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Insolvency procedures in the EU: A second chance for honest entrepreneurs?


The European Commission has issued a recommendation “on a new approach to business failure and insolvency”. It sets out common principles for national insolvency procedures for businesses in financial difficulties. The aim is to avoid liquidation and to encourage viable businesses to react and where possible and necessary to restructure at an early stage.



Across the European Union (EU) there are about 200,000 businesses facing insolvency and as a result 1.7 million employees lose their jobs each year. The insolvency laws vary greatly from Member State to Member State.

The key issues of the recommendation are:
1. Flexibility in restructuring procedures and an increase in the importance of keeping costs to a minimum;
2. Access to a framework which allows the debtor to commence restructuring early on with the objective of preventing insolvency;
3. Limited court involvement in the restructuring process enabling the debtor to restructure without the need to formally open court proceedings. While restructuring plans adopted by a majority of creditors and restructurings with new financing should be confirmed by the courts, the restructuring process should be conducted out of court as much as possible;
4. Appointment of a mediator or supervisor by the court made on a case by case rather than compulsory basis, thereby enabling the debtor to maintain control of the company's management;
5. The right for a debtor to request that a court grant a temporary stay of individual enforcement actions lodged by creditors, which stay should not interfere with the performance of continuing contracts and should have a duration that strikes a fair balance between the interests of the debtor and creditors. The EC recommends that the duration of a stay should not exceed four months, although this period can be renewed for up to a maximum of twelve months in total;
6. Restructuring plan decisions made by a majority of the creditors within classes composed of creditors who have the same interests,
for example, secured and unsecured creditors form different classes;
7. New financing, such as new loans and the selling of certain assets by the debtor, which have been agreed to in the restructuring plan andconfirmed by the courts not declared void, voidable or unenforceable as improper transactions;
8. Limited negative effects of bankruptcy on honest entrepreneurs in order to give them a second chance. Entrepreneurs should be discharged from their debts which were subject to bankruptcy after no later than three years.

Member States shall implement the principles set out in the Recommendation by 12 March 2015 and the EC will assess the implementation of the Recommendation in Member States by 12 September 2015. Under Article 288 of the Treaty on European Union, a Recommendation is non-binding and therefore there is no change in EU law until a regulation or directive is adopted. However, the Recommendation is an expression of political will and influence, and where Recommendations are not enacted by member states within a given time-frame, policy warnings and enforcement through incentives and sanctions may be used.

Nonetheless the Recommendation is likely to have an effect on the future readiness of Member States and at least it is earmarking already the Commissions agenda for the future. And it may be seen as evidence that there is a serious intention by the EC to envisage a future respective directive. In this context it is also helpful to understand the actual revision on Proposal for a Regulation amending Council Regulation (EC) No 1346/2000 on insolvency proceedings;
eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX:52012PC0744

This initiative is seeking for further harmonization in the context of crossborder-insolvency. At the latest in September this proposal shall be further negotiated with the Council.

Article from FENCA Newsletter (May 2014)
FENCA – Federation of European National Collection Associations
Friedrichstrasse 50-55
10117 Berlin - Germany
www.fenca.eu



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