A new Approach to Business Failure and Insolvency

A new Approach to Business Failure and Insolvency

EU aims to rescue financially distressed, but viable businesses.

On October 7, 2013 I posted a blog ‘European business rescue: looking for a best approach’, focusing on the July 5th, 2013 consultation of the European Commission on the best European approach to business failure and insolvency. Nine months later, on March 12th, 2014 the European Commission presented in the slipstream of responses received a Recommendation ‘on a new approach to business failure and insolvency’. From the press release it can be taken that the objective of the Recommendation is to shift the focus away from typical bankruptcy liquidation towards encouraging viable businesses to restructure at an early stage to prevent insolvency. With around 200,000 businesses across the EU facing insolvency and 1.7 million people losing their jobs each year as a result, the Commission wants to give viable enterprises the opportunity to restructure and stay in business. The chosen method is to reform the national insolvency legislation of the Member States with the aim to assist viable firms in business and safeguard jobs. At the same time it aims to improve the environment for creditors who will be able to recover a higher proportion of their investment than if the debtor had entered into formal insolvency proceedings. The Recommendation adopted on 12 March 2014 has 20 recitals and 36 recommendations.

Within 12 months EU Member States are invited to implement the Recommendation’s ‘principles’ and therefore to:
1. Facilitate the restructuring of businesses in financial difficulties at an early stage, before starting formal insolvency proceedings, and without lengthy or costly procedures to help limit recourse to liquidation;
2. Allow debtors to restructure their business without needing to formally open court proceedings;
3. Give businesses in financial difficulties the possibility to request a temporary stay of up to four months (renewable up to a maximum of 12 months) to adopt a restructuring plan before creditors can launch enforcement proceedings against them;
4. Facilitate the process for adopting a restructuring plan, keeping in mind the interests of both debtors and creditors, with a view to increasing the chances of rescuing viable businesses;
5. Reduce the negative effects of a bankruptcy on entrepreneurs’ future chances of launching a business, in particular by discharging their debts within a maximum of three years.

Eighteen months after adoption of the Recommendation the Commission will assess the state of play, based on the annual reports from the Member States to evaluate whether further measures to strengthen the ‘horizontal approach’ are necessary. See the link for the EC Recommendation.

The Netherlands Association for Comparative and International Insolvency Law (NACIIL) will organise a workshop on the Recommendation in Amsterdam on June 4th, 2014, with speakers from the DG Justice European Commission and the Legal Advisor Section Private Law, Ministry of Security & Justice, The Hague.

Parallel to this Recommendation and at the request of the European Law Institute, research was started in September 2013 in the field of insolvency and company law, called Business Rescue in Insolvency Law. The Institute has appointed Professor Stephan Madaus (University of Halle-Wittenberg), Dr. Kristin van Zwieten (from Oxford University) and myself as project reporters. The ultimate aim is to design a set of norms and requirements that will enable further development of coherent and functional rules for business rescue in Europe. The project is to be carried out over a period of thirty months. During its first year – meaning this year 2014 – some twenty-five National Correspondents (NCs) will draft inventory reports on their respective national insolvency laws, based on a detailed questionnaire which was prepared by the project reporters last month. NCs are experts from a selected group of thirteen different European countries which each represent different approaches to insolvency law. Some topics that will be covered in those reports include: the governance and supervision of in-court and out-of-court rescue, special protection for financing a rescue, treatment of executory contracts, ranking of creditors’ claims, avoidance powers, restructuring plans, special arrangements for small and medium- sized enterprises (SMEs), and the position of turnaround advisors and insolvency office holders and courts.

In addition to these national reports, an inventory report on international recommendations from standard-setting organizations, such as the World Bank and UNCITRAL, will be drafted by the Turnaround, Rescue & Insolvency team of the Leiden Law School. The results of the first year’s work, and national papers on the implementation of the Recommendation, will be presented and discussed at a two day conference, which is scheduled for 19/20 March 2015 in Vienna. In the later stages of the project, this output will be used by the Reporters to formulate recommendations for harmonisation or reform, which at this stage are expected to be presented in the form of a Legislative Guide. This process will be assisted by input from a specialist Advisory Committee (AC), staffed by experts in relevant areas for business rescue, such as company law, labour law, securities law, competition law and accountancy. All in all, the first step in a joint approach to a problem that is felt in nearly all EU Member States.


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