# EUR-Lex - 52012DC0742 - EN

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# 52012DC0742

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE A new European approach to business failure and insolvency /* COM/2012/0742 final */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE

A new European approach to business
failure and insolvency

1.           Introduction: Justice for growth

As Europe is facing a
severe economic and social crisis, the
European Union is taking action to promote economic recovery, boost investment
and safeguard employment. It is a
high political priority to take measures to create sustainable growth and
prosperity[1].

The debt crisis has a direct effect on
people, jobs and businesses. The economic crisis has led to an increase in the
number of failing businesses. From
2009-2011, an average of 200 000 firms went bankrupt per year in the EU.
About one-quarter of these bankruptcies have a cross-border element. About 50 % of all new businesses do not
survive the first five years of their life. 1.7 million jobs are estimated to
be lost due to insolvencies every year.

Growth has been put at the heart of the
Commission’s agenda on justice (‘Justice for Growth’), in line with the growth
strategy Europe 2020, the Annual Growth Survey and the recently adopted Single
Market Act II.[2]
Modernising the EU’s insolvency rules to facilitate the survival of businesses
and present a second chance for enterpreneurs has been identified as a key
action to improve the functioning of the internal market. The 2009 Stockholm
Programme for the European area of justice[3]
highlighted the importance of insolvency rules in supporting economic activity.

The European response should be to create
an efficient system to restore and reorganise business so that they can survive
the financial crises, operate more efficiently and when necessary, make a fresh
start. This applies not only to large multi-national companies, but to the 20
million small companies that are the backbone of Europe’s economy. The effective handling of insolvency cases is an
important issue for the European economy and sustainable growth.

The EU Regulation on insolvency proceedings[4] was adopted to deal with issues of cross-border
insolvency through the proper recognition and coordination of national
insolvency proceedings and in order to avoid incentives for the parties
to transfer assets or judicial proceedings from one Member State to another,
seeking to obtain a more favourable legal position (forum shopping). As
its scope is cross-border, the Regulation however did not harmonise insolvency
laws used for national insolvency cases. Thus,
differences in national laws remain, and as a consequence, economic
activities may be lost, creditors recover less than they otherwise would, and
creditors from different Member States are not treated equally. The Commission
is currently proposing the modernisation of the EU Regulation on insolvency
proceedings but the changes proposed concern only cross-border cases.

Modern insolvency law in the Member States should help sound
companies to survive and encourage entrepreneurs to get a second chance. It
should ensure that procedures are speedy and efficient, in the interest of both
debtors and creditors, and should help safeguard jobs, help suppliers to keep
their customers, and owners to retain value in viable companies.

To achieve the Europe 2020 objectives, we need
to focus on the general objective of improving the efficiency of justice in the
EU. Efficient justice systems can greatly contribute to reducing risks and
legal uncertainties and encouraging cross-border business, trade and
investment. In its experience with the Member States under an economic recovery
programme, the Commission has identified the key role of judicial reforms.
Reforms of national insolvency law are an important tool to promote economic
recovery. The 2012 European Semester reflected the impact of justice systems on
the economy by making recommendations to certain Member States relating to
efficient insolvency proceedings. The challenge is to
address adequately and swiftly the debtor’s financial difficulties while
protecting the creditor’s legitimate interests and ensuring access to justice
to all parties.

During the last twenty years, the single market
has been developed as an area without barriers. If a company is in trouble financially, it should be just as
easy to get help cross-border as domestically. The creation of a level playing field of national insolvency laws should lead to
greater confidence in the systems of other Member States for companies,
entrepreneurs and private individuals willing to operate in the internal market.
Efficient insolvency rules also improve access to
credit, which encourages investment. Creditors are more likely to lend when
they are confident that they will be able to collect their loans. Greater
compatibility of the rules on insolvency proceedings can therefore improve the
functioning of the internal market. Although diversity is part of legitimate
regulatory competition based on national political choices, it generally leads
to the problem of forum shopping[5].

