EUROPEAN COMMISSION Strasbourg, 22.11.2016 SWD(2016) 357 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU {COM(2016) 723 final}

{SWD(2016) 358 final}



1. INTRODUCTION 2. POLICY CONTEXT, ECONOMIC CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 2.1. Policy context 2.2. Economic context 2.3. Drivers and problems 2.3.1. Drivers 2.3.2. Problems 2.4. Risks 2.5. Baseline scenario 2.6. The EU's right to act, subsidiarity, necessity and proportionality 3. OBJECTIVES 4. HIGH-LEVEL OPTIONS 4.1. Description of high level options Option 1: Maintaining the status quo (baseline scenario) Option 2: Setting up a fully harmonised preventive restructuring procedure and a second chance framework Option 3: Introducing an alternative, optional EU restructuring and second chance regime for cross-border cases Option 4: Setting up a minimum harmonised legal framework in the area of restructuring and second chance for entrepreneurs 4.2. Analysis of high level options and discarded options

5. SUBSTANTIVE SUB- OPTIONS AND ANALYSIS OF THEIR IMPACT 5.1. Early restructuring possibility 5.3. Debtor in possession 5.4. Plan approval by a majority of creditors 5.5. New financing and interim financing, safe harbour provisions and third party releases 5.6. Reducing the formalities relating to court proceedings 5.7. Lowering and aligning discharge periods for natural persons 77 5.7.1. Entrepreneurs 5.7.2. Consumers 5.8. Measures to increase the effectiveness of restructuring, insolvency and second chance procedures 6. THE PREFERRED HIGH-LEVEL OPTION 4 7. ANALYSIS OF OVERALL IMPACTS OF THE PREFERRED HIGH-LEVEL OPTION 4 8. MONITORING AND EVALUATION 9. ANNEXES



IMPACT ASSESSMENT REPORT RESTRUCTURING AND SECOND CHANCE 1. INTRODUCTION Insolvency rules in their widest sense cover a wide range of measures from early intervention before a company gets into serious difficulties, timely restructuring to ensure that viable business parts are preserved, giving a second chance to honest entrepreneurs and liquidation proceedings. A well-functioning insolvency framework covering all these measures is an essential element of a good business environment and it is a key condition for sustainable growth and jobs creation, which is a key priority of the European Commission. A reliable and predictable insolvency framework maximises the efficiency, predictability and effectiveness of insolvency proceedings, which ultimately results in an effective credit system and a favourable investment climate. Insolvency frameworks providing for transparent, predictable and cost-effective mechanisms for resolution of over-indebtedness should make it possible to save viable businesses in difficulties (by restructuring the existing company or by selling it as a "going concern") or make it easier to liquidate a company and its assets if the company does not have any prospect of survival. Efficient insolvency rules, thus, help increase the recovery rate of debts and avoid the build-up of non-performing loans in the financial system At the same time, allowing honest entrepreneurs to benefit from a second chance after overcoming bankruptcy is crucial for ensuring a dynamic business environment and promoting innovation. Restructuring and second chance for individuals are therefore critical parts of an appropriate insolvency framework. Good insolvency frameworks should define procedures for dealing with

- businesses in financial difficulties, but not yet insolvent (where the restructuring framework is most useful), - companies that are very close to insolvency or already insolvent (where any means of recovery the value for creditors are most important), - a possibility of a fresh start of economic activity for natural persons, in particular entrepreneurs (debt discharge). The core of any insolvency law is the most efficient use of the resources used by a distressed company and allocation of potential costs. This primary economic efficiency objective is complemented by specific redistributive goals which result from cultural and social value patterns of a given society and may vary between countries. Insolvency legislation therefore sets out conditions for initiating insolvency procedures, outlines creditors’ and debtors’ rights and obligations, describes the role of courts, as well as the steps and the timeframe to be followed once the procedure starts. An effective insolvency regime should not only ensure a fair and timely distribution of assets among creditors through liquidation proceedings, but it should also allow viable debtors to restructure at an early stage and thus avoid insolvency and the related loss of value, jobs and know-how. In addition, in a cross-border context, each of the countries affected has an interest in regulating insolvency of an entrepreneur whose activities or assets are located on its territory . An effective restructuring and second chance framework should also provide for safeguards against possible moral hazard risks which are inherent but which should not impede the adoption of restructuring and second chance frameworks. This brings about problems which cannot be resolved solely by rules determining the applicable law and jurisdiction. These aspects have been partly addressed through the Regulation (EU) 2015/848 on insolvency proceedings (the Insolvency Regulation), which includes provisions on jurisdiction for opening insolvency proceedings, recognition and enforcement of judgments issued in such proceedings, as well as provisions regarding the law applicable to insolvency proceedings. However, even under such rules, in a number of situations, more than one law and jurisdiction will have a competence to handle the cross-border insolvency and the differences in these laws will hinder a successful resolution of such a case . 2. POLICY CONTEXT, ECONOMIC CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 2.1. Policy context Efficient insolvency frameworks play a key role in economic policy since they can contribute in a tangible way to create jobs and sustainable growth by helping companies in difficulties, but still viable, to get back on their feet and quickly taking companies beyond rescue off the market. For this reason, the issue has attracted considerable interest at the level of the European Union for quite some time. In 2011, the European Parliament adopted a Resolution on insolvency proceedings which contained recommendations for harmonising specific aspects of substantive insolvency law, including restructurings, and company law. The recommendations regarding the harmonisation of specific aspects of insolvency and company law concerned certain aspects of the opening of insolvency, certain aspects of the filing of claims, aspects of avoidance actions, general aspects of the requirements for the qualification and work of liquidators, as well as aspects of restructuring plans. An accompanying study confirmed that there were ‘certain areas of insolvency law where harmonisation is worthwhile and achievable', in particular as regards the efficiency of restructuring procedures. Also the Competitiveness Council conclusions of 2011 called on Member States to reduce the discharge period for entrepreneurs to 3 years. Against this background and recognising the significant differences between national insolvency frameworks, the European Commission issued in December 2012 a Communication which highlighted a need for a step-by-step approach as regards certain areas where differences between domestic insolvency laws could hamper the functioning of an efficient internal market . The subsequent first action under this approach was the modification of Regulation (EC) No 1346/2000 accomplished by the adoption of the Insolvency Regulation. The Insolvency Regulation focuses on resolving the conflicts of jurisdiction and laws in cross-border insolvency proceedings, and ensures the recognition of insolvency-related judgments across the EU. It does not harmonise the substantive insolvency laws of the Member States. As a next step, the Commission adopted in 2014 the Recommendation on restructuring and second chance (the Recommendation) . The Recommendation focused on restructuring and second chance, since it was considered that in these two fields the action at EU level would bring most added-value . The Recommendation invited Member States to put in place (i) effective pre-insolvency procedures with the aim of helping viable debtors to restructure and thus avoid insolvency and (ii) second chance provisions for entrepreneurs enabling them to have a discharge in no more than three years after insolvency. In particular the Recommendation focused on: (i) availability of a preventive restructuring framework, (ii) facilitating negotiations of restructuring plans, including appointment of a mediator or a supervisor, stay of individual enforcement actions and suspension of insolvency proceedings, (iii) restructuring plans, including contents of restructuring plans, adoption of restructuring plans by creditors, court confirmation of the restructuring plan, rights of creditors, and effects of a restructuring plan, (iv) protection for new financing, and (v) second chance for entrepreneurs, including discharge periods. Following its adoption, an evaluation of its implementation was conducted and two data collection rounds were carried out after one year and after two years, respectively. Already on the occasion of these two reviews which were carried out in 2015 and 2016, it was apparent that most Member States which were already lagging behind in this area were not making sufficient progress. These reviews also revealed that while the Recommendation has provided useful focus for those Member States undertaking reforms in the area of insolvency, it has not led to the desired impact in terms of consistent changes across all Member States, facilitating the rescue of businesses in financial difficulty and in giving a second chance to entrepreneurs. This was due to its partial implementation in a significant number of Member States, including those having launched certain reforms. By way of example, it can be outlined that on restructuring, there are still several Member States where it is not possible to restructure a business before it is insolvent (DK, CZ, BG, HU, SK, LT). CY, SI and PL introduced new preventive restructuring procedures but they differ in certain points form the Recommendation (in SI commercial creditors for example cannot participate in preventive restructuring which is limited to financial creditors); while EL, ES, SL, RO and IT brought some limited improvements to their existing procedures. On second chance, since the adoption of the Recommendation, several Member States (e.g. ES, RO, HU, HR) have introduced for the first time a debt discharge regime for natural persons. In EL, discharge for entrepreneurs was reduced to 3 years. However, in most Member States where reforms were recently introduced, the duration of the discharge period and the conditions for having access to discharge do not comply with the Recommendation: in general discharge periods are five year or more (ES, RO, HU) and sometimes there are impossible repayment obligations attached (in HU, 50% of debt needs to be repaid to benefit from discharge). In Romania, only consumers benefit from the discharge regime, but not the entrepreneurs. Other differences in the implementation of the Recommendation are described in more detail below in section 2.3.2. on problem drivers. Such differences in Member States frameworks translate into continuing legal uncertainty, additional costs for investors in assessing their risks, less developed capital markets and persisting barriers to the efficient restructuring of viable companies in the EU, including cross-border enterprise groups. A comparative legal study on differences between insolvency and restructuring regimes in Member States concluded that "there appears to be the incomplete and inconsistent implementation of the Recommendation." Following the adoption of the Insolvency Regulation, the Commission reflected on ways forward to deal with the disparities between substantive insolvency laws . Evidence from the public consultation on the Green Paper on the Capital Markets Union , which included explicit questions on insolvency frameworks, as well as the Doing Business data of the World Bank on the global practices for resolving insolvency confirmed the critical importance of restructuring processes as workable alternatives to liquidation processes for viable businesses. In parallel, studies and reports on entrepreneurial activities concluded that entrepreneurs should not be stigmatised when honest business endeavours fail. On the one hand, individuals should not be deterred from entrepreneurial activity, resuming consumption or taking up gainful employment; on the other hand, any rules providing for debt discharge should prevent abuse and incentivise careful debt management. In light of these assessments, it was apparent that non-binding measures at the European level would not be sufficient to bring about these changes.

