A new EU approach to handling business failure and insolvency

Each year some 200 000 businesses in European Union countries go broke and 1.7 million people lose their jobs. The new recommendation marks a shift towards the preventive restructuring of viable businesses to allow them to stay in operation and to safeguard jobs while enabling creditors to recoup more of their investment. It also seeks to ensure that bankrupt entrepreneurs get a second chance.

ACT

Commission Recommendation 2014/135/EU of 12 March 2014 on a new approach to business failure and insolvency.

SUMMARY

European attitudes to business insolvency are in flux, with reforms to existing European Union law on cross-border insolvencies already under way. This new European Commission recommendation, however, aims to provide a common framework for national insolvency rules.

The framework would allow debtors to do the following.

• Restructure as soon as likely insolvency becomes apparent.
• Keep control over the day-to-day operation of their business.
• Request a temporary stay of enforcement actions lodged by creditors if such actions would hamper the prospects of a restructuring plan. The length of the stay should depend on the complexity of the anticipated restructuring and be granted for no more than 4 months initially and for no more than 12 months in total.
• Seek court confirmation of a restructuring plan which affects the interests of dissenting creditors. Creditors would be bound by any court-confirmed plan. The recommendation lists the contents of restructuring plans and the requirements for court confirmation.
• More easily obtain new financing for a restructuring plan as court confirmed new financing would be exempt from avoidance actions.

The restructuring procedure aims to be rapid, to not be costly and to allow for as many steps as possible to be taken out of court. A mediator or supervisor may be appointed to assist negotiations between the debtor and creditors.

Second chance

Compelling evidence that honest entrepreneurs who get a second chance following bankruptcy are more successful in their next venture has convinced the Commission to recommend allowing entrepreneurs a fresh start after bankruptcy.

Entrepreneurs would be fully discharged of their debtswithin 3 years of a court decision to open bankruptcy proceedings or the start date of any repayment plan.

Nevertheless, the recommendation recognises that full discharge is not always appropriate and EU countries may introduce more stringent laws to discourage dishonest entrepreneurs or those who do not respect their legal obligations to their creditors.

National laws to safeguard the livelihood of the entrepreneur and his/her family by allowing the entrepreneur to keep certain assets would also be permitted.

RELATED ACT

Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee: A new European approach to business failure and insolvency (COM(2012) 742 final of 12 December 2012 - not published in the Official Journal).

Proposal for a regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1346/2000 on insolvency proceedings (COM(2012) 744 final of 12 December 2012 - not published in the Official Journal).

Last updated: 28.07.2014