The ‘new approach to business failure’ is influencing tax law. When a taxable entity is distressed, Member States now enjoy flexibility in collecting VAT debts in order to facilitate rescue and to offer companies a second chance, the CJEU has ruled.
If proceedings have been opened against a debtor, two questions arise: 1) what is the position of the state as regards claims that arose prior to the opening of those proceedings? and 2) may the state tax any income that results from restructuring?
The first question – the only one at stake here – is crucial. If the state is considered to have the same position as an ordinary unsecured creditor, a rescue plan might affect a tax claim; the state might vote in favour of this, ie in favour of a tax waiving; the state might even be crammed down. By contrast, if the state is regarded as having a ‘sheltered position’ – the expression is intentionally non-technical – a plan cannot affect a tax claim, or it may affect a tax claim only to a limited extent.
Basically, the answer depends on national laws: these vary from state to state, ranging from more rescue-friendly laws (UK and Germany) to less rescue-friendly laws (Italy and France). However, concerning VAT, the answer depends primarily on EU law: first, because EU law regulates this tax (Directive 2006/112/EC); and, secondly, because the CJEU has ruled that economic operators carrying out the same transactions must not be treated differently in relation to the levying of VAT. Accordingly, Member States have to take any measure to ensure VAT debt collection (C-132/06 and C-500/10).
This CJEU position might conflict with the ‘new approach to business failure’. This approach was put forward by the EU Commission in 2012 (COM(2012) 742 final); afterwards, it was reinforced in 2014 (C(2014) 1500 final), 2015 (COM(2015) 468 final), and 2016 (DG JUST (A1), 2016/JUST/025 – INSOLVENCY II). This conflict explains why the CJEU, requested by an Italian Court to give a preliminary ruling, went back to the issue, and why it specified that EU law does ‘not preclude national legislation … [being] interpreted as meaning that an insolvent trader may apply to a court to open a procedure for an arrangement with creditors for the purpose of settling its debts by liquidating its assets, in which that trader offers only partial payment of a value added tax debt and establishes by an independent expert’s report that that debt would not be repaid more fully in the event of that trader’s bankruptcy’ (C-546/14 – Degano case).
Certainly, this decision will encourage both national regulators and courts to remove from their own laws those restrictions which are compliant with the idea that EU law would not allow VAT debt waiving (see Art. 182-ter.1 of the Italian Insolvency Statute and Art. L. 626-6 of the French Code de Commerce, as commonly interpreted). The CJEU has held that this idea was wrong. This decision will probably convince both national regulators and tax authorities to soften their positions in order to facilitate rescuing, as rescuing today means continuing to have taxable revenues tomorrow. It is to be hoped that this decision will suggest that the EU regulator should maintain the momentum and tackle the problem of priority in the ranking of tax claims. In fact, a directive has been announced which will provide common minimum rules for the ranking of claims in national proceedings (DG JUST (A1), 2016/JUST/025 – INSOLVENCY II).
Renato Mangano is a Professor of Commercial Law and Insolvency Law at the University of Palermo, and a Visiting Fellow of the Commercial Law Centre of the University of Oxford.