The "Five Presidents' report" of 22 June 2015 on "Completing Europe's Economic and Monetary Union" listed the area of insolvency law among the most important bottlenecks preventing the integration of capital markets in the euro area and beyond . Convergence of insolvency and restructuring proceedings would facilitate greater legal certainty for cross-border investors and encourage the timely restructuring of viable companies in financial distress. The inefficiency and divergence of insolvency laws make it both harder for investors to assess credit risk in general and particularly as regards cross-border investments. More cross-border risk-sharing, deeper and more liquid capital markets and diversified sources of funding for EU businesses will deepen financial integration, lower costs and increase the EU's competitiveness. This in turn will contribute to job creation and sustainable growth. The 2015 Capital Markets Union Action Plan therefore announced a legislative initiative on business insolvency, including early restructuring and second chance. This initiative is intended to address the most important barriers to the free flow of capital and build on national regimes that work well. In the public consultation of the Green Paper on the Capital Markets Union Action Plan which took place in summer 2015 the majority of stakeholders highlighted the need of further action going beyond the 2014 Recommendation on restructuring and second chance regarding on restructuring of companies, stay on individual creditor claims and definition of a common discharge period, efficiency and effectiveness of insolvency practitioners and the courts. At the same time, the Single Market Strategy stated that the Commission would support honest entrepreneurs and propose legislation to ensure that Member States provide a regulatory environment that is able to accommodate failure without dissuading entrepreneurs from trying new ideas again . More specifically as regards the banking sector, the Communication Towards the Completion of Banking Union published in November 2015 confirmed that (i) there is a need for greater convergence in insolvency law and restructuring proceedings across Member States, (ii) the inefficiency and divergence of insolvency laws make it harder to assess and manage credit risk, and that (iii) enhancing legal certainty and encouraging the timely restructuring of borrowers in financial distress is particularly relevant for the success of strategies to address the problem of non-performing loans in some Member States. The ECOFIN Council Conclusions of July 2016 on a roadmap to complete the Banking Union underlined the importance of the work carried out by the Commission to propose a legislative proposal for minimum harmonisation in the field of insolvency law in the context of the Capital Markets Union (CMU), noting that this may also support efforts to reduce future levels of non-performing loans. More recently, it its Communication on Capital Markets Union - Accelerating Reform the Commission reiterated that inefficiencies and differences in national insolvency frameworks generate legal uncertainty, obstacles to recovery of value by creditors, and barriers to the efficient restructuring of viable companies in the EU, including for cross-border groups. 2.2. Economic context In recent years, an average of 200,000 firms went bankrupt each year in the EU, resulting in direct job losses totalling 5.1 million over three years . About one-quarter of these bankruptcies involved creditors and debtors in more than one EU Member State . However, the single market dimension of the problems is even larger than these figures suggest since many companies avoid expanding or investing cross-border in the first place, due to the non-convergence of insolvency frameworks and uncertainty about the effectiveness of the applicable rules, as described in section 2.1. The trends in the number of corporate insolvencies are provided below as provided below in the table show the increasing number of insolvencies starting with the peak of the economic crisis in 2009 and still remaining high. Table 1: Trends in number of business bankruptcies and other forms of unvoluntary business cessations selected Member States 2007 to 2014 – 2009=100 % (the numbers in the table are given in 100%) . Member State 2007 2008 2009 2010 2011 2012 2013 2014 AT 91.2 91.5 100.0 92.4 85.0 87.5 79.1 78.6 BE 81.5 90.0 100.0 101.6 108.5 112.4 124.6 114.0 BG 100.0 125.2 145.1 177.6 193.8 170.6 CY 88.7 84.9 100.0 107.5 114.5 83.6 118.9 102.5 CZ 67.3 72.3 100.0 109.1 119.7 131.0 151.1 144.3 DK 42.0 65.0 100.0 113.2 95.8 95.6 87.4 70.6 EE 19.1 40.1 100.0 97.4 59.1 46.9 43.5 40.6 EL 144.5 101.1 100.0 100.0 125.4 116.9 110.4 93.0 ES 19.9 55.6 100.0 94.5 109.5 148.9 167.2 114.0 FI 68.8 79.8 100.0 87.5 90.0 90.4 95.6 91.2 FR 81.2 87.9 100.0 95.5 94.1 96.7 99.0 98.9 HU 84.7 100.0 104.4 83.0 68.7 93.1 149.1 IR 53.6 66.0 100.0 100.8 113.0 109.0 95.6 IT 65.6 80.0 100.0 119.7 129.5 130.6 150.6 167.5 LT 32.9 51.9 100.0 88.8 69.0 76.0 84.2 91.4 LU 95.1 82.8 100.0 132.5 141.1 151.5 151.4 122.7 LV 0.0 56.4 100.0 121.9 41.2 40.0 36.5 42.9 NL 100.0 88.8 88.1 105.9 120.7 95.7 PT 68.5 92.5 100.0 107.2 124.4 175.3 158.1 105.3 SE 75.8 82.5 100.0 95.2 91.1 97.8 100.8 93.7 SK 61.2 90.9 100.0 124.6 135.9 130.4 142.8 148.6 UK 62.8 86.2 100.0 85.8 89.7 85.5 75.9 69.7 Sources: London Economics based on data from AT: Kreditschutzverband; BE: Statistics of the Belgium Federal Public Service Economy; BG: provided by official of Ministry of Economy; CY: Department of Registrar of Companies and Official Receiver; CZ: CRIF from Insolvency Register of Ministry of Justice: DK: Statistics Denmark; EE: Krediitiinfo SA; ES: OECD; Statistics Finland; FR: Insee: EL: OECD; HU: Hungarian Central Statistical Office; IR: Dpt of Jobs, Enterprise and Innovation; IT: Cerved; LT: Statistics Lithuania; LU: Statec; LV: Lursoft; NL: Statistics Netherlands; PT: COSEC SA: Swedish Agency for Growth Policy Analysis; SE: SK: Ministry of Justice Slovakia; UK: Insolvency Service Today in Europe half of all businesses do not survive the first 5 years of their existence. In a number of Member States, the peak of bankruptcies was reached during the initial years of the crisis, i.e. in 2009 (Austria, Estonia, Finland, France, Lithuania, United Kingdom) or in 2010 (Denmark, Hungary, Latvia). In another group of Member States the peak was reached in 2012 (Luxembourg, Portugal) or in 2013 (Belgium, Bulgaria, Cyprus, Czech Republic, Luxembourg, Netherlands, Spain and Sweden) . However, even if the number of bankruptcies can be expected to stabilise and re-converge to pre-crisis trends, the economic case for more efficient and convergent insolvency frameworks remains. In case of liquidation, companies trading with the insolvent company may not receive anything at all if their debt was not secured; also secured creditors have to take into account the possibility of a substantial reduction in value of their claims . In case of restructuring, on the other hand, insolvency is avoided, contract debts are in general paid, and negotiations concern in most cases only the financial debt. Restructuring is in general beneficial for the creditors if the business is viable. Hence, restructuring instead of liquidation constitutes a gain for all stakeholders involved, provided that restructured companies are able to stick to their new repayment plan. Regarding second chance, a distinction between entrepreneurs and consumers needs to be made, since the economic rationale for offering each of them a second chance is different in the two cases. Offering a second chance to entrepreneurs means that they have a chance to restart a business activity and there is evidence that those starting for a second time learn from their mistakes and their next businesses are more viable . For consumers, the rationale of providing them with a second chance is not only economic but also social. Consumers discharged of debts can start buying services and products and therefore contributing to the rise of GDP. But most importantly, consumers and their families could avoid being caught in a debt-trap for life, with all the precarious social consequences that this situation may cause to individuals and families. In some Member States natural persons entrepreneurs (with unlimited liability) constitute more than 50% of all businesses, since the creation or management of limited liability companies has not been facilitated in those Member States . Therefore, a discharge, even for entrepreneurs or managers of single-member limited liability companies, could have a significant impact on the economy going beyond what is usually associated with local businesses. A number of such companies, registered as "sole traders", have cross-border activity which in other Member States is normally performed by their corporate equivalents. Moreover, entrepreneurial debts are often intertwined with personal debts (e.g. using the same car both for business and private purposes). In addition, in order to start a limited liability company, credit institutions require a security on private houses as a prerequisite to a loan . This means that economic consequences of entrepreneurial debts, and a possible discharge of them, go beyond the economic activity of an entrepreneur. The focus on restructuring of corporate entities and discharge of natural persons is complementary and allows dealing with the economic consequences of debts regardless of the legal form which created such debts. The debts of natural persons-entrepreneurs would be subject to discharge, whereas the debts of limited liability companies would be treated in restructuring or liquidation proceedings. Enterprise mortality is closely linked to the problem of non-performing loans which is the most usual cause of liquidation of companies. The European Central Bank’s 2015 comprehensive assessment identified a total of EUR 980 billion in non-performing exposures in the banking system . The table below compares the change in non-performing loans between 2004 and 2014 in the EU, the United States and Japan. It demonstrates that the Eurozone had the greatest difficulties in liquidating the large portfolios of non-performing loans. Whilst there are several reasons for this, it is clear that cumbersome and lengthy insolvency proceedings, as well as lack of modern restructuring and second chance frameworks contribute significantly to this problem . Chart 1: Non-performing Loans, Provisions and Write-offs in the United States, Eurozone and Japan

