“Insolvency should not always lead to the closing of the company and selling off the assets,” said Valdis Dombrovskis, a vice-president of the commission. “If the company is viable it should be given a second chance.”
The commission announced the move as part of a package intended to make legal systems less harsh on entrepreneurs, amid fears that some countries make it too difficult to shake off a failed venture and embark on new projects.
Vera Jourova, the EU’s justice commissioner, said that Brussels had seen clear evidence of unnecessary wealth destruction. “Every year in the EU, 200,000 firms go bankrupt, which results in 1.7m job losses,” she said. “Much of this could be avoided.”
Brussels has long been considering how Europe could mimic the benefits of Chapter 11 of US bankruptcy laws, a provision that is seen as taking the sting out of bankruptcy and promoting a more dynamic economy. The plans also draw inspiration from regulations in some EU countries that facilitate early corporate restructuring, such as the UK’s “schemes of arrangement”.
Under the EU proposals a business would be able to fend off winding-up orders from its creditors while it seeks to negotiate a voluntary debt restructuring. The protection would initially last four months but courts could extend it up to a year.
The new rules would also prevent a small minority of dissenting creditors from holding up restructuring agreements, with safeguards to ensure dissenters “legitimate interests” were protected.
Up until now Brussels has been cautious about incursions into insolvency law, where Europe has a diverse patchwork of national procedures.
While fund managers have said the lack of common EU rules in this area inhibits the growth of European capital markets, EU officials believe full harmonisation of national codes is a political impossibility.
Ms Jourova cited World Bank data indicating that, while in some EU countries, investors recoup on average 90 per cent of the money they put into a company that fails, in others the figure is as low as 30 per cent, showing that the availability of early, voluntary restructuring could make a substantial difference.
Brussels has also acted amid evidence of a weak entrepreneurial culture in some European countries. According to an EU survey, half of Europeans would not start a business because of fear of failure.
Another part of the commission plans would establish an EU-wide limit of three years when entrepreneurs would have to shoulder the debts from past failed ventures. Such limits currently vary widely between countries. The limit would not apply when a debtor “acted dishonestly or in bad faith”, the commission said.
by: Jim Brunsden