain viable business models but require additional financing and time to recover. In such cases, the regime may incentivise rapid exit rather than the use of restructuring options and may do too little to promote early intervention at the stage of financial distress. Existing pathways under the 2019 Restructuring Directive may, in practice, be insufficiently accessible or visible for start-ups. A preferable approach would be to provide a single, simplified gateway procedure combining both liquidation and restructuring in a modular design. Any bias towards liquidation may be hard to detect empirically, since it manifests in foregone restructurings rather than observable outcomes. This is, in effect, a “road not taken” problem. Its significance will ultimately depend on whether the regime evolves to incorporate a simplified restructuring tool, potentially drawing on the 2019 Restructuring Directive and the 2021 UNCITRAL Legislative Guide.

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Irit Mevorach is a Professor of International Commercial Law at the University of Warwick, School of Law. 

This blog is based on a discussion held at the 7th LawFin Workshop The 28th Regime: An Effective Legal Architecture for Innovation in Europe?. Visit the event page to explore more conference-related blogs.

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