Source: Euro Area Policies, Selected Issues, IMF July 2015 Member States with less efficient insolvency frameworks to deleverage non-performing loans are faced with the weight of existing company debt which deters investors, holds back consumption, and creates a situation of debt overhang . High levels of non-performing loans in banks' portfolios also undermine their lending capacity for banks and impacts job creation and growth. Studies and data from the International Monetary Fund suggest that high indebtedness of EU companies and the problem of non-performing loans represent an investment barrier and prevent economic growth. As the graph above shows, in the EU the progress has been slower in resolving these impaired loans in comparison to the U.S. or Japan. As long as private debts remain at high levels, economic activity may struggle to pick up. The International Monetary Fund calculates that freeing-up capital disposed for non-performing loans could unlock new lending of between EUR 167–€522 billion, provided there is a corresponding demand for new loans . Efficient insolvency and restructuring laws can serve to avoid future build-up of non-performing loans since loans on which performance ceases could be enforced more efficiently. Improving legal settings of enforcement regimes will thus not resolve the issue of existing NPLs over which enforcement proceedings have already started. However, reinforcement of the judiciary setting could still help to speed up the remaining steps of the proceedings. High levels of NPLs have a direct consequence on the capacity of banks to support growth. According to the IMF Article IV review of the Euro area, “high levels of NPLs and debt have held back bank lending and investment, limiting the pass through of easier financial conditions. ” In this way, reforms of insolvency laws can complement other ongoing reforms at the EU level in the banking sector and as regards capital markets. 2.3. Drivers and problems 2.3.1. Drivers This sub-section describes the main drivers which give rise to the problems explained in section 2.3.2. These drivers were raised by stakeholders in the performed public consultations, in particular in the public consultation on the Green Paper on the Action Plan of the Capital Markets Union. Overall, respondents indicated a number of specific issues within the area of insolvency which in their view should be harmonised at EU level, such as preventive restructuring proceedings, out-of-court and hybrid restructuring procedures, second chance for entrepreneurs, regulation of qualifications, tasks and rights of insolvency practitioners, liability of directors and shadow directors, introduction of a time cap on insolvency procedures, establishment of an EU register with information on insolvencies and a harmonised form for petition claims. Stakeholders suggestions also aimed at harmonisation of requirements for opening insolvency proceedings, including a common definition of default and avoidance actions, restructuring of companies, stay on individual creditor claims and definition of a common discharge period. Other frequently quoted proposals for action suggested harmonisation of ranking of creditors' claims and the issue of personal insolvency. Following the consultations with the group of insolvency experts, relevant stakeholders and Member States experts, all the issues raised were examined and most of them, although not all, have been made subject to a deeper analysis and regulatory action as described in the following sub-section A. to E. and in section 5 on substantive sub-options. A. Preventive restructuring A.1. Rules on the possibility of restructuring at an early stage The later a business initiates restructuring proceedings, the higher the costs of restructuring and the lower the management powers and success rate. Therefore debtors in financial difficulties should have the possibility to restructure their debts before they are insolvent. That said, the risk of insolvency has to be apparent, for example, because the debtor is unlikely to be able to repay his debts as they fall due in the foreseeable future . However, the overall general statistics demonstrate that less formal procedures are not applied very often in the majority of Member States . The highest proportion of restructurings in relation to the overall number of insolvency proceedings in the EU appears to be in France with around 30 % of restructuring proceedings . For instance, in Spain, where restructuring proceedings have been recently introduced and which shows a situation common to most Member States, out of all the agreements reached in 2014, only 9.7% were made in an early composition agreement. Since 2010, a smaller number of agreements has been made (with exception of 2013) compared with 2006, 2007 and 2009 where the rates were 22.4%, 25.4% and 21.8 respectively. Most agreements are made as part of ordinary insolvency proceedings and this is the case even more in the last years which might suggest that the latest changes in the law did not succeed in promoting less formal proceedings, or that debtors are using alternatives, such as the homologation refinancing agreement. This is despite the fact that the median value of recovery rates in the early composition agreements in 2014 was 68.7% of the nominal present value of the debt, whereas in the ordinary composition agreement it was only 44.3%. Additionally, recovery rates in early composition agreements were in general higher always higher than in the ordinary composition agreement (see figure below). Chart 2: Comparison of median recovery rates in Spain between ordinary composition agreements and early composition agreements Source: Own elaboration of VVA/ JIIP/ DTI/ Grimaldi consortium using the data provided by Colegio de Registradores de la Propiedad, Bienes Muebles y Mercantiles de España; * The recovery rates refer to the recovery expectations of the nominal present value for the normal creditors and under the supposition of full payment of what is agreed A concern that such preventive procedures can be misused by debtors whose businesses are not viable, and should rather be liquated than rescued, has led some Member States to impose high thresholds for entering these procedures. Furthermore, in some Member States debtors are under an obligation to file for formal insolvency procedures as soon as they are over-indebted (balance sheet test), which may dissuade directors to file for preventive restructuring due to risks of personal liability. SMEs, in particular, are reported to have great difficulties recognising their financial difficulties and the need to act quickly to contain the damage . Table 3: Situation in Member States as regards access to restructuring frameworks Access to restructuring Member States No access to any type of defined procedure to restructure debts with creditors before their companies are actually insolvent or are already late with payments BG, HU, SK and HR Possibility to restructure before being insolvent, but under very strict access conditions (e.g. an expert certificate must be filed or proof of a high majority of creditors already supporting the plan is required, imminent insolvency leading to late filing). AT, DE, DK, IT and PT Possibility to restructure at an early stage when there is a likelihood of insolvency in the future, without strict conditions being attached BE, CZ, EE, FI, FR, EL, ES, LV, LT, LU, NL, PL, RO, SE, CY, IE and UK An early possibility of restructuring and a low threshold for entering into negotiations of a restructuring plan favours the saving of viable businesses channelling them away from liquidation . The risk of misuse exists but should be addressed by a proper assessment of the viability of the business in the light of the restructuring plan, adopted by creditors, rather than by imposing strict entry conditions to access the procedures.