Giving entrepreneurs a second chance to restart viable businesses and safeguarding
employment are key elements of the new European approach to business failure
and insolvency. This approach aims to give a solid boost to European business
in the internal market. The proposal to update the EU Regulation on insolvency
proceedings in the cross- border context, adopted in parallell to this
Communication, is already based on this new approach. It will also be supported
by the forthcoming European Entrepreneurship Action
Plan.

This Communication highlights those areas
where differences between domestic insolvency laws have the greatest potential
to hamper the establishment of an efficient insolvency legal framework in the internal
market. It seeks to identify the issues, on which the new European approach to
business failure and insolvency should focus so as to develop the rescue and
recovery culture across the Member States.

2.           Shaping the new Approach to insolvency:
the need to create a more business friendly environment

A lot of research and analysis has already been
carried out by both the European Parliament and the Commission relating to
national insolvency laws.

In November 2011, the
European Parliament adopted a Resolution on insolvency proceedings.[6] It called, first,
for the revision of the Insolvency Regulation and the proposed revision
responds to this call. The European Parliament also recommended harmonising specific aspects of national insolvency
law and company law. A study[7]
commissioned by it had shown that disparities between national insolvency laws
can create obstacles, competitive advantages and/or disadvantages and difficulties
for companies with cross-border activities or ownership within the EU. The
study found that harmonising insolvency processes across the EU Member States
would increase the efficiency of the insolvency and business reorganisation
process. In turn, this would increase the return to creditors if a decision is
taken to liquidate the assets or improve the prospects for reorganisation by encouraging
more creditors to support plans for restructuring. Together this would increase
confidence of the commercial and financial sectors in the efficiency of the EU’s
financial infrastructure.

Based on the study, the
European Parliament concluded
that ‘there are certain areas of insolvency law where harmonisation is
worthwhile and achievable’. However any further consideration of reforming
insolvency law will have to take into account the impact on other important
areas of law.

The Commission has recently studied business dynamics[8]. The study revealed
no evidence of impact of the type of legal system (common law/civil law) on the
level of entrepreneurship (firm birth rate, total entrepreneurial activity,
firm survival rate). This means that efficient bankruptcy procedures are not
determined by the type or focus of legal system, but by specific provisions
like out-of-court settlements, fast-track procedures for SMEs, an early warning
system and other provisions that significantly affect the efficiency of the
system. The best performing countries have an efficient legal framework for
bankruptcy and early warning systems. The study shows that almost all countries
considered to have a very efficient bankruptcy legal system are also considered
to have highly efficient early warning tools.

An important issue to
support an effective second chance[9]
is the ‘time to discharge’, which is
the time from when a company is bankrupt (liquidation) and when it can restart
its business. A discharge is often regarded as crucial for the opportunity to
restart. Currently, the discharge time varies greatly from country to country.
In some countries, honest business bankruptcies are automatically granted a
discharge immediately after liquidation is finished. In some, bankrupted companies
have to apply for a discharge; and in others, bankrupted companies cannot
obtain discharge.

An additional reflection
concerning the question of ‘second chance’ refers to the business re-start of a
formerly bankrupt/failed entrepreneur. In many European countries, there is a
policy commitment to address the issue of business failure and promote second
chance. Member States have put forward plans to reform their national
insolvency legislation in order to support entrepreneurs looking for a second
chance. Most national legislation does not seem to make it easy for
re-starters. This leads to fewer re-starters, despite the fact that failed
entrepreneurs have a strong inclination to go back into business.

The May 2011
Competitiveness Council called for specific measures to be taken. The Council ‘invites
Member States to promote a second chance for entrepreneurs by limiting, when
possible, the discharge time and debt settlement for honest entrepreneurs after
bankruptcy to a maximum of three years by 2013’[10].

3.           Areas in national insolvency law where
approximation could bring benefits

On the basis of an
analysis of the above findings, the Commission has identified a number of areas
where differences in national insolvency laws can create legal uncertainty and an
‘unfriendly’ business environment. This creates a less favourable climate for cross-border
investment.

