22 November 2016

Commission proposes new approach to business insolvency in Europe

The European Commission for the first time presented a set of European rules on business insolvency which will facilitate early restructuring so as to prevent bankruptcy and avoid laying off staff. It will also lead to more effective and efficient insolvency procedures throughout the EU.

This initiative is a key deliverable under the Capital Markets Union Action Plan and the Single Market Strategy. It will contribute to removing important barriers to the development of capital markets in the EU by providing legal certainty to cross-border investors and companies operating across the EU. The new rules will help attract investors, create and preserve jobs, as well as help economies absorb economic shocks. Currently, too many viable companies in financial difficulties are steered towards liquidation rather than early restructuring and too few entrepreneurs get a second chance.

The proposal is also good news for financial stability since efficient restructuring procedures will prevent businesses from defaulting on their loans to the banks and will help addressing the issue of high levels of non-performing loans in parts of the EU banking sector. This is turn will allow banks to lend more to consumers and businesses.

The proposed Directive focuses on three key elements:

• Common principles on the use of early restructuring frameworks, which will help companies continue their activity and preserve jobs.
• Rules to allow entrepreneurs to benefit from a second chance, as they will be fully discharged of their debt aftera maximum period of 3 years. Currently, half of Europeans say they would not start a business because of fear of failure.
• Targeted measures for Member States to increase the efficiency of insolvency, restructuring and discharge procedures. This will reduce the excessive length and costs of procedures in many Member States, which results in legal uncertainty for creditors and investors and low recovery rates of unpaid debts.

The new rules will observethe following key principle to ensure insolvency and restructuring frameworks are consistent and efficient throughout the EU:

• Companies in financial difficulties, especially SMEs, will have access to early warning tools to detect a deteriorating business situation and ensure restructuring at an early stage.
• Flexible preventive restructuring frameworks will simplify lengthy, complex and costly court proceedings. Where necessary, national courts must be involved to safeguard the interests of stakeholders.
• The debtor will benefit from a time-limited ''breathing space'' of a maximum of four months from enforcement action in order to facilitate negotiations and successful restructuring.
• Dissenting minority creditors and shareholders will not be able to block restructuring plans but their legitimate interests will be safeguarded.
• New financing will be specifically protected increasing the chances of a successful restructuring.
• Throughout the preventive restructuring procedures, workers will enjoy full labour law protection in accordance with the existing EU legislation.
• Training, specialisation of practitioners and courts, and the use of technology (e.g. online filing of claims, notifications to creditors) will improve the efficiency and length of insolvency, restructuring and second chance procedures. 

Text of the proposal

© European Commission