In the public consultation and during the 'Sounding Board' meetings, most of the stakeholders from business and the financial sector as well as practitioners in the field of restructuring underlined that many economically viable business that could have eventually avoid insolvency, end up in bankruptcy because they did not have the possibility to restructure effectively at an early stage. Business sector voiced that the death rate of companies can be reduced by the possibility of early restructuring for viable business in difficulties as it would shift the focus away of liquidation. Financial sector also stressed that since creditors’ recovery rates are in general higher where the insolvency framework allows for early and efficient restructuring of viable firms and quick resolution of the non-viable ones, the introduction of efficient restructuring procedures in EU will allow creditors to recover more than in the case of liquidation of an insolvent debtor. Trade Unions' representatives warned against the moral hazard risk that business may use restructuring frameworks strategically to reduce their liabilities towards workers. A2.Rules on stay of enforcement actions (moratorium) A stay on enforcement actions by a court suspends the right of a creditor to enforce its claim against a debtor . A properly defined "stay" of individual or collective enforcement actions is a crucial element of any useful restructuring procedure . Inadequate or overly restrictive stay provisions are likely to reduce the chances for a successful turnaround and damage the overall value of the business. The application of the stay, as one of the “fundamental debtor protections provided by the bankruptcy laws , impacts on the prospects of viability of the company and may give higher rewards to creditors who started enforcement early . This goal will be compromised, however, if creditors are able to seize assets that are essential to the carrying on of the company’s business . It is thus essential to strike the right balance between the different interests at stake. Table 4: Situation in Member States as regards rules on stay of enforcement actions Conditions of application of stay of enforcement actions Member States No possibility to obtain a stay of individual enforcement actions in preventive restructuring procedures AT Stay period limited in time, but extendable in more complex cases or upon evidence of progress in negotiations CZ, FR, IT, LV, LT, NL, PT, SE, SI, CY, IE and UK Stay period limited in time and non-extendable in more complex cases or upon evidence of progress in negotiations DE, ES, EL, PL Stay may be lifted by the court before the expiry of the stay period if the objectives of the stay can no longer be achieved or evidence of abuse BE, DE, EL, SE, CY, IE Stay for an indefinite period until the restructuring plan is adopted or rejected BE, EE, FI, LU, RO and DK Most often the stay also means that formal insolvency procedures cannot be opened against the debtor. In some Member States certain actions cannot be "stayed" (e.g. in BE, DK and SE in respect of specific secured transactions; in EE in respect of employment claims). During negotiations of a restructuring plan, the debtor should be able to apply to a court for a suspension of individual enforcement actions ("stay"), otherwise the success of the restructuring process is in jeopardy. The "stay" could be requested against any type of creditor. The stay would not be effective if, at the same time, the debtor's duty to file for insolvency were not suspended for the period of the stay or if creditors were allowed to enforce their rights through a collective action (i.e. opening insolvency proceedings) during this time . During the consultation process, the business sector and experts in the field of restructuring have pointed out that the absence of a 'breathing space' (stay on individual or collective enforcement actions) is likely to reduce the prospects of a successful restructuring. They were of the view that businesses in financial difficulties should have the possibility of a necessary amount of time to define a restructuring plan and avoid precipitate creditor action. In addition, the financial sector stressed that a stay of a proportionate and appropriate timeframe, along with the possibility for a creditor to lift it under conditions, can contribute to the efficiency of negotiations by striking a balance between the debtor's and creditors' interests. A3. Rules on debtor-in-possession The debtor-in-possession is a mechanism ensuring that the management of the debtor will not be displaced in favour of an outside insolvency administrator. The use of this mechanism encourages timely use of the restructuring option . However, the debtor-in-possession is not available in all jurisdictions and not under the same conditions. The choice between debtor-in-possession and management displacement is not an ‘all-or-nothing’ one and there are in fact a plurality of possible approaches on this issue . Evidence from the World Bank Doing Business Index suggests that average recovery rates for creditors in economies where insolvency administrators have a key role in deciding on the viability of the business are more than 10% higher than in economies where that determination is done by other means . Table 5: Situation in Member States as regards debtor-in-possession rules Application of debtor-in-possession rules Member States Debtor may lose certain powers of control over the business during preventive restructuring procedures FR, CY and NL Debtor left in possession, but an insolvency practitioner or administrator is also appointed to supervise the debtor AT, CZ, EE, FI, DE, LV, LT, LU, PL, RO, SK, SI, SE, UK, IE and HR Supervision of the debtor by the court BE No obligation for a court to appoint insolvency practitioner or administrator (or out-of-court appointment possibility) EL, IT, PT and ES Supervision of insolvency practitioner or administrator is not required in a simplified restructuring procedure. FI While the principle of a debtor in possession is not controversial as such, the role and level of involvement of insolvency practitioners must strike a balance between the need to ensure the success of proceedings, including the necessary confidence, and cost and effective access to such procedures, in particular for SMEs. Most of the stakeholders consulted were of the view that the productive capacity of a company is undermined if the debtors do not have the possibility to keep control over the day-to-day operations of their business. In the public consultation, the business sector particularly mentioned that debtor-in-possession arrangements can promote operational efficiencies and realise significant cost savings. During the dedicated stakeholders' meetings, some business organisations also voiced that many SMEs are hindered from accessing restructuring, because of the costs and difficulties that the appointment of a supervisor/administrator entails. On the other hand, it was supported by the business and financial sector that the appointment of a practitioner sometimes is proved necessary, for example, in complex cases or where it is the only way to achieve full transparency for creditors and reduce the risk of abuse, A4. Rules on the preparation and adoption of restructuring plans A company’s ability to make use of a legal proceeding for the adoption of a restructuring plan is integral to any insolvency system aiming to avoid business failure where possible. The speed and rules of adoption of a restructuring plan are of crucial importance for a cross-border investor. Both secured and unsecured creditors need to know what the so-called cram down rules are, if any, in the country where the investment is made and what it means for their own prospects of recovery. If the creditor is a shareholder, he needs to know the rights of shareholders in the adoption of the restructuring plan itself and the rate of recovery.

Table 6: Situation in Member States regarding the preparation and adoption of restructuring plans Preparation and adoption of restructuring plans Member States No possibility of binding dissenting creditors by majority voting AT and LT Possibility of binding dissenting creditors allowed, but certain categories of creditors are exempted (e.g. public creditors, workers, secured creditors, commercial creditors) CZ, EE, EL, ES, HR, IT, LV, LU, NL, PL, PT, SI and the UK Creditors are not treated in separate classes for the purposes of voting on a restructuring plan and the restructuring plan is adopted if not opposed by a majority of creditors DK Simple majority in value for a “cram-down” of liabilities in the course of a voluntary business arrangement CY Possibility of binding dissenting creditors, but all creditors must be involved, even those whose rights are not affected BE, DE and RO Possibility that only certain categories of creditors which are affected by the plan are involved (e.g. financial creditors) FI, FR and SI The rules on adoption of restructuring plans should reflect the different interests of creditors (e.g. secured and unsecured) and shareholders and their likely recovery in the event of insolvency. For example, creditors or classes of creditors and shareholders who can no longer profit should not have a decisive say in the adoption of such plans. By giving a bigger say to creditors and shareholders who are "in the money", that is those who can still financially contribute to the rescue of the business, restructuring plans would have bigger chances of success in the long term and help debtors avoid relapsing into financial difficulties soon after a first restructuring. SoLocal, the French online marketing group (former YellowPages in France), has 4.400 workers and €1.164 billion euros in debt. On 19 October 2016, the shareholders rejected the group’s debt restructuring during a general meeting. The company’s “Conquer 2018” proposal, which aimed at reducing the group’s debt to €400 million and featured a capital increase, required the support of two-thirds of shareholders, even after the required majority of creditors approved the financial restructuring. After the shareholders' vote, creditors have the right to demand immediate payment on SoLocal’s debt as it wouldn’t comply with its September and June leverage covenants . The company future enters a phase of serious uncertainty.

During the consultation process, business sector and practitioners in restructuring said that restructuring cannot be effective and successful if there are no clear rules on the adoption of the plan and on the need for the plan to balance among the different interests. Specifically, they were of the view that restructuring can have bigger chances to success if the plan is fair and reasonable and leave no creditor worse off than they would be in the most likely alternative scenario, i.e. liquidation. Financial institutions also underlined that uncertainty and higher financing costs can only be avoided by ensuring adequate safeguards for secured creditors in cram-down mechanisms. Trade Unions' representatives underlined the importance of preserving the workers' rights to information and consultation, which are conferred by EU law, in particular where restructuring involves a transfer of parts of the business. A5. Rules on provision of new financing in restructuring If new financing is necessary for the success of restructuring, the protection of the parties providing this funding is of vital importance for the rescued company . In the absence of debtor-in-possession financing arrangements, under which a company under court-supervised protection can receive additional financing, a distressed company has to rely on existing creditors to meet its interim funding requirements whilst a restructuring plan is devised. The process with a large number of financial institutions having differing strategies and involved in complicated cross-border proceedings often leads to conflicting objectives . Weak protection of parties providing new sources of financing diminishes the prospects of viability of the company and also of recovery rates . Table 7: Situation in Member States as regards provision of new financing in restructuring Conditions of provision of new financing in restructuring Member States No special protection provided in relation to parties who provide new financing CZ, EE, DE, HU, LT, LU, MT, NL, SK, UK New financing involving a connected person and provided within 6 months prior to the filing of bankruptcy proceedings can be set aside PL New financing cannot be challenged provided that the lender supplied funds and it was in relation to a settlement that had been approved by the court FR the new financing was provided pursuant to a bona fide attempt to rehabilitate the insolvent and restructuring provisions were adhered to BG the new financing occurred during the execution of a restructuring plan EL the bankruptcy judge approves the reorganisation arrangement RO certain specified conditions have occurred ES the arrangement envisaged favourable treatment being bestowed on the financing LV the action was designed to fulfil obligations under the restructuring scheme approved by the court SI Any transaction involving new financing and entered into pursuant to an effort to restructure is deemed not to have an intention of harming creditors DE Putting in place incentives for new financing is an essential element in ensuring a sustainable restructuring. Protection from avoidance actions in subsequent insolvency proceedings is therefore an essential element of restructuring plans. It seems necessary to extend such protection also to interim financing, i.e. financing necessary to ensure the continuation of the debtor's business during negotiations (before the plan is adopted), in particular in respect of creditors who are stayed. Several Member States fall short of ensuring this basic protection. A super-priority status for new financing exists in some Member States, however while being very effective in protecting new financing it is more controversial as it is sometimes considered to come into conflict with the principle of legal certainty and protection of property rights for existing creditors. During the public consultation and the ‘Sounding Board’ meetings, protection of new financing was deemed by most of the stakeholders as a necessary incentive for restructuring. The business sector underlined that if viable companies, in need of working capital, are left without the possibility to finance their day to day operations, they will be driven to liquidation, to the detriment of the real economy. In addition, business sector and financial institutions stressed that potentially interested creditors should be encouraged; when creditors decide to inject liquidity in a distressed company, they should be given a sufficient degree of predictability on the recovery of their claims. A6. Intensity and quality of courts' and insolvency administrators' involvement Preventive restructuring frameworks allow debtors and creditors to negotiate informally before insolvency starts. However a number of jurisdictions allow only for restructuring through formal insolvency: within these jurisdictions there are differences in the opening of the insolvency procedure that may generate problems in cross border situations . In most Member States, insolvency proceedings are administered by a judicial authority, through commercial courts, courts of general jurisdiction or through specialised insolvency courts. Sometimes judges have specialised knowledge and responsibility for insolvency matters, while in other cases insolvency matters are just one of a number of wider judicial responsibilities of the courts. During the ‘Sounding Board’ meetings, most of the stakeholders, including the business and financial sector as well as practitioners in the field of restructuring agreed that rigidity, cost and time of the procedures can be reduced if there is less court involvement. The experts consulted were also of the view that court involvement should be required when there is a need to protect the interests of third parties and avoid abuse. Furthermore, in the public consultation, business and financial sector stressed that confidence in the operation of courts and efficiency of the restructuring procedures can be enhanced by improving the efficiency of insolvency practitioners as well as encouraging specialisation of judges.

