Opinion of the European Economic and Social Committee on the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions — Overcoming the stigma of business failure — For a second chance policy — Implementing the Lisbon Partnership for Growth and Jobs COM(2007) 584 final
Date: 2008-05-29
Institutions: European Economic and Social Committee
Subjects: European Employment Strategy, aid to undertakings, bankruptcy, company in difficulties, economic and social cohesion, financial solvency, public awareness campaign

30.8.2008

EN

Official Journal of the European Union

C 224/23

Opinion of the European Economic and Social Committee on the Communication from the
Commission to the Council,
the European Economic and Social
Committee and the Committee of the Regions — Overcoming the stigma of business failure — For
a second chance policy — Implementing the Lisbon Partnership for Growth and Jobs

the European Parliament,

COM(2007) 584 final

(2008/C 224/05)

On 5 October 2007 the European Commission decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the

Communication from the Commission to the Council, the European Parliament, the European Economic and Social
Committee and the Committee of the Regions — Overcoming the stigma of business failure — For a second chance
policy — Implementing the Lisbon Partnership for Growth and Jobs

The Section for the Single Market, Production and Consumption, which was responsible for preparing the
Committee's work on the subject, adopted its opinion on 6 May 2008. The rapporteur was Mr Morgan.

At its 445th plenary session, held on 28 and 29 May 2008 (meeting of 29 May), the European Economic
and Social Committee adopted the following opinion by 70 votes with 3 abstentions.

1. Conclusions and Recommendations

may be, and this risk attaches itself to all the stakeholders in the
enterprise.

1.1
Since 2001 the Commission has been addressing the
negative effects of business failure. In particular, it has flagged
the need to improve bankruptcy procedures. Given its limited
competence in this area, the Commission has concentrated on
collecting data on the legal and social consequences of business
failure, facilitating the identification and dissemination of good
practices and to working on early warning tools as a means of
reducing the stigma of failure.

1.4
The US laws seek to balance the interests of debtors,
creditors and society as a whole. It is the Opinion of the EESC
that Member State laws should be drafted to achieve the same
balance. Insolvency and the non payment of debts can create
enormous difficulties for creditors and drive them in their turn
into insolvency. Stripping the debt out of a company to give it a
chance to restart can be most unfair on creditors. Insolvency
laws need to strike the right balance.

1.2
The EESC endorses the emphasis placed by the Commis-
sion on the need to overcome the stigma of business failure.
Good national framework conditions for entrepreneurship are
crucial to the full exploitation of the EU's entrepreneurial poten-
tial and to the creation of dynamic companies. The societal
appreciation of successful entrepreneurship, vital to this end,
should go hand in hand with a policy of promoting a second
chance for entrepreneurs who have failed.

1.5
From the point of view of society in general, keeping all
or part of the enterprise in business may be the best solution. If
the company is potentially viable, then all the stakeholders will
benefit furthermore, if an insolvent company can be rescued by
the insolvency practitioners, then employees will continue to be
employed. If a bankrupt entrepreneur goes back into business,
then he creates new employment. Employment in any of these
ways clearly serves society at large.

It correctly highlights that as part of

The Commission is right to assert that business creation,
1.3
business success and business failure are each inherent in the
market economy.
the
general lack of societal appreciation and understanding of entre-
preneurship, events such as business distress or business failure
are neither sufficiently understood as a normal economic devel-
opment nor seen as an opportunity for a fresh start. The EU
must change its mind set. The more the stigma of
failure
attaches to a former bankrupt, the more at risk any new venture

There are many ways in which an enterprise can fail,
1.6
even with the best intentioned entrepreneur. In the start up
phase, it may not be possible to establish a viable enterprise.
Beyond the start, a flawed business model may still mean that
the company has no future. On the other hand, potentially
viable companies can fail because of mistakes made by the
entrepreneurs as well as for reasons right out of their control.
Such companies can and should be saved by receivers with
most of the jobs protected.

