Towards an effective EU insolvency framework

Key messages

• BUSINESSEUROPE is generally supportive of a second chance approach to insolvency in the EU which is why it welcomed the 2014 Commission recommendation on business failure and insolvency.
• Viable businesses should be given an opportunity of recovery across the EU and of eliminating the stigma of failure. This is key for an employment fostering agenda.
• Facilitating a second chance is particularly important for small and medium size companies (SMEs) as they are less resourceful when it comes to meeting restructuring costs and dealing with insolvency procedures.
• It is however essential that this objective is balanced against the interests of creditors. Restructuring should not come at any cost.
• The level of ambition of an EU intervention should be balanced. Insolvency law is a highly complex area of law, deeply rooted in national legal traditions, which means an EU intervention comes with the risk of unintended consequences.
• Research and fact-finding on differences between national insolvency rules and problems in their application (with an internal market impact) is therefore essential to define the most appropriate EU approach.
• In BUSINESSEUROPE’s view, any future initiative should meet the following conditions in order to produce an added value:

1. Measures adopted should be diverse in scope and in nature. The legislative route should not be the only one considered. For example, companies in difficulties could benefit from assistance and specific information tools on restructuring and recovery proceedings.
2. The focus should also be on prevention and on incentives for companies and their managers to look for solutions upon the first signs of difficulties.
3. Given how insolvency is intertwined with many areas of law and with national legal traditions a minimum standards approach would be more favourable.
4. In order to be consistent with a second chance approach, any future EU initiative on national insolvency proceedings should focus on those elements which help early restructuring and recovery from financial difficulties rather than those elements leading to swift liquidation.
5. The negotiation approach during pre-insolvency phase should be privileged.
6. The aim should not be to implement in Europe a US Chapter 11 but to draw inspiration from its main features and best practices.
7. It is essential to preserve the ability of the company going through a restructuring procedure to keep its business units functioning and staying afloat without the threat of liquidation.
8. There should be no attempt to harmonise classes of creditors. This would be a too difficult task at European level. Nevertheless, a debate is needed regarding public creditors and their role/powers during restructuring procedures.
9. Measures to protect new financing given to companies that are being restructured might be necessary in order to keep the incentives for this type of investment.
10. Differences between the laws of the Member States on measures governing employees' rights in insolvency may represent additional challenges. A concrete example is that some Member States apply the obligations arising from Council Directive 2001/23/EC on the transfer of undertakings even to companies undergoing insolvency proceedings.
11. Minimum standards on moratorium could be a useful incentive for companies to look for, establish and execute a restructuring plan. As a safeguard, publicity on the moratorium would be required.
12. Promoting specialisation of courts and training of judges regarding pre-restructuring and insolvency procedures is essential. Minimum standards for insolvency practitioners should also be developed.
13. Terminology used needs to be perfectly identified. Insolvency is a wide concept that can bare different interpretations or cover multiple procedures in the Member States (e.g. liquidation, winding-up, restructuring).
14. We strongly believe in promoting the idea of second chance for those cases where the entrepreneur’s failure was not due to fraudulent or grossly negligent behaviour. Any future EU initiative should not attempt to provide legal definitions for subjective concepts like ‘honest entrepreneur’ but rather provide for criteria which can allow to easily identifying those entrepreneurs who objectively deserve a second chance.
15. Disqualification of directors should be looked at. This is even more relevant in situations where the relevant authorities of Member States share information about directors/managers who have been disqualified at the moment of registration of a new business activity. Exchanges of this nature among authorities are encouraged but any potential prejudice should be avoided against entrepreneurs who failed for reasons other than fraud or gross negligence.
16. When a business is facing difficulties, the warning signs of a crisis may not always be obvious to those charged with overseeing the management and operations or their external advisors. Voluntary early warning systems can provide a range of indicators of potential insolvency that, if identified early enough, allow the opportunity to avoid business failure.
17. Alternative out-of-court means should be promoted at an earlier stage of restructuring procedures.
18. Use of digital tools should be envisaged and encouraged throughout pre-insolvency and insolvency procedures.
19. Insolvency of consumers should not be mixed up with insolvency of companies. These two situations should be analysed and tackled separately.