Fabian Demicoli

Giving businesses a ‘second chance’

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.

Benefitting 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, all the while protecting creditors' right to
get their money back. The new rules will increase the
efficiency and effectiveness of cross-border insolvency proceedings, affecting
an estimated 50 000 companies across the EU every year. This is a first step
towards an EU "rescue and recovery" culture to help companies and
individuals in financial difficulties; this is explored further in a policy
communication adopted in parallel today which identifies those areas of national
insolvency law which have the greatest potential to create an
"unfriendly" business environment and to hamper the development of an
efficient insolvency framework in the internal market.

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 go bankrupt in the EU each year. This means
that some 600 companies in Europe go bust
every day. A quarter of these bankruptcies have a cross-border element. But
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 to get a "second chance".

The revision of the EU Insolvency
Regulation seeks to modernise the existing rules so that they support
restructuring of business in difficulties and create a business-friendly
environment, especially in times of financial difficulties. It will bring the
Regulation, which dates from 2000 up to date with developments in national
insolvency laws, in particular in terms of highly indebted firms. Creditors'
interests can also be served by a restructuring, as it can mean that they are
more likely to get back their money that might otherwise be lost in a
winding-up.

It will also increase legal
certainty, by providing clear rules to determine jurisdiction, and ensuring
that when a debtor is faced with insolvency proceedings in several Member
States, the courts handling the different proceedings work closely with one
another. Information to creditors will be improved by obliging Member States to
publish key decisions – about the opening of insolvency proceedings, for
example. All in all, these changes will improve the efficiency and
effectiveness of cross-border insolvency proceedings.

This proposal is also intended as a
first step towards an EU "rescue and recovery" culture in cases of
companies and individuals in financial difficulties more generally. The
challenge is to address the debtor's financial difficulties while protecting
the creditor's interests. In the future, there could be separate rules for
honest entrepreneurs and for cases where the bankruptcy was fraudulent or
irresponsible. In the case of honest bankruptcies, a shortened discharge period
in relation to debts and the legal restrictions stemming from bankruptcy would
make sure entrepreneurship does not end up as a "life-sentence"
should a business go bust.

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

 

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