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1.7
It is important to distinguish between the company and
its directors. Directors may go bankrupt while a receiver is
rescuing the company and its employees. When a company
fails, the entrepreneurs may well be bankrupted because of the
bank guarantees which they have given, even though their
personal conduct was not fraudulent. It is these non-fraudulent
entrepreneurs with which the Commission is concerned. When
they have created a good business and then have the misfortune
to fail through inexperience or bad luck, they deserve a second
chance; the economy needs their skills. Others, who fail through
incompetence and a lack of vision probably have little to offer
the economy, even if they can find financial backers. Not all
bankrupt entrepreneurs deserve a second chance.

tification of businesses at risk amongst the tens of thousands of
SMEs in each Member State. Even so, Member States are encour-
aged to make the most of such possibilities as do exist, e.g. the
French use of the VAT authorities to provide an early warning
of possible company cash flow problems. The Commission says
that support measures should focus on bankruptcy prevention,
expert advice and timely intervention. The problem arises when
directors do not realise that their business is at risk. Member
State governments will need to work with the Accountancy
profession and SME support organisation to develop such pro-
active measures as are appropriate to their own SME culture.

The Commission's initiative has helped trigger reform
1.8
across the EU. Many Member States have already drawn some
inspiration from the good practices and policy conclusions
collected at the European level. Around one third of Member
States have put forward plans to reform their national
insol-
vency legislation. Even so, almost half of the EU countries still
need to take the first steps in this direction. While the Commis-
sion has limited competency in this policy domain, the EESC
urges it to use every means at its disposal to energise Member
State finance ministers to act.
the EESC,
Member State progress is generally unsatisfactory.

In the opinion of

The EESC fully endorses all

the points made in the
1.9
Communication in respect of insolvency law, subject of course
to the detail of the laws ultimately put in place. These involve
the formal recognition of non-fraudulent bankruptcies, early
discharge from debts and reduction of legal restrictions, disqua-
lifications and prohibitions with accelerated proceedings. The
medium term target should be that proceedings take no more
than twelve months.

1.10
The EESC believes that it is imperative that all Member
States complete the revision of their insolvency laws with the
least possible delay. In addition to changes in the law, it is vitally
important that bankruptcies be handled expeditiously by the
courts. The process needs to be well organised. These changes
are the centre piece of the Second Chance programme.

Active support

1.11
to businesses at risk is the second
message contained in the Communication. It is not part of the
Second Chance programme per se. Instead it is a programme
designed to avoid bankruptcy and to preserve businesses and
jobs. In section 4.0 a number of examples are given of business
failures which could have been avoided.
In this respect the
thrust of the Communication is to head off avoidable failures
through early warning, the provision of temporary funding and
the services of advisors.

1.12
This programme is not very practical for the generality
of SMEs since there are few mechanisms for the pro-active iden-

1.13
It is clear that the most important recommendation in
the Communication relates to the reform of Insolvency Law.
This is the key measure without which the Second Chance
programme will not get off the ground.

Some of the softer recommendations in the Communi-
1.14
cation can be implemented without changes to insolvency law.
When the law has been changed,
the other soft measures
proposed by the Commission can be undertaken. Without
changes in the Insolvency Law, the main point of the Commis-
sion's Communication will be missed.

The EESC believes that each Member State should
1.15
respond to this Communication by including its proposals
within its National plan for
the Lisbon Strategy (guideline
#15 applies).

2. Introduction

2.1
Since 2001 the Commission has been addressing the
negative effects of business failure. In particular, it has flagged
the need to improve bankruptcy procedures. Given its limited
competence in this area the Commission has concentrated on
collecting data on the legal and social consequences of business
failure, facilitating the identification and dissemination of good
practices and to working on early warning tools as a means of
reducing the stigma of failure.

2.2
This has helped trigger reform across the EU. Many
Member States have already drawn some inspiration from the
good practices and policy conclusions collected at the European
level. Around one third of Member States have put forward
plans to reform their national insolvency legislation. However,
almost half of the EU countries still need to take the first steps
in this direction. Even though the Commission has limited
competency in this policy domain, the EESC urges it to use
every means at its disposal to energise Member State finance
ministers to act. In the opinion of the EESC, Member State
progress is generally unsatisfactory.

