Insolvency: Commission recommends new approach to
rescue businesses and give honest entrepreneurs a second chance
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, and a proposal to revise existing EU rules on
cross-border insolvencies, which recently received the approval of the European
Parliament.
"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 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. 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.
In
parallel, the Commission launched a public consultation on a European approach
to business failure and insolvency in July 2013, 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).
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