The laws of Member States have different rules on insolvency practitioners themselves, namely their qualifications, eligibility for their appointment, licensing, regulation, supervision, professional ethics and conduct. The questions related to insolvency practitioners concern any type of mediators or supervisors engaged in the insolvency process. Depending on the extent of involvement of courts and/or insolvency practitioners one could distinguish: Pure out-of-court agreements: private contractual arrangements that require all creditors' consensus; Hybrid informal agreements: mechanisms which combine the benefits of judicial control and out-of-court easiness at low cost can rely on decisions by a majority of creditors. The lowest degree of involvement of courts or insolvency administrators or practitioners is in out-of court proceedings, whereas the highest in formal insolvency proceedings. The degree of involvement has an impact on costs. However, in Member States where no insolvency practitioner is involved in restructuring procedures, the debtor is less likely to make use of the procedure and to do so quickly and effectively . The high quality of insolvency practitioners and judges matters for the time of the proceedings. Specialised insolvency practitioners and judges can contribute greatly towards reducing the length of procedures and bring other benefits . Since cross-border restructurings and insolvencies presuppose a high level of cooperation between insolvency administrators and judges, it is even more crucial that they have a proper training and resources and that they adhere by common ethical standards. Table 8: Situation in Member States as regards intensity of courts' and insolvency administrators' involvement Member States Hybrid proceedings combine out-of-court and formal procedures UK, EL, PT, ES, FR and AT Formal insolvency proceedings needed with full involvement of the court/insolvency practitioners BG, HU, DK, CZ, SK, SI, HR, LT Providing for hybrid proceedings and the enforceability of private agreements would increase the effectiveness of insolvency frameworks, especially as regards preserving value for debtors and creditors. It would provide more options to companies, instead of always having to go for more costly involvement of courts or insolvency administrators. The efficiency could further increase if judges or insolvency administrators had a high level of specialisation in insolvency and restructuring. According to the 2016 public consultation, the degree of specialisation of insolvency administrators and of judges co-relates with increased recovery rates for creditors. B. Insolvency (liquidation) procedures Other drivers concern in particular rules related to formal insolvency (liquidation) proceedings such as: conditions for filing for insolvency (definition of insolvency), ranking of claims, the wider issue of avoidance actions, the length of formal insolvency proceedings, directors' responsibilities relating to insolvency. In the public consultation, although many stakeholders identified them as areas, which would merit some form of action at the EU level, they also acknowledged feasibility concerns due to the existing divergence of national rules, national specificities and implications on other areas of law. Moreover, most of the Member States expressed strong concerns with regard to those areas. B1. Definition of insolvency In the performed public consultation, the banking sector voiced that different definitions of insolvency result in different moments when insolvency is declared, therefore there is no clarity for creditors about the time span for the restructuring and when the opening of an insolvency proceedings in inevitable. In addition, some business organisations agreed that a common definition of insolvency, although difficult to achieve, would be very useful. However, the Expert Group on Insolvency expressed the view that a definition would not be necessary in order to access early restructuring proceedings and that harmonising this aspect might have unintended consequences for other areas of national law, such as company law, employment law etc.. Certain experts were of the opinion that focus should be put on the triggering criteria, especially for early restructuring proceedings . Against the background of the discussions with Member States' experts it appeared that there is opposition to a harmonisation of the definition of insolvency but also that this is less relevant for the purposes of restructuring than the critical guidance on when the debtor can access early restructuring, on the terms of such restructuring and on the impact on the debtors' duty to file for formal insolvency proceedings. So while it may be important to define concepts, a definition of insolvency did not appear to be indispensable to ensure the efficiency of preventive insolvency procedures while for formal insolvency procedures, although helpful, a definition would not be at this moment in time a priority. B2. Order of priority of claims The laws of Member States differ significantly as regards the priority of claims in insolvency. This has an impact on how insolvency proceedings are run and how debts are recovered. In the public consultation, some stakeholders supported that differences in the areas of ranking of claims affect to a large or to a considerable extent the operation of the internal market. Moreover, others supported that a general harmonisation in this area would increase recovery rates for creditors. However, the banking sector voiced that although this issue is important when doing business on a cross border basis, it is not necessarily the essential driver of the decision to invest or not. Moreover, business organisations expressed scepticism on the feasibility of EU action in this area given how it is deeply rooted in national legal traditions, which carries the risk of unintended consequences in case of intervention. In addition, during the dedicated meetings with the Member States, most of them, if not all, were opposed to a general harmonisation of ranking of claims because of national specificities and implications on other areas of law. Discussions in the Commission Expert Group revealed that this area is sensitive given that Member States have taken different approaches as regards preference for workers and state creditors (tax, social security etc.). This goes at the core of national discretion and competing values are at stake. Nevertheless to incentivise companies to restructure at an early stage, tax and state aid rules should not be more burdensome in early restructuring than in insolvency procedures. B3. Avoidance actions The laws of Member States also differ on possibilities for avoiding contracts detrimental to companies and creditors. Differences concern conditions under which a detrimental act can be avoided (avoidance actions) and the period within which such acts can be challenged. In the public consultation, a part of the respondents stressed that divergence on avoidance actions affect to some extent the operation of the internal market and that harmonisation of avoidance actions (in particular of suspect periods) would contribute to increasing recovery rates for creditors. They stressed that investors, companies and entrepreneurs would be more willing to invest or do business outside their Member States if they were provided with the assurance that certain types of transactions, entered into within a certain period of time, are prescribed throughout the EU. Particularly, the banking sector acknowledged that rules on avoidance actions are essential to decide whether to deal with a debtor in financial trouble and insolvency practitioners’ organisations voiced that different standards in avoidance actions create legal uncertainty and it gives rise to substantial legal costs in insolvency proceedings. However, discussions in the Commission Expert group revealed that while avoidance actions could in principle be harmonised across the board, it would be disproportionate to do so at this stage. Therefore, it was proposed to create a limited rule on avoidance actions, namely a harmonized safe harbour from avoidance actions for non-related party transaction related to restructuring negotiations.

B4. Liquidation of assets In some Member States the rules on the actual liquidations of assets result in prolonging the proceedings. In the performed public consultation, when asked what are the key issues for the excessive length of insolvency proceedings, most of the respondents mentioned delays in the liquidation of the debtor's assets, activities related to the supervision of the debtors and litigation concerning the debtors' right and obligations. A smaller part of respondents considered lack of digitisation as a key issue for the excessive length of proceedings. Particularly, the banking sector explained that the foreseeable length of enforcement and insolvency proceedings are usually taken into consideration for investment decisions. Business organisations mentioned that measures to shorten the length of the proceedings would have a positive impact in recovery rates. . However, while some stakeholders were of the view that a target maximum duration for insolvency proceedings would be useful, a larger part were of the opinion that it would not be appropriate. Particularly, practitioners’ organisations expressed that the variety of proceedings is much too large for that and there are too many risks entailed. When asked what incentives could be put in place to reduce the length of insolvency proceedings, the respondents mentioned: electronic means of communication; specialisation of courts; supporting the courts' resources; less court involvement/supervisory role only; clear requirements for entering to insolvency proceedings; ensuring that the thresholds are triggered early enough for restructuring; deadlines/time-limits for court proceedings; publicly accessible information as a (general) prevention; remuneration of insolvency practitioners. B5. Directors and shareholders In a company, directors exercise corporate powers which are generally balanced with duties of care prohibiting wrongful trading. Some Member States have certain obligations in place for directors in the period before insolvency occurs and impose liability for any harm caused by continuing to operate when it was either clear or should have been foreseen that insolvency could not be avoided. The rationale for such provisions is to create appropriate incentives for early action through the use of voluntary restructuring negotiations. It may also encourage directors to obtain competent professional advice when financial difficulties occur and thus avoid insolvency. Shareholders may obstruct a restructuring procedure which would return the company to viability. Allowing shareholders to oppose restructuring would likely reduce the number of successful restructurings. In the public consultation, the majority of stakeholders were of the view that directors of companies should be incentivised to take appropriate preventive measures if companies are in distress but not yet insolvent. Financial institutions voiced that it is necessary that directors should have a duty to act diligently in order to protect creditors and stakeholders. However, during the dedicated meetings with the Member States, although they acknowledged the need to incentivise directors for early restructuring, most of them were reluctant to mandatory detailed provisions on directors’ duties, due to the implications on company law. On shareholders, many stakeholders from the business and financial sector said that the existing differences between the laws of the Member States regarding measures to clarify the position of shareholders of companies in insolvency or close to insolvency affect the functioning of the Internal Market either to a considerable extent or to some extent. Financial institutions and investor associations (EBF, AFME,) said that the shareholders' rights within creditors' committee might need to be limited in certain circumstances, i.e. when they prevent the plan from being adopted although this plan is likely to ensure the continuation of the company's activity and the recovery of the debts. Overall, these other drivers while being relevant relate only indirectly to restructuring and second chance and are strongly dependent on the existing national legal frameworks and the social, economic and political choices made in other areas of law. They will be looked at more closely in this impact assessment report but only in connection with the aspects which are related to preventive restructuring and second chance. The assessment in the preferred option touches upon some specific aspects relevant for these additional drivers, such as the availability of early restructurings, definition of conditions for new financing and their priority, cram down requirements or reduction court formalities which would impact positively on the costs, length and recovery rates of both preventive restructuring and formal insolvency procedures. C. Second chance Discharge from debt is instrumental for those who wish to learn from their mistakes and have a fresh start. The need of discharge for natural persons is amplified by the fact that people starting business bring in their project also personal assets and credits taken in their personal capacity or help from the members of family . Where debt settlement procedures are not available the entrepreneur will normally still have access to bankruptcy procedures available to corporate debtors . At the same time, almost all Member States offer a debt settlement procedure to consumers . Table 9: Situation in the Member States debt restructuring for natural persons including discharge and second chance Member States Full discharge of entrepreneurs as part of bankruptcy is available BE, CZ, CY, EE, FR, EL, IE, LU, RO, SI, UK Bankruptcy does not give right to discharge AT, BG, HU, NL, SE Opportunity of discharge for entrepreneurs after a debt settlement following the expiry of discharge period of differing length AT, CY, CZ, DK, EE, FI, DE, EL, HU, IE, LT, LV, NL, PT, SK, SI, ES, UK Discharge without further conditions after one year UK, IE Discharge within 3 years is available in bankruptcy proceedings CY, IE, FR, UK Discharge within 3 years is available in debt settlement AT, CY, NL and SK No debt settlement procedures for entrepreneurs BG, FR, LU, MT, PL, RO Chart 3: Period of time to obtain full discharge Source: Ecorys, Bankruptcy and Second Chance for Honest Entrepreneurs, 2014 Discharge from business debts (and personal debts of business people) under reasonable conditions and received after a period which is not excessively long gives a second chance to restart business. The impossibility of repayment and too difficult conditions of discharge cause both entrepreneurs and consumers to fall in a debt trap. In consequence, these natural persons do not contribute to economic growth (reduced consumption, withdrawal from labour market, lower potential for entrepreneurship) and instead of returning to economically productive life they may have to rely on social services support. In the performed public consultation, the majority of the respondents were of the view that the absence of adequate second chance provisions hampers economic and entrepreneurial activities and that therefore a full discharge of debts, possibly subject to certain conditions, should be offered to both entrepreneurs and consumers provided that they are 'honest' debtors. Many stakeholders’ organisations, including practitioners in the field of restructuring, stressed the increasing number of sole entrepreneurs and the difficulties of distinguishing between debts arising from professional and private life; they were of the view that consolidation of the procedures is appropriate for an effective discharge. Businesses and entrepreneurs stressed that a second chance approach would increase trade, strengthen the real economy and be a driver for growth, since it would encourage entrepreneurship and stimulate consumer spending. However, they supported adequate safeguards in order to prevent moral hazard. The banking sector said that a responsible entrepreneurship model should be promoted in a way that a full discharge of debt is given to honest entrepreneurs only after the repayment of certain amount of debt. They were even more critical of consumer insolvency, saying that this policy area should not be pursued at this moment in time. D. General effectiveness of procedures