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Official Journal of the European Union

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TABLE A: CURRENT SITUATION IN MEMBER STATES

Y

Measures exist

(Y)

Measures
partially

planned/available

N

No measures exist

n
o
i
t
a
c
u
d
e

=
n
o
i
t
a
m
r
o
f
n
I

N

N

N

N

(Y)

N

N

N

N

N

N

N

N

N

N

N

N

Belgium

Bulgaria

Czech Republic

Denmark

Germany

Estonia

Ireland

Greece

Spain

France

Italy

Cyprus

Latvia

Lithuania

Luxembourg

Hungary

Malta

Netherlands

(Y)

y
g
e
t
a
r
t
s

l
l
a
r
e
v
O

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

Austria

N

(Y)

n
o
i
s
i
c
e
d

t
r
u
o
C

t
n
e
l
u
d
u
a
r
f
-
n
o
n

n
e
h
w

y
t
i
c
i
l

b
u
P

c
t
e

,
s
n
o
i
t
c
i
r
t
s
e
r

d
e
c
u
d
e
R

(Y)

(Y)

N

N

N

N

N

N

N

N

N

N

N

N

Y

Y

N

N

Y

N

N

Y

(Y)

(Y)

N

N

N

N

N

N

N

N

Y

N

N

(Y)

N

(Y)

s
t
p
u
r
k
n
a
b

t
s
e
n
o
h

r
o
f

t
n
e
m
t
a
e
r
t

l
a
g
e
l

r
e
t
t
e
B

Y

N

N

(Y)

Y

N

N

f
e
i
l
e
r

t
b
e
d

r
o
=
d
n
a

d
o
i
r
e
p

e
g
r
a
h
c
s
i
d

t
r
o
h
S

(Y)

N

N

Y

(Y)

(Y)

Y

(Y)

(Y)

Y

(Y)

Y

N

N

(Y)

N

N

(Y)

(Y)

(Y)

Y

N

(Y)

(Y)

N

Y

N

N

N

(Y)

(Y)

r
o
t
c
e
s

l
a
i
c
n
a
n
i
f

i

n
h
t
i

w
n
o
i
s
s
u
c
s
i
D

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

(Y)

t
r
o
p
p
u
s

e
t
a
l
u
m

i
t
S

N

N

N

N

N

N

N

N

N

N

N

N

N

N

Y

N

N

N

s
k
n

i
l

r
e
t
s
o
F

N

N

N

N

N

N

N

N

N

(Y)

N

N

N

N

N

N

N

N

(Y)

(Y)

N

i

s
g
n
d
e
e
c
o
r
p

d
e
n

i
l

m
a
e
r
t
S

N

N

(Y)

(Y)

N

(Y)

Y

Y

Y

Y

(Y)

(Y)

(Y)

(Y)

N

N

N

N

Y

Þ
Y
ð

þ
Y

l
a
t
o
T

4

0

1

4

4

2

2

4

3

3

4

4

1

4

1

0

2

4

7

C 224/26

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Official Journal of the European Union

30.8.2008

n
o
i
s
i
c
e
d

t
r
u
o
C

t
n
e
l
u
d
u
a
r
f
-
n
o
n

n
e
h
w

y
t
i
c
i
l

b
u
P

N

N

N

N

N

N

N

Y

3

N

s
t
p
u
r
k
n
a
b

t
s
e
n
o
h

r
o
f

t
n
e
m
t
a
e
r
t

l
a
g
e
l

r
e
t
t
e
B

(Y)

N

(Y)

N

N

N

Y

Y

15

(Y)

f
e
i
l
e
r

t
b
e
d

r
o
=
d
n
a

d
o
i
r
e
p

e
g
r
a
h
c
s
i
d

t
r
o
h
S

(Y)

N

N

(Y)

N

(Y)

(Y)

Y

17

Y

c
t
e

,
s
n
o
i
t
c
i
r
t
s
e
r

d
e
c
u
d
e
R

N

N

(Y)

N

N

Y

N

Y

12

Y

n
o
i
t
a
c
u
d
e

=
n
o
i
t
a
m
r
o
f
n
I

N

N

N

N

N

N

N

N

2

N

y
g
e
t
a
r
t
s

l
l
a
r
e
v
O

N

N

N

N

N

N

N

N

1

N

i

s
g
n
d
e
e
c
o
r
p

d
e
n

i
l

m
a
e
r
t
S

Y

N

Y

N

N

Y

Y

Y

17

Y

t
r
o
p
p
u
s

e
t
a
l
u
m

i
t
S

N

N

N

N

N

Y

N

N

3

N

s
k
n

i
l

r
e
t
s
o
F

N

N

N

N

N

N

N.