3.1.        Second chance for
entrepreneurs in honest bankruptcies[11]

Principle II of the Commission’s ‘A Small
Business Act for Europe’[12] is aimed at the promotion of a second chance for honest
entrepreneurs[13].
The ‘honest’ failure is a case where the business failure was through no
obvious fault of the owner or the manager, i.e. honest and above-board,
contrary to cases where the bankruptcy was fraudulent or irresponsible. It
calls for exchanges of best practice between Member States.

Lengthy and costly
bankruptcy procedures are a major limitation to an effective second chance. In
addition, honest bankrupt entrepreneurs are usually subject to the same
limitations as fraudulent entrepreneurs. This not only means a risk that failed
honest entrepreneurs face the social stigma attached to bankruptcy, but there
are also legal and administrative impediments to re-starting a business. Difficulties
in finding financing for a new venture are considered as the main problem for
re-starters. But it should be kept in mind that those that attempt to re-start,
learn from their mistakes and usually experience faster growth than newly
established companies.

Action could be taken to
differentiate more between honest and dishonest bankruptcies. Insolvency
regimes could differentiate between debtors who have acted honestly in their
conduct or business giving rise to the indebtedness, and those who have acted
dishonestly, and could for example contain a provision that wilful or
irresponsible non-compliance with legal obligations by a debtor be subject to
civil penalties and, where appropriate, criminal liability. Any supportive programmes for starting up a new business should be
available only to honest bankrupts without treating those businesses however differently
from the non-bankrupt businesses.

The following measures
should be considered as the most significant to be taken in order to reinforce
second chance:

·
Separate liquidation
proceedings for honest and dishonest entrepreneurs;

·
Frame and apply ‘fast-track’
liquidation proceedings for honest bankruptcy.

3.2.        Discharge periods that do
not encourage a second chance

Discharge is also key
for second chance: a three-year discharge and debt settlement period should be
a reasonable upper limit for an honest entrepreneur and as automatic as
possible. It is crucial that entrepreneurship does not end up as a ‘life
sentence’ if things go wrong[14].

Member States agreed on
the need to harmonise the ‘time to discharge’ to less than three years in the
May 2011 Competitiveness Council conclusions, following the launch of the
Review of the Small Business Act for Europe[15].

Shortening and aligning
the ‘time to discharge’ would be an important step towards creating a
friendlier and more innovative business environment, allowing European
enterprises to operate on a level playing field. It could be a first step
towards a wider approximation of national bankruptcy laws.

3.3.        Varying chances for
restructuring due to different rules on the opening of proceedings

There are significant
differences between the criteria for opening insolvency proceedings. In certain
Member States, insolvency proceedings may be opened only for debtors that are
already affected by financial difficulties and are insolvent. In others,
proceedings can be opened for solvent companies that anticipate insolvency in
the imminent future. Further differences may be found in insolvency tests (like
the liquidity test) adopted in the laws of Member States. Evidently, the
differences between insolvency tests mean that companies in a similar financial
condition may meet an insolvency test in one Member State but not in another. As
a consequence, companies may have unequal chances to resort to informal
out-of-court restructuring in order to resolve financial difficulties and avoid
insolvency proceedings that involve partial or total divestment of a debtor and
the appointment of a liquidator.

Another problem relates
to the rules on mandatory filing of insolvency. There are significant
differences between Member States regarding the deadlines a debtor must meet when
the opening of insolvency proceedings is mandatory. In some Member States, the
debtor has two weeks after becoming insolvent to file for bankruptcy, in some
the debtor must file within two months from the date it becomes aware of the
insolvency situation. In others, the debtor must file for bankruptcy at the
latest 45 days following cessation of payments.

The length of the
timeframe may impact a debtor’s ability to solve financial difficulties. While
overly tight deadlines may adversely affect this ability, long deadlines may
delay the granting of relief under insolvency proceedings and undermine the
efficiency of proceedings for all creditors.

