New European approach to business failure and insolvency

13 December 2012
by eub2 -- last modified 13 December 2012

Businesses hit by the economic crisis will be thrown a lifeline under a new proposal from the European Commission today to modernise Europe’s rules on cross-border business insolvency, helping to give otherwise viable businesses a ‘second chance’. The Commission is proposing to modernise the current rules on cross border insolvency which date from 2000. Benefiting from ten years of experience, the new rules will shift focus away from liquidation and develop a new approach to helping businesses overcome financial difficulties, while at the same time protecting the right of creditors to get their money back.

Why do the current rules need updating?

The current Insolvency Regulation was adopted in 2000 and has been in force for more than ten years. A consultation of stakeholders and studies launched by the Commission revealed a number of shortcomings with its application in practice. Most importantly, the current Regulation is oriented to liquidation rather than saving and restructuring businesses in difficulty.

The revision of the EU Insolvency Regulation will modernise the existing rules and shift the focus so that they facilitate restructuring of business in difficulties and give honest entrepreneurs a second chance, especially in times of financial crisis. The revision will also bring the Regulation up to date with developments in national insolvency laws, by extending the scope to national procedures which allow the restructuring of a company at a pre-insolvency stage, which leave the existing management in place or which provide for debt discharge of an individual.

What is the impact of new insolvency rules on the economy?

Due to the economic crisis the number of failing businesses has increased. Between 2009 and 2011, an average of 200 000 firms went bankrupt in the EU each year. One-quarter of these bankruptcies have a cross-border element and a total of 1.7 million jobs are estimated to be lost due to insolvencies every year. This means that some 600 companies in Europe went bust every day. The European response should be to create an efficient system to restore and reorganise business so that they can survive the financial crises, operate more efficiently and when necessary, make a fresh start.

The proposed regulation would make cross-border insolvency proceedings more efficient and effective. It facilitates the rescue of a company in financial difficulties and the release of an honest entrepreneur from his debts. It is a first step towards an EU "rescue and recovery" culture for companies and individuals in financial difficulties.

How many businesses are affected?

Cross-border insolvency proceedings affect an estimated 50,000 companies across the EU every year. The new insolvency rules apply not only to large multi-national companies, but to the 20 million small companies that are the backbone of Europe's economy. The effective handling of insolvency cases is an important issue for the European economy and sustainable growth.

Around 20% of large enterprises have foreign subsidiaries or joint ventures. By contrast, only 5% of EU Small and Medium Enterprises (SMEs) have reported that they have subsidiaries or joint ventures abroad. Nevertheless, with over twenty million SMEs in the EU as a whole, this means that there are more than one million SMEs in Europe which have subsidiaries or joint ventures abroad.

Who was consulted when preparing the new rules?

On 30 March 2012, the Commission launched a public consultation on modernising EU rules governing insolvencies. Small and large businesses, self-employed individuals, insolvency practitioners, judicial authorities, public authorities, creditors, academics and the general public were invited to share their experience with insolvency and in particular cross-border insolvency.

What is the new European approach to business failure and insolvency set out in the Communication?

Modern insolvency laws in the Member States should help sound companies to survive and help entrepreneurs get a second chance. Procedures should be speedy and efficient, in the interest of both debtors and creditors, and should help safeguard jobs, help suppliers to keep their customers, and owners to retain value in viable companies.

Giving honest entrepreneurs a second chance to restart viable businesses and safeguarding employment are key elements of the new European approach to business failure and insolvency. This approach aims to give a solid boost to European business in the internal market. The proposal to update the EU Regulation on insolvency proceedings in the cross- border context adopted today, is already based on this new approach. This will also be reflected in the forthcoming European Entrepreneurship Action Plan.

The Communication highlights the areas where differences between domestic insolvency laws have the greatest potential to hamper the establishment of an efficient insolvency legal framework in the internal market. It seeks to identify the issues on which the new European approach to business failure and insolvency should focus so as to develop a rescue and recovery culture across the Member States.

What are the next steps?

The proposal for a regulation will now pass to the European Parliament and the Council of the EU for negotiation and adoption

Furthermore, the Commission intends to deepen its analysis of the impact arising from differences between national insolvency laws on the functioning of the internal market. To this end, it will enter into a dialogue with the European Parliament and the Council on the basis of the Communication adopted together with the updated Regulation. Moreover, the Commission will launch a public consultation to gather views from stakeholders.

European Commission – Insolvency proceedings

Source: European Commission