N

2

N

r
o
t
c
e
s

l
a
i
c
n
a
n
i
f

i

n
h
t
i

w
n
o
i
s
s
u
c
s
i
D

N

N

N

N

N

N

N

N

1

N

Þ
Y
ð

þ
Y

l
a
t
o
T

3

0

3

1

0

4

3

5

4

Poland

Portugal

Romania

Slovenia

Slovakia

Finland

Sweden

United Kingdom

Total Y+(Y)

United States

2.3
Table A is taken from the Communication. Columns 4
to 6 relate to reform of insolvency laws. It is very obvious that
the Member States are very active in respect of legislation while
at the same time it also shows that very few countries have put
revised laws into effect. If the totals under the columns related
to legislation in effect, then they would not be 12, 15, 17, 17
but rather 6, 6, 5, 10. This is a poor result from 27 Member
States. Slow action or inaction is undoubtedly damaging entre-
preneurial activity in Member States because until the necessary
changes are made, the possibility of failure is an important
barrier to enterprise.

given in the table for the EU States. The following is the expla-
nation of the US entry on the chart:

— Reduced restrictions –Y-

In the US none of

the more
common restrictions found in the EU (e.g. preventing a
bankrupt
company,
from becoming a director of as
preventing a bankrupt from being a trustee, and establishing
some sort of credit limit for a bankrupt) apply.
In fact,
section 525 of the US Bankruptcy Code provides that indivi-
duals may not be discriminated against solely on the ground
that
they are or have been the subject of bankruptcy
proceedings.

Another feature of

the table is that the six columns
2.4
which surround the columns related to legislation are more or
less blank. This is somewhat surprising because even though the
insolvency legislation has not been changed in most Member
States, the other softer measures could nevertheless be under-
taken.

— Better legal

treatment –(Y)- Like other EU countries, no
discharge is granted in case of misconduct, fraudulent beha-
viour, etc. No other extra ‘better treatment’ exists.

2.5
In order to provide a comparator, the EESC has asked the
Commission to provide data for the USA equivalent to that

— Short discharge –Y- There is no specified period during
which the bankrupt retains the status of bankrupt before
being discharged.

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— Streamlined proceedings –Y- The most common form of
bankruptcy procedure used by individuals is the Chapter 7
relating to liquidation or bankruptcy. Generally the process
takes 3-4 months to finalise. As a safeguard against multiple
filings, Chapter 7 cannot be used by any individual who has
already used it in the previous 6 years.

2.10
From the point of view of society in general, keeping all
or part of the enterprise in business may be the best solution. If
the company is potentially viable, then all the stakeholders will
benefit.

2.6
The US Code exhibits a completely different mind set
from that which pertains in most, if not all, Member States. The
legal standpoint of most Member States at the moment shows
how far this issue is just not understood. The time being taken
to change insolvency laws reveals that, in the vernacular, the EU
just does not ‘get it’. A change of mind set will accelerate the
introduction of new laws. Equally, without such a change the
softer measures will never get off the ground.

2.7
In the 19th Century the stigma of business failure was
such that it drove failed entrepreneurs to suicide. While there
the social stigma
are fewer suicides in the 21st Century,
remains. EU citizens need to see entrepreneurs as doing some-
thing very worth while, even when they fail. Some failure is
inevitable. A little less than three quarters (73,0 %) of
the
931 435 enterprises that were born in 1998 within the busi-
ness economies of Spain, Finland, Italy, Luxembourg, Sweden
and the United Kingdom survived two years. Slightly less than
half (49.1 %) of the same cohort of enterprises survived five
years through to 2003.

It correctly highlights that as part of

2.8
The Commission is right to assert that business creation,
business success and business failure are each inherent in the
market economy.
the
general lack of societal appreciation and understanding of entre-
preneurship, events such as business distress or business failure
are neither sufficiently understood as a normal economic devel-
opment nor seen as an opportunity for a fresh start. The EU
must change its mind set. The more the stigma of
failure
attaches to a former bankrupt, the more at risk any new venture
may be, and this risk attaches itself to all the stakeholders in the
enterprise.

The US laws seek to balance the interests of debtors,
2.9
creditors and society as a whole. It is the Opinion of the EESC
that Member State laws should be drafted to achieve the same
balance. As is described in Section 4 below, insolvency and the
non payment of debts can create enormous difficulties for cred-
itors and drive them in their turn into insolvency. Stripping the
debt out of a company to give it a chance to restart can be
most unfair on creditors. Insolvency laws need to strike the
right balance.