3.4.        Unfulfilled expectations
of creditors for different categories of debtors

The laws of Member
States differ in the possibilities granted to creditors to commence insolvency
proceedings against debtors and in relation to the various categories of
debtors. These differences may be difficult to reconcile with the legitimate
expectations of creditors. Creditors expect to be able to impose insolvency
proceedings on their debtors and, instead of resorting to individual
enforcement action, may instigate collective insolvency proceedings.

Another area in which
approximation may be needed is the capacity to commence proceedings against a
debtor. All Member States have systems allowing a debtor (a natural person or a
public or private legal entity) that carries on a business activity, a creditor
and the state to apply to the courts to initiate insolvency proceedings against
a debtor. However, some jurisdictions limit the ability of a creditor to start
insolvency proceedings by adding special conditions. Any limitations on the creditor's
ability to commence insolvency proceedings may lead to situations where a
creditor is treated differently when it comes to opening main and secondary
proceedings against the same debtor.

3.5.        Uncertainty
for creditors relating to procedures to file and verify claims

In order to reduce
uncertainty and create equal treatment among creditors in the Member States,
further approximation of the rules on filing and verifying claims should be
considered, such as the procedures, time limits, penalties and consequences for
failure to comply and the information to be provided to creditors.

The transparency and efficiency
of the claims filing and verification process impact significantly on
creditors’ ability to obtain a satisfactory outcome of bankruptcy proceedings.
The laws of Member States regulate this area differently. The differences found
include the time limits for filing claims and asserting rights, availability
and access to information about the process and the consequences of delayed
filing of claims. Frequently, the time limit for filing claims is laid down in
the bankruptcy decision. Failure to meet the time limit can also have different
consequences in difference Member States. In some, a creditor who missed the
time limit may lose its rights to advance and obtain a satisfactory outcome of
its claim in bankruptcy proceedings, whereas in other Member States it does
not.

Foreign creditors are
more likely than domestic creditors to be impacted by the significant
differences between the laws of Member States, given the potentially severe
consequences of failure to observe the rules governing the process. These
include losing their right to participate in distributions.

3.6.        Promoting restructuring
plans

The rules regulating
restructuring plans (including contents and related procedural issues) have a
crucial role in creating the conditions for successful restructuring in
insolvency proceedings. Rigid and impracticable rules may hinder the chances of
adopting a restructuring plan, leaving no alternative but to wind up a company.
The legal framework for restructuring plans adopted in Member States differ significantly.
The main differences concern identification of the parties that can act as promoters
of the plan and also the adoption, modification and verification of plans.

While the laws of
Member States generally accept that it is up to the debtor to propose a
restructuring plan, the rules on whether creditors may propose the plan or
influence its preparation vary. There are also major differences in the rules
regarding the procedure for adopting the plan, including whether creditors are
divided into categories and required majorities. In certain Member States, they
are not divided into categories. The laws of the Member States contain
different rules on the required majorities for approving a plan. The laws of
the Member States also differ on the standards applied by the courts when
reviewing the plan. Under some laws, the courts have wide discretionary powers,
under other laws, these powers are rather more limited.

4.           Special needs of SMEs to promote second
chance

The EU pays special
attention to the situation faced by SMEs and to giving them a second chance.
The Commission considers that support for SMEs to tackle economic difficulties
should be granted for[16]:

·
Prevention;

·
Post-bankruptcy and second
chance;

·
Out-of-court settlements;

·
In-court procedures.

Restructuring can be
extremely costly for SMEs, so much so that often only bankruptcy is a viable
option. Solutions should be found to lower restructuring costs for SMEs. Capped
fees can be a solution. Alternative procedures should be put in place to make
adequate solutions available for all types of SMEs. Procedures should be
proportionate to the size of the business. Out-of-court procedures should be
open to all types of debtors, regardless of the available funds. While the
average time taken of out of court settlements is relatively short, the rate of
success in achieving settlements is above 50% in most EU Member States. Even
though out-of-court settlements and pre- insolvency proceedings are recently
introduced mechanisms, they are increasingly used by SME's in the EU.