A modernised insolvency framework could not achieve the objectives set if the quality and efficiency of actors involved is not improved. This conclusion came up consistently in the public consultation, during the expert group discussions and the dedicated meetings with the stakeholders, academics and practitioners. This no doubt translates into excessive length of procedures in some Member States and/or high costs of procedures. Although an ideal length of insolvency procedures has not yet been established, investors are reluctant to invest where procedures risk taking too long. In the EU, there are 10 Member States where the average time to resolve insolvency is more than two years (in 8 of these MS the average length is 3 years or more). The effectiveness of all procedures is dependent on the speed with which the courts can take decision, on the quality of the assistance or supervision performed by insolvency practitioners and by the level of digitalisation of procedures. These aspects are relevant across all insolvency spectrum, be it preventive restructuring, liquidation of second chance, a view which came across consistently during the consultations. Specialised insolvency practitioners and judges can contribute greatly towards reducing the length of procedures and bring other benefits. In the public consultation and the ‘Sounding Board’ meetings, businesses, financial sector, insolvency practitioners and academics stressed that enhancing the efficiency of insolvency practitioners as well as encouraging specialisation of judges is of key importance in order to increase confidence in the operation of the system and improve the efficiency of the procedures. E. Additional drivers One additional important indirect driver is the lack of special arrangements for restructuring SMEs. SMEs often do not have the resources to undergo an early health check by a professional and therefore the number of early restructurings in this sector is relatively small. As a result, SMEs are disproportionately driven to liquidation rather than restructuring. Liquidation of SMEs can be value destructive in a disproportionate manner since a majority of countries do not have a simplified procedure for SMEs; a simplified liquidation procedure could speed up the process and lower the costs of liquidation, resulting in higher returns to creditors and a speedier second chance for directors or entrepreneurs. Means to encourage SMEs to address their financial difficulties early include: early warning tools, including specialised low-cost advice; templates for restructuring plans; hybrid procedures or out-of-court work-outs with creditors. Special small business rescue procedures do not exist in many Member States, including countries with mature, sophisticated economies such as Germany, Austria, Netherlands and the Scandinavian countries (Denmark, Sweden, Finland the comparator, Norway) . Therefore, the creation of an EU-wide fast track procedure for SMEs would not seem in line with the approaches taken in most Member States. Instead, SMEs problems could be addressed throughout the whole framework focussing on specific points where access can be improved and made less costly and where SMEs can be encouraged to seek early advice on how to address their financial difficulties. 2.3.2. Problems The differences and inefficiencies in national laws cause the following key problems: Lost opportunities and excessive costs generated by barriers to cross-border investment (Problem 1), Foregone benefits and additional costs for creditors and debtors related to liquidations of viable companies (Problem 2), Lost opportunities and additional costs for natural persons (entrepreneurs and consumers) related to inefficiencies in insolvency frameworks as regards a fresh start (Problem 3). Problem 1: Lost opportunities and excessive costs generated by barriers to cross-border investment The suboptimal cross-border investment in the EU is caused by many factors. Inefficiencies in insolvency frameworks are an important element which has an influence on the level of cross-border investment . Cross-border investment is hampered in the following ways: (i) difficulty to assess cross-border investment risks due to divergences in insolvency frameworks (and uncertainties as regards the outcomes), including the rules on restructuring and second chance. This means that at least to a certain extent cross-border investment is not taking place, since it is too difficult or it is too costly to quantify the risk; (ii) significant differences in recovery rates cross-border due to divergences in insolvency frameworks, including the rules on restructuring and second chance. This means that at least to a certain extent cross-border investment is not taking place, since the recovery rates for foreign investors are unsatisfactory. When taking a decision about funding a project in another country of the EU, a prudent creditor or investor will seek information about the prospect of recovering his dues in case of failure. In order to evaluate the risk of any investment, the investor needs to be able to quantify both the expected risk of failure (probability of default) and the expected loss incurred if that failure happens (loss given default). In its risk assessment the prudent investor/creditor will look at the insolvency framework as a whole (prevention, recovery of value and discharge). Not only will he analyse major parameters of the formal insolvency proceedings (security of claims, distribution of value and time to resolution), but he will also want to know whether a debtor can restructure a business and whether it can do it with or without the agreement of its creditors. In order to make a cross-border investment, it is essential to know whether restructuring can be "imposed" on some classes of stakeholders. Also, it is critical to know whether an entrepreneur could be discharged of debts (at which moment and after which period) . Large asymmetries between Member States in the way restructuring proceedings and debt discharge are regulated generate additional costs for cross-border investors compared to those who invest in the EU only in one Member State . The costs increase exponentially in case the investor would like to invest in more than one Member State. In particular, such costs could be prohibitive if the investment were to take place simultaneously in a number of Member States or would be done by an SME which does not have in-house legal department and would need to pay for the costs of foreign legal advice . Moreover, the investor in the EU may be obliged to pay not only for the assessment of multiple differing restructuring frameworks of individual Member States, but also for the assessment of the costs resulting from the coordination of the multiple applicable national restructuring frameworks. The more the insolvency frameworks, including restructuring and second chance, will differ, the more expensive the assessment of the coordination between their concurrent applications will be. Ultimately, this leads to additional costs of creation of corporate structures which will not be designed economically in the most efficient way but with the aim of circumventing the concurrent application of multiple insolvency and restructuring frameworks or at least those with low recovery rates or those under which restructuring is difficult. Certain transactions in EU Member States are under certain circumstances structured using complex structures with special purpose vehicles to reduce the potential impact of insolvency if it occurs .

