On Tuesday 22 November, the European Commission proposed that the EU adopt a single legal framework to deal with corporate insolvency. The aim is principally to deal with problems as early as possible in order to give honest entrepreneurs a second chance.
Every year, across the EU, 200,000 businesses fail, bringing about the loss of 1.7 million jobs. Very often, the insolvency could have been avoided if there had been more effective insolvency and restructuring procedures in place, commented the Commissioner responsible for the dossier, Vera Jourova.
The national insolvency regimes differ greatly from one country to another. In certain member states, businesses may only start restructuring at a relatively late stage in the game. In other countries, although early restructuring is possible, the available procedures are not as effective as they could be. According to the Association for the Financial Markets in Europe (AFME), the German, British and Danish regimes are among the most effective, whilst the Hungarian, Lithuanian and Maltese systems are under-performing, according to the World bank.
According to the Commission, a preventative framework aiming to restore the viability of businesses and avoid insolvency should be available as soon as the threat of insolvency emerges. The aim is also to avoid the costs related to legal proceedings and to allow the company to continue its activities. The Commission recommends creating automatic early-warning mechanisms that are accessible to accountants, banks or clerks of the court, on the basis of information regarding late payments made by a company, to avoid inaction on the part of the directors. A restructuring plan adopted by a majority of stakeholders must be binding on all parties involved, as long as the plan has been approved by a Court.
In order to facilitate the negotiation of restructuring plans, the Commission's text provides for a debtor to be able to ask a Court for the stay of individual actions or insolvency proceedings, if these actions requested by creditors could negatively affect this negotiation and hinder the company's prospects of restructuring. The Commission is building on the experience of individual reforms in member states and believes that a deferral period should be granted initially for a period of up to four months, renewable for a maximum of twelve months. The member states should ensure that all types of credit are are covered by this deferral period, including preferential and secured creditors.
Minority shareholders and creditors who oppose this will, furthermore, not be able to block a restructuring plan, but their legitimate interests will be upheld. New financing will be specifically protected, which will increase the chances that the restructuring will be a success. Thanks to preventative restructuring procedures, workers will be able to take full advantage of the protection offered by employment law, in line with existing EU rules.
"The earlier financial difficulties can be identified and addressed, the greater the likelihood of a better outcome for society as a whole", said Jason Piper of the ACCA, the organisation representing accountancy experts.
Businesses should be "given the chance to restructure and bounce back", added Markus J. Beyrer of BusinessEurope, which represents European employers. (Original version in French by Élodie Lamer)