Insolvency: Commission recommends new approach to rescue businesses and give honest entrepreneurs a second chance

Wednesday 12 Mar 2014 @ 13:25
EU News

The European Commission has today set out a series of common principles for national insolvency procedures for businesses in financial difficulties. The objective is to shift the focus away from liquidation towards encouraging viable businesses to restructure at an early stage so as to prevent insolvency. With around 200,000 businesses across the EU facing insolvency and 1.7 million people losing their jobs each year as a result, the Commission wants to give viable enterprises the opportunity to restructure and stay in business. Reforming national insolvency rules would create a "win-win" scenario: it will help keep viable firms in business and safeguard jobs and at the same time improve the environment for creditors who will be able to recover a higher proportion of their investment than if the debtor had gone bust. Post-bankruptcy, honest entrepreneurs should swiftly get a second chance because evidence shows that they are more successful the second time around. The Recommendation adopted today follows a public consultation last year on a European approach to insolvency (IP/13/655), and a proposal to revise existing EU rules on cross-border insolvencies, which recently received the approval of the European Parliament (MEMO/14/88).

"Businesses are essential to creating prosperity and jobs, but setting one up – and keeping it going – is tough, especially in today’s economic climate," said Vice-President Viviane Reding, the EU's Justice Commissioner. "With a growing number of firms facing financial difficulties across Europe, we need to rethink our approach to company insolvencies. Henry Ford’s first automobile company went out of business after 18 months, but he went on to found one of the most successful companies in the world. We should not be stifling innovation - if at first an honest entrepreneur does not succeed, he or she should be able to try again. Our insolvency rules should facilitate a fresh start."

"We need to put in place an efficient mechanism that would allow a distinction between honest and dishonest entrepreneurs as this is fundamental to reduce the current stigma of bankruptcy" emphasized Vice-President Antonio Tajani, the EU Commissioner for Enterprise and Industry. "This distinction should help eliminate discrimination against those entrepreneurs who are non-fraudulent bankrupts, so that they become eligible for any existing market support available for starting a new business.

Today’s Commission Recommendation will help to provide a coherent framework for national insolvency rules, asking Member States to:

Facilitate the restructuring of businesses in financial difficulties at an early stage, before starting formal insolvency proceedings, and without lengthy or costly procedures to help limit recourse to liquidation;
Allow debtors to restructure their business without needing to formally open court proceedings;
Give businesses in financial difficulties the possibility to request a temporary stay of up to four months (renewable up to a maximum of 12 months) to adopt a restructuring plan before creditors can launch enforcement proceedings against them;
Facilitate the process for adopting a restructuring plan, keeping in mind the interests of both debtors and creditors, with a view to increasing the chances of rescuing viable businesses;
Reduce the negative effects of a bankruptcy on entrepreneurs’ future chances of launching a business, in particular by discharging their debts within a maximum of three years.

Next steps: The Recommendation asks Member States to put in place appropriate measures within one year. 18 months after adoption of the Recommendation the Commission will assess the state of play, based on the yearly reports of the Member States to evaluate whether further measures to strengthen the horizontal approach on insolvency are needed.

Background

Insolvencies are a fact of life in a dynamic, modern economy. Around half of enterprises survive less than five years, and around 200 000 firms become insolvent in the EU each year. This means that some 600 companies in Europe go bust every day. A quarter of these insolvencies have a cross-border element. And they are on the rise – the number of insolvencies has doubled since the beginning of the crisis and the trend is set to continue in 2014.

Furthermore, evidence suggests that failed entrepreneurs learn from their mistakes and are generally more successful the second time around. Up to 18% of all entrepreneurs who go on to be successful have failed in their first venture.

It is therefore essential to have modern laws and efficient procedures in place to help businesses, which have sufficient economic substance, overcome financial difficulties and entrepreneurs get a "second chance". Yet, insolvency frameworks in many EU countries currently channel viable enterprises in financial difficulties towards liquidation, rather than restructuring. They also present obstacles to giving honest entrepreneurs a second chance after insolvency by establishing long discharge periods.

Experience shows that the earlier companies in difficulties are able to restructure, the higher their chance of succeeding. But early restructuring (before formal insolvency proceedings are started) is not possible in several countries (for example Bulgaria, Hungary, Czech Republic, Lithuania, Slovakia, Denmark) and, where it is an option, procedures can be inefficient or costly, reducing incentives for companies to keep afloat. Finally, in some countries it can take many years before honest entrepreneurs who have gone bankrupt can be discharged of their old debts and try another business idea (Austria, Belgium, Estonia, Greece, Italy Latvia, Lithuania, Luxembourg, Malta, Croatia, Poland, Portugal, Romania). When an honest entrepreneur goes bankrupt, a shortened discharge period in relation to debts would make sure bankruptcy does not end up as a "life-sentence" should a business go bust.

The divergence between Member States laws has an impact on the recovery rates of cross-border creditors, on cross-border investment decisions, and the restructuring of groups of companies. A more coherent approach at EU level would not only improve returns to creditors and the flow of cross-border investment, but also have a positive impact in terms of entrepreneurship, employment and innovation.

The existing EU Framework in the area of insolvency

European rules on cross-border insolvency are laid down in Regulation (EC) No 1346/2000 on insolvency proceedings (the “Insolvency Regulation”), which has applied since 31 May 2002. The Regulation contains rules on jurisdiction, recognition and applicable law and provides for the coordination of insolvency proceedings opened in several Member States. The Regulation applies when the debtor has an establishment or creditors in another Member State than his own.

In December 2012, the European Commission presented a package of measures to modernise these insolvency rules (IP/12/1354, MEMO/12/969) On 5 February 2014, the European Parliament voted in favour of the Commission’s proposal, which now has to be agreed by Ministers in the Council in order to become law (MEMO/14/88).

In parallel, the Commission launched a public consultation on a European approach to business failure and insolvency in July 2013 (IP/13/655), seeking views on key issues such as the time required to discharge a debt, the conditions for opening proceedings, the rules for restructuring plans and the measures needed for SMEs.

Several EU Member States have received recommendations in the context of the European Semester – the EU’s cycle of economic policy coordination – inviting them to reform several aspects of their insolvency systems (this is the case for Spain, Latvia, Malta and Slovenia). Several others are currently in the process of reforming their laws to improve the rescue possibilities for companies in financial difficulty, to reduce discharge periods for entrepreneurs or, more generally, to improve the performance of their insolvency frameworks (this is the case for the Netherlands, Luxembourg, Poland, Latvia, Cyprus, Estonia, Croatia and the United Kingdom).

For more information

Commission recommendation on a new approach to business failure and insolvency:

http://ec.europa.eu/justice/newsroom/civil/news/140312_en.htm

European Commission – Insolvency proceedings:

http://ec.europa.eu/justice/civil/commercial/insolvency/index_en.htm

Homepage of Vice-President Viviane Reding, EU Justice Commissioner:

http://ec.europa.eu/reding

Follow Vice-President Reding on Twitter: @VivianeRedingEU

Homepage of Vice-President Antonio Tajani, EU Commissioner for Industry and Entrepreneurship:

http://ec.europa.eu/commission_2010-2014/tajani/index_en.htm

Follow Vice-President Tajani on Twitter: @AntonioTajaniEU

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