According to the World Bank, the highest recovery rates for creditors are recorded in economies where restructuring is the most common insolvency proceeding . For instance, 45 percent of OECD economies use restructuring as the most common way to save viable firms and have an average recovery rate of 83 cents on the dollar, as opposed to 57 cents on the dollar in liquidation . This difference contributes to the creation of additional costs in the assessment of the risk under the foreign system. Chart 4: Higher recovery rates are more likely in economies where restructuring is the most common insolvency proceeding, Source: World Bank A recent report shows that balanced and effective insolvency frameworks have a beneficial effect on the costs of borrowing via changes to credit ratings. It also proves that recovery rates remain a significant factor affecting the cost of borrowing, even when other institutional variables, beyond insolvency-related factors, are shown to have explanatory power . In the performed public consultation, stakeholders in banking and investment acknowledged that differences in insolvency frameworks between Member States can become a deterrent to cross-border corporate investment, since the difficulties of establishing the value of distressed debt, may increase the cost at which investors are willing to invest or even it could discourage investors from establishing their business activities in other Member States. Moreover, they voiced that creditors who decide to inject liquidity in a distressed company should be given a sufficient degree of predictability on the recovery of their claims. They agreed that a system that enables the rescue of viable companies, outside or within insolvency proceedings, is essential to mitigate the problem of non-performing loans. Moreover, insolvency practitioners supported that divergence and inefficiency in insolvency frameworks can create barriers to corporate lending and investment, including cross-border investment. They stated that uncertainty or difficulties over realising value from distressed debt may be particularly pronounced in the case of cross-border lending and investments and this may increase the cost at which investors and creditors are willing to invest in or lend to cross-border borrowers. Also in the public consultation on the Green Paper on the Action Plan of the Capital Markets Union large number of market participants and investors noted that the diversity of regimes across the EU negatively impacts confidence in cross-border investment. Central banks and regulators of capital markets supported a comprehensive reform of insolvency frameworks to remove obstacles to cross-border investment in the EU posed by differing national insolvency regimes. Also from the point of view of commercial banks, pension funds and other financial intermediaries, in this consultation the widespread divergence in Member States' insolvency regimes constitute a key deterrent to cross-border investment. Banks further argued that a targeted harmonisation of certain aspects of the differing national insolvency regimes would be a positive contribution to the Capital Markets Union. Member State governments and Finance Ministries adopted a more cautious approach suggesting the performance of a step-by-step approximation. Likewise, business associations showed more divided positions both on the impact of differing national insolvency regimes and on the form of possible actions to tackle those differences. Representatives of the SMEs would appreciate improvements in the efficiency and effectiveness of insolvency practitioners and the courts. Labour unions called for a wide ranging harmonisation of national insolvency frameworks. Other respondents, such as research institutes, considered that a better insolvency framework allows for a better re-allocation of capital and more growth, and that a targeted harmonisation of certain aspects of national insolvency frameworks would bring an added value in a Capital Markets Union. Problem 2: Foregone benefits and additional costs for creditors and debtors related to liquidations of viable companies A successful restructuring of a financially distressed, but economically viable enterprise is conditioned by a number of pre-requirements, in particular the resolution of the problem of the “race to grab” debtors' assets (the need for a stay of enforcement actions at least for the period of preparation of the restructuring plan) and the “hold-out” problem of individual creditors (the need for a qualified majority, not unanimity, for the adoption of the restructuring plan) and some additional requirements . Moreover, cross-border groups of companies have to deal with additional coordination costs of multiple national restructuring proceedings. In the performed public consultation, business sector and practitioners voiced that unnecessary liquidation of viable businesses can increase costs for all stakeholders and result in a loss of productive capacity. The absence of an easily accessible and well-functioning restructuring framework generates three types of costs: relocation costs, coordination costs and lost benefits from financially distressed companies which due to the difficult access or low-quality of restructuring frameworks have to be liquidated instead of being rescued. a) Relocation costs Relocation costs represent costs for companies that could not use a good restructuring framework in a Member State where they were located and were obliged to relocate to other Member States for the purpose of restructuring and avoiding insolvency. Relocation costs also include the costs for creditors to inform themselves about the laws of the "new" Member State (the one to which the distressed company moved). Great discrepancies between the restructuring regimes in Member States create incentives for relocation. Relocation triggered by differences in restructuring regimes might lead to the application of a different insolvency regime than originally expected by creditors. Debtors who want to free themselves of long-standing re-payment obligations at home gain from re-locating to another Member State with less stigmatising regimes. This may adversely affect minority creditors even though the restructuring itself could be beneficial to the body of creditors and the company as a whole. At the same time, creditors at home risk to be adversely affected if debtors relocate too soon, particularly if they are taken by surprise and have to incur legal and administrative expenses trying to enforce their claim in another Member State. In the case of SMEs, relocation is usually not an option because of the anticipated legal complexity. Luxembourg has been mentioned as one of the countries where relocation to other European Member States happens more frequently. Consulted stakeholders stated that it is quite common among Luxemburgish companies to move to the UK due to its more favourable pre-pack insolvency regime (better adapted procedures and higher chances of business survival), under which companies can be restructured. Such relocation is ‘common’ merely among large companies, being way too costly for SMEs and individual entrepreneurs . Total relocation costs for both debtors and creditors amount to an estimated € 9 million per year in Europe. Of course, this figure is a rough estimate which does not account for all types of cases (e.g. a large multinational bank declaring insolvency abroad after relocation) . Table 10: Estimation of relocation costs incurred by debtors in the EU Number of relocating businesses in the EU Relocation costs/business Total relocation costs for debtors Travel Moving Renting 0.5% x Total number of formal insolvencies (=559) €100 €250 €8742 €5,082,428 Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers

The forum shopping phenomenon has been used in the EU in situations where debtors and creditors have sought to utilise more friendly non-insolvency based restructuring procedures existing in other Member States than insolvency based restructuring schemes available in Member States where they had they their centre of main interest (COMI). In particular, there has been a recent trend for non-English companies to restructure under the English law scheme of arrangement . In some circumstances, the ability to institute proceedings in a different and more favourable jurisdiction may be helpful to a company in distress, but this is not available to all companies (particularly medium or smaller companies), and may often be more costly and inefficient than proceedings in the debtor’s own jurisdiction . The costs for the creditor may discourage enforcing of claims and lead to small or inexistent recovery. Additional costs will arise for creditors after the relocation, i.e. costs of legal advice and the costs related to a shift in centre of main interests (COMI) ; this may be a barrier for creditors to properly manage their interests in recovering the debt, especially when it is relatively low. Some high profile examples of relocation have been noted in the impact assessment on the revision of the existing Insolvency Regulation . In a recent series of cases the three German companies Deutsche Nickel, Schefenacker and Hans Brochier took steps in order to be able to make use of the English law on schemes of arrangement. The costs associated with these moves can be very high. For example, “Schefenacker, with debts of €400m, paid its advisers €40m” in order to “move to the UK in 2007 to speed up a complicated restructuring.” Another high-profile case involves Hellas Telecommunications, which led to a reported loss of € 1.3 billion for its unsecured creditors . However, as these examples only cover large companies, they may not be representative of the total amount of relocations, nor of the average economic impact. It seems likely that many more relocations happen 'behind the scenes' and involve smaller enterprises . The fact that a debtor opts for another jurisdiction could be related to the court efficiency or certain features of the chosen jurisdiction's preventive procedure (e.g. the possibility to bind dissenting creditors to a restructuring plan which helps save a business from bankruptcy and liquidation) . b) Coordination costs Coordination costs represent additional costs for groups of companies, which have subsidiaries in other Member States, or lost benefits from an unrealised restructuring of a viable cross-border group which due to the differences in restructuring rules of affected Member States had to be liquidated instead. The difference in costs between purely domestic and cross-border insolvency proceedings could not, in most cases, be quantified, although cross-border insolvency proceedings were acknowledged as costlier. This increase was assumed to be 10%, based on the results of the consultation carried out . The average difference in length between cross-border and domestic proceedings (as indicated by the stakeholders who provided a quantitative estimate) is 55%. Much longer proceedings for cross-border insolvencies than for purely domestic insolvencies is one of the key drivers for costlier proceedings for both debtors and creditors . In other words, a financially distressed, but viable group of companies located in one Member State will have much higher chances of being rescued than a group in the same situation which operates in two or more Member States because the latter will have to overcome the differences of multiple national restructuring procedures. In case of a cross-border group of companies in financial distress, if in one Member State restructuring takes place in formal proceedings and in others in informal (or is not available at all), this may even lead to a collapse of the whole restructuring. If there is no consolidated proceeding for a group of companies with domestic and foreign subsidiaries, there is a need to involve lawyers, administrators and trustees in all the different countries where there are subsidiaries . In particular, higher costs arise when there is a need for coordinating formal procedures in some Member States and less formalised procedures in other Member States. These differences in restructuring frameworks will make the cross-border restructuring much more expensive than a purely national restructuring. Often they will prevent any restructuring from happening, and force an otherwise viable group of companies into liquidation. For the reasons listed above, no restructuring plan involving the continuation of the business of groups of companies has ever been accepted in more than two jurisdictions. Even when a group of companies is represented by a mother company and one subsidiary in another Member State (for example an SME which has acquired one of its foreign suppliers), a common restructuring plan may be hard to be adopted. According to the April 2011 report of the Reflection Group on the Future of EU Company Law, the international group of companies has become the prevailing form of European large-sized enterprises, in which business activity is typically organised and conducted through a multinational network of subsidiaries. About 20% of large enterprises (ca. 8,500) have foreign subsidiaries or joint ventures. There are more than one million SMEs in Europe which have subsidiaries or joint ventures abroad. Where the rules for the content and adoption of an early restructuring plan are complex and cumbersome and the conditions vary from Member States to Member States, the restructuring of the whole group of companies in financial distress is hardly an option for the management board. Although ad hoc solutions have been found in practice (mainly through the relocation of the firm to a Member States with an efficient preventive regimes, such as UK), where the legal uncertainty and costs for all parties involved is an obstacle to the functioning of the Single Market. In the insolvency of the PIN Group, a mail delivery service provider the Luxembourg holding company moved its COMI to Germany where the vast majority of its subsidiaries were located, in order to enable a proper restructuring process for all members of the group in the same jurisdiction. Despite the vicinity of the insolvency petition the court held that the COMI shift was not abusive as it merely tried to coordinate the insolvency proceedings over the whole holding group. Therefore, it was regarded as being in the interest of the creditors as it tried to maximize the debtor’s net assets. The restructuring of the group was successfully carried out. The additional coordination costs of cross-border restructuring, where such restructuring will not be impossible, can lead ultimately to extra costs for debtor. Creditors are likely to compensate the legal uncertainty due to the differing restructuring rules by raising their interest rates on loans, mortgages and other forms of credit or on reducing the amount they lend. c) Additional costs and lost benefits from unsuccessful rescues of viable companies Viable companies in financial distress should have the chance to be rescued instead of being directly liquidated . If this were the case, a number of financially distressed, but viable companies could be saved and a number of other companies in the EU internal market would not become insolvent due to liquidation of other companies (knock-on effect). This could be achieved if all Member States had the necessary elements of a restructuring framework with an optimal economic potential. This could therefore lead to an efficiency gain in each Member State. What is the foregone benefit of too formalised procedures? An example from the UK 1) Hypothetically, if the UK restructuring framework did not include the less formal tools such as the "Company Voluntary Arrangement" (CVA), firms would need to use formal procedures such as "Administration" in order to restructure. Assuming that 27% of firms use the CVA procedure successfully, that all firms using it are small and that 839 firms were using it in 2012 it allows for the conclusion that if they used instead the Administration procedure (assuming that they could afford it), this would create for them additional cost of up to 62.2 million . 2) The average return for unsecured creditors in the administration procedure is 4% . Average return for unsecured creditors in rescue cases under CVA is 37% . The CVA rescue rate is 27%, so the number of firms rescued in 2012 would be 226 . Assuming the average unsecured debt of £506,781, if those firms were dealt with in the administration procedure the return would be 20,000 (compared with 187 500 under CVA). Consequently, the foregone value would amount to £167,500 per case, or £37.8 m in total. In conclusion, the (hypothetical) financial cost of no alternative to the formal restructuring procedure in the UK would be around £37.8 – 62.2 m. In reality this cost would be significantly higher if the cases of restructuring via another UK’s less formal procedure (Schemes of Arrangements) were included . Scaling up the quantifiable part of the cost to the group of countries which have only formal restructuring procedures (BE, DE, FR, FI, SE, LV) the total cost of not having a hybrid alternative could be (with all due caveats) estimated to be in the order of magnitude of €135-223 m . Table 11: The costs of a formal rescue procedure (administration) compared to the less formal procedure (company voluntary arrangement or CVA) in the UK . per Administration (formal procedure) (£ 000’s) per CVA (less formal procedure) (£ 000’s) Small company 5 – 300 5 - 25 Medium company 45 – 500 10 - 200 Large company 2000 – 4000 500 - 1500

