Modernising EU Insolvency law: towards a more rescue-oriented framework?

At the same time, business policy must aim to rehabilitate ‘honest’ business people so as to give them a second chance – while providing proper safeguards for shareholders and customers. These were the main conclusions of a roundtable recently hosted by Sajjad Karim, MEP and organised by ACCA and UEAPME at the European Parliament.

Ten years on from its introduction, considerable changes in the economic and political environment, including the recent financial crisis, galloping globalisation and businesses relocations, mean that we need to take a fresh look at the EC Regulation on Insolvency Proceedings. The European Commission is seeking to improve the current framework so that it leads to greater efficiencies in insolvency proceedings. 

In parallel, the EU executive has just launched a consultation towards an Entrepreneurship 2020 Action Plan which will seek to improve the framework conditions for entrepreneurs' business activities, and support for would-be and new entrepreneurs when starting up new businesses.

In this context, UEAPME, the voice of small businesses in Europe, and ACCA (the Association of Chartered Certified Accountants) organised in the European Parliament, Brussels, a roundtable hosted by Sajjad Karim, MEP and moderated by John Davies, head of technical at ACCA. It aimed to exchange views and practical experiences on the strengths and weaknesses of the Regulation and on the prospects for encouraging a new rescue culture in Europe.The roundtable also addressed how can insolvency law can best address the needs of SMEs.

The distinguished line-up of speakers comprised of Paraskevi Michou, Director of the Civil Justice Directorate at DG Justice, Joanna Drake, Director of SMEs and Entrepreneurship at DG ENTREPRISE, Robert van Galen, board member of INSOL EUROPE, Giulia Pusterla, CNDCEC Board member , Catherine Burton, Lawyer at DLA Piper and R3, Olivier Delaere, Coordinator at 'Tussenstap' npo and Luc Hendrickx, Director Enterprise Policy and External Relations at UEAPME. 

Paraskevi Michou, Director of the Civil Justice Directorate at DG Justice, said: 'Insolvency is an important issue for the European economy. About 50% of enterprises do not survive the first five years of their existence. In 2010, a total of 220,000 businesses went into liquidation in the EU, and the job losses related to insolvencies that same year are estimated to be 1,730 million. After 10 years of application of the Insolvency Regulation, the Commission believes the Regulation needs a facelift to better fit the needs of the single market in the 21st century in which the SMEs play a key role. The European insolvency rules must contribute to the rescue culture and encourage entrepreneurship.'

The debate revealed the current regime works reasonably well to coordinate cross-border insolvency proceedings. However it did highlight several issues that need to be addressed, such as the continuing issue of identifying the member state whose law should be applied to cross-border proceedings and the special position of the insolvency of groups of companies. 

Sajjad Karim, MEP, said: 'It is encouraging to see the European Commission notes the developments and innovations since the adoption of the Directive and it coming into force 10 years ago. This is particularly true in relation to company groups, where insolvency coordination is especially important, but even more so in relation to pre-insolvency work, where the emphasis is rightly put on rescuing businesses who have lost their way.'

In addition, the Regulation does not always work efficiently in practice, namely in terms of cooperation between courts, or between courts and liquidators. Besides, insolvency registries only exist in a few Member States and there is no general obligation to publish a judgment opening an insolvency proceedings, hence the need for the interconnection of national insolvency registers and the creation of an EU Insolvency Register. In addition, there are language, cost and procedural barriers for the lodging of claims in another Member State.

Last but not least, the Regulation excludes many personal insolvency schemes – thus exposing private debtors discharged from their debts in their home Member State, to enforcement actions by their foreign creditors.

There was a broad agreement that it is also crucial to raise awareness in the business community and public opinion at large to remove the social stigma of failure. European insolvency law has been largely liquidation-oriented, but needs to be more rescue-oriented in order to accommodate the concepts of rehabilitation and reorganisation of business. To help create such a shift, intermediaries such as professional bodies, lawyers and accountants can play an important role in providing high quality advice, personal coaching and orientation after bankruptcy.

Joanna Drake, Director of SMEs and Entrepreneurship at DG ENTREPRISE, said: 'An effective second chance policy is fundamental to send a message that entrepreneurship may not end up as a 'life sentence' in case things go wrong. It is, for example, important to reduce discharge time for honest entrepreneurs to two or three years maximum, to allow for a real option to start afresh. Creating more entrepreneurs and a more entrepreneurial Europe will also require targeted actions and policies to better promote entrepreneurial culture in education and to 'mine' largely untapped sources of potential high return such as women and senior entrepreneurs.'

Luc Hendrickx, Enterprise Policy and External Relations at UEAPME, added that: 'From an SME perspective there is an urgent need to improve the situation on the publication of the decision opening insolvency procedures. UEAPME favours the creation of an EU-insolvency register in order to facilitate cross-border searches. SMEs also experience problems with lodging claims in nother Member States or with respect to the treatment of foreign creditors. To give failed entrepreneurs a real second chance, personal coaching and orientation after bankruptcy, such as the Belgian 'Tussenstap', should become a right and be fully supported by the authorities.' 

Panellists highlighted the need to strike the right balance between conflicting interests, stressing that any reforms which are introduced, that aspire to encouraging a more rescue-orientated legal framework and culture should be accompanied by safeguards to ensure the responsibility of directors and entrepreneurs is controlled, and that legal remedies are available to deal with those that take advantage of more lenient rules to the detriment of creditors. 

It was also stressed that as far as the revision of the insolvency Regulation is concerned, radical changes may prove too prescriptive and lead to a new layer of uncertainty. Harmonisation of insolvency law should be part of a separate exercise. On the other hand, a closer look at the work undertaken at global level by the UNCITRAL Model law, and better guidance and interpretation would be helpful.

John Davies concluded: 'The discussion highlighted the willingness of the EU Commission to enshrine the insolvency debate in the wider context of the growth agenda. We now look forward to the publication of the Entrepreneurship 2020 Action Plan and of the Insolvency Package, planned for December 2012.'