SMEs can also be
affected by economic difficulties as creditors. Certain SME representatives
consider that micro businesses as creditors lose an unreasonable proportion of
their outstanding claim in insolvency proceedings due to lengthy proceedings
and national priority rules. It is worth exploring what could be done to
improve the status of SMEs as creditors.

5.           Steps To Be Taken

The Commission, as a first step, proposes
the modernisation of the EU Regulation on insolvency proceedings. In addition, it
intends to adopt a European Entrepreneurship Action Plan which would include
action to promote efficient bankruptcy procedures and offering second chance .

As a further step the Commission is
reflecting on ways forward to tackle problems arising from the disparities between
national insolvency laws. Individual action at
national level cannot adequately address the challenges posed by the
transnational aspects of the internal market. Action could usefully be taken to
diminish uncertainty and to create a more business-friendly environment. The
challenge is to address adequately and quickly the debtor’s financial
difficulties alongside the creditor’s interests, while facilitating the rescue and restructuring of businesses.

The Commission will
continue the approach started under
the previous European Semester cycle, in the context of which some Member
States have already reformed their domestic insolvency
laws. Country-specific recommendations
inviting the Member States to update their insolvency laws could therefore be
issued where necessary.

Furthermore, the
Commission intends to deepen its analysis of the impact arising from
differences between national insolvency laws on the functioning of the internal
market. To this end, it will enter into a dialogue with the European Parliament
and the Council on the basis of this Communication. Moreover, the Commission
will launch a public consultation so as to receive views from stakeholders on
the issues identified in this Communication and any other concerns as well as
on possible solutions and policy options.

[1]               See President Barroso's letter to EP President in the
framework of the State of Union address on 12 September 2012.

[2]               COM(2012) 573.

[3]               OJ C 115, 4.5.2010, p. 1.

[4]               Council Regulation (EC) no 1346/2000 on insolvency
proceedings, OJ L 160, 30.6.2000, p. 1.

[5]               The problematic is described in more detail in the
Impact Assessment, accompanying the Revision of Regulation (EC) No 1346/2000 on
insolvency proceedings, COM(2012) 744.

[6]               EP resolution of 15.11.2011
with recommendations to the Commission on insolvency proceedings in the context
of EU company law.

[7]               ‘Harmonisation of insolvency law at EU level’,
European Parliament 2010, PE 419.633. This was followed by the study
"harmonisation of insolvency law at EU level with respect to opening of
proceedings, claims filing and verification and reorganisation plans" EP
2011, PE 432.766

[8]               ‘Business dynamics: start-ups, business transfers and
bankruptcy, European Commission, DG Enterprise and Industry, January 2011. This
report contains a study on the economic impact of legal and administrative
procedures for bankruptcy and opportunities for a second chance after
bankruptcy in 33 European countries (27 EU Member States plus Iceland, Norway,
Croatia, Turkey, Serbia and Montenegro).

[9]               See ‘A second chance for entrepreneurs: prevention of
bankruptcy, simplification of bankruptcy procedures and support for a fresh
start’, Report of the Expert Group, European Commission, DG Enterprise and
Industry, January 2011.

[10]             Council of the European Union document 10975/11.

[11]             There is a clear need to distinguish ‘honest’ failures
from fraudulent ones and to clearly avoid encouraging the latter.

[12]             COM(2008) 394 final. This had been preceded by a
Communication on ‘Overcoming the stigma of business failure — for a second
chance policy’, COM(2007) 584final.

[13]             Principle II: ‘Ensure that honest entrepreneurs who
have faced bankruptcy quickly get a second chance’.

[14]             This was also a recommendation in the above-mentioned
report of the expert group on second chance.

[15]             COM(2011) 78 final.

[16]             ‘A second chance for entrepreneurs: prevention of
bankruptcy, simplification of bankruptcy procedures and support for a fresh
start’, see above footnote 9.