Assessment of additional costs due to cross-border dimension Table 12: Total costs at EU level for domestic and cross-border insolvency proceedings: SMEs (incl. entrepreneurs) Domestic proceedings Cross-border proceedings Number of formal insolvencies/year Total proceeding costs (€/year) Number of formal insolvencies/year Total proceeding costs (€/year) UK+CZ+LU +FR+BE+LV 76,327 319,436,885 2,907 24,080,618 EU28 (method 1) 145,703 609,783,071 6,071 50,289,651 EU28 (method 2) 277,553 1,161,589,814 10,767 89,190,235 EU28 (middle estimate) 211,628 885,686,443 8,419 69,740,187 Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers Table 13: Total costs at EU level for domestic and cross-border insolvency proceedings: large companies Domestic proceedings Cross-border proceedings Number of formal insolvencies/year Total proceeding costs (€/year) Number of formal insolvencies/year Total proceeding costs (€/year) UK+CZ+LU +FR+BE+LV 95 2,931,011 5 224,617 EU28 (method 1) 291 8,969,861 15 687,402 EU28 (method 2) 322 9,934,585 17 763,698 EU28 (middle estimate) 307 9,471,793 16 718,774 Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers First, it is important to note that these figures do not represent the additional costs of the cross-border dimension of insolvency proceedings, but the total costs incurred by all cross-border insolvency proceedings in the EU. Second, while the two methods used yield very different results (since the total number of formal insolvency proceedings per year in the EU has been estimated as 152,000 with the first method and 289,000 with the second method) the reality is believed ‘reality’ to lie in between, around 220,000 total insolvency proceedings per year in the EU, close to the European Commission figure of 200,000 firms going bankrupt each year in the EU. With 220,000 insolvency proceedings every year, total proceedings costs in the EU would amount to €895 million for domestic proceedings, and €70 million for cross-border proceedings. The additional cost of the cross-border dimension of insolvency procedures is estimated as follows: Table 14: Difference between domestic and cross-border insolvency proceedings costs - SMEs Domestic proceedings Cross-border proceedings Difference (cross-border vs. Domestic) (€/insolvency) Average proceeding costs (€/insolvency) Average proceeding costs (€/insolvency) EU28 4,185 8,284 +4,099 An addition of 98% compared with purely domestic proceedings Source: own calculations based on respondents’ answers Table 15: Difference between domestic and cross-border insolvency proceedings costs - Large companies Domestic proceedings Cross-border proceedings Difference (cross-border vs. domestic) (€/insolvency) Average proceeding costs (€/insolvency) Average proceeding costs (€/insolvency) EU28 30,853 44,923 +14,070 An addition of 45% compared with domestic proceedings Source: Calculations of VVA/ JIIP/ DTI/ Grimaldi consortium based on respondents’ answers If viable companies become insolvent, rather than restructured at an early stage, this has consequences for the whole chain of trading partners of these companies (knock-on effect). In the performed consultation, organisations of small business stressed that in some cases, since, start-ups have a smaller client - base as well as a smaller financial buffer than “older” companies, the insolvency of a client might have a larger impact on start-ups. One in six corporate insolvencies are the result of knock on effects from other insolvencies. Moreover, the 2016 Eurobarometer on insolvency showed that 17% of companies (SMEs) have foreign debtors. For those who have foreign debtors for many (50%) foreign debt constitutes more than 6% of turnover. It is higher for bigger and also for newer companies. It is true that companies less frequently enforce foreign claims, but it may be the effect of giving up certain foreign claims since they are more difficult and more costly to enforce.

Government intervention is necessary to mitigate this network externality from business failures and reduce the impacts on employment and productivity. European companies have large networks of cooperation: on average, export constitutes 17,6% of supply provided by those companies. Thus there is a substantial risk that insolvency of a client will impact its supplier. Large companies, although only representing 0.2% of European companies, provide 30% of jobs in the EU and produce 41% of gross added value. According to the April 2011 report of the Reflection Group on the Future of EU Company Law, the international group of companies has become the prevailing form of European large-sized enterprises, in which business activity is typically organised and conducted through a multinational network of subsidiaries. About 20% of large enterprises (ca. 8,500) have foreign subsidiaries or joint ventures . There are also more than one million SMEs in Europe which have subsidiaries or joint ventures abroad . Problem 3: Lost opportunities and additional costs for natural persons (entrepreneurs and consumers) related to inefficiencies in insolvency frameworks as regards a fresh start Failure and over-indebtedness are situations that affect natural persons, whether entrepreneurs or consumers. Business failure is an unavoidable risk inherent to any enterprises, especially young ones. In Europe, every year, more than 200,000 companies go bankrupt . Since the financial crisis, due to lowering incomes and increasing unemployment, over-indebtedness has impacted more than 10% of European citizens (recent data show that 11.4% of consumers are permanently in arrears ). Different discharge regimes may lead natural persons to relocate to more debtor-friendly jurisdictions. This involves costs for the debtor who needs to seek information, legal advice and relocate their centre of main interest . Likewise, creditors would also bear costs following the relocation as they would have to adjust to the change of their debtors or even have to give up the recovery of these debts. For smaller value loans, which are typically granted to natural persons, the cost of recovery may discourage the enforcement of claims or lead to very low recovery. This would impact in particular creditors that have many debtors with smaller value loans. Additional costs for natural persons may stem from the stigma of insolvency and the related "reputational damage" of insolvency. Entrepreneurs are likely to find it more difficult, hence more costly to find new trading partners for their new business or simply to continue the existing (restructured) business. For a natural person, finding a new job, for instance, after winding up a business, or new apartment to rent will also tend to be more difficult and the whole transaction more costly. Personal and business debts of individual entrepreneurs are often intertwined: entrepreneurs take personal loans to start and run their business, for example because they guarantee their business loan by personal assets, such as car or a family; or natural persons use consumer credit to buy assets which they use also for professional activities. Since any debt, including the one contracted by the natural person, whether entrepreneur or consumer, can become unpaid, almost all Member States have systems that allow for discharge of natural persons from debts which they can no longer service. The chart gives a broad view of how entrepreneurs are treated in insolvency proceedings in EU Member States. Chart 5: Treatment of entrepreneurs in insolvency proceedings in the 28 EU Member States In several MS there is one single regime for discharging personal debt whether the debtor is a consumer or whether he is an entrepreneur (e.g. Finland, UK). These regimes are more efficient in affording second chance since all personal debts are consolidated into one procedure. In other MS, there are different regimes for entrepreneurs and consumers (e.g. France, Romania). Debt discharge frameworks in Member States still substantially, in particular in terms of the conditions of access, repayment schedules and periods (one to eight years in depending on the legal regulations in individual Member States ), restrictions on performing certain activities and asset disposals etc. A lost benefit consists in a reduced economic activity of individuals resulting from a limited access to new credit for natural persons stigmatised by insolvency. While in some cases refusing a credit is justified, possibly even in the interest of the borrower (e.g. for persons unable to manage their budget) this should not be applied systematically to all persons who have had payment difficulties. A further lost benefit of excessively long discharge periods for natural persons resides in the continuing poverty and financial exclusion of bankrupt individuals. Poverty has negative impacts on public spending, and the state of health and security in a country . As to financial exclusion , it is also detrimental to the providers of financial services who lose a part of their potential customers. The lack of harmonised rules on consumer insolvency impacts negatively on cross-border selling of retail financial services . Legal uncertainty for creditors in the case of default of a natural person was identified as a barrier to cross-border lending, by several reports such as the report of 2009 on the f