2.11
Employees' interests are served in a number of ways. In
the event of an insolvency, Member States have implemented
the Insolvency Directive which provides for payments to the
work force. If an insolvent company can be rescued by the
insolvency practitioners, then employees will continue to be
employed. If a bankrupt entrepreneur goes back into business,
then he creates new employment. Employment in any of these
ways clearly serves society at large.

3. Gist of the Communication from the Commission

3.1 Public image, education and the media

3.1.1
The first step to tackle the negative effects of business
failure is to publicly discuss it. In the EU the general public
often perceives bankruptcy as a criminal affair, no matter the
cause. The media have a positive role to play in tackling this
misperception. The lessons to be learnt are as follows:

(a) The benefits of a fresh start should be put forward in infor-
mation campaigns and education programmes, showing that
making several attempts goes hand in hand with a normal
learning process, research and discovery.

(b) The media can play a role in disassociating bankruptcy and
fraud and disseminating the benefits of renewed entrepre-
neurship, thus improving the image of business restarters
amongst the public at large and highlighting the value of
their experience.

(c) Further discussing the issue with all relevant actors should
help uncover the many facets of stigma surrounding busi-
ness failure.

3.2 The role of insolvency law

3.2.1 Making a fresh start after bankruptcy can be challen-
ging from a legal standpoint. In many countries bankruptcy law
treats everyone in the same way irrespective of whether the
bankrupt was fraudulent or irresponsible or whether the failure
was through no obvious fault of the owner or the manager, i.e.
honest and above board.

3.2.2
Numerous rules impose restrictions, prohibitions and
disqualifications on bankrupts solely on the basis of the exis-
tence of bankruptcy proceedings. This automaticity of approach

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takes no account of the risks that are an everyday fact of busi-
ness life and implies a belief that a bankrupt is someone in
whom society can have no trust or confidence. A radical shift in
the rationale of insolvency laws is needed in the EU. The main
points are as follows:

support — are not

gical
sufficiently addressed by public
support. In general, fresh starts are deterred because of the lack
of resources to set up a new business, notably of financial
means. The lessons to be learnt are that:

(a) It

is vital

to create the right

framework which, while
protecting all parties' interests appropriately, recognises the
possibility for an entrepreneur to fail and start again. Bank-
ruptcy law should include a clear distinction between non-
fraudulent and fraudulent bankrupts.

(b) Entrepreneurs who go bankrupt through no fault of their
own should be entitled to receive a formal court decision
declaring them non-fraudulent and excusable. The decision
should be publicly accessible.

(a) Relevant authorities should devote sufficient financial means
to fresh starts by removing barriers to public finance
schemes for start-ups.

(b) Banks and financial institutions should reconsider their very
cautious attitude towards restarters, often based on negative
credit ratings. The Commission plans to put this issue on
the agenda of the Round Table of Bankers and SMEs.

(c) An early discharge from remaining debts subject to certain

criteria should be provided for in insolvency law.

(c) EU countries should ensure that the names of non-fraudu-
lent bankrupts do not appear on lists restricting access to
loans in the banking sector.

(d) Legal restrictions, disqualifications or prohibitions should be

reduced.

(e) Legal proceedings should be made simpler and faster, thus
maximising the value of the assets in a bankruptcy estate
prior to the reallocation of the assets. Typically, proceedings
should last a maximum of one year.

3.3 Active support to businesses at risk

3.3.1
The stigma of business failure is one reason why many
SMEs in financial trouble conceal their problems until it is too
late. Timely action is crucial to avoid bankruptcy and a rescue is
in many cases, preferable to liquidation. The main lessons are:

(a) The number of insolvencies cannot be reduced to zero, but
early support for viable enterprises will keep insolvencies to
a minimum. Support measures should focus on bankruptcy
prevention, expert advice and timely intervention.

(b) Attention needs to be paid to the accessibility of support, as

businesses at risk cannot afford expensive advice.

(d) Those responsible for public procurement should be aware
that public procurement directives do not allow for former
non-fraudulent bankrupts to be disadvantaged.

(e) Adequate psychological and technical support and specific
training and coaching should be available for restarters.

(f) Relevant authorities should fuel

links between potential
restarters and customers, business partners and investors so
that the needs of the restarters may be supported.

In conclusion, good national framework conditions for
3.5
entrepreneurship are crucial to the full exploitation of the EU's
entrepreneurial potential and to the creation of dynamic compa-
nies. The societal appreciation of successful entrepreneurship,
vital to this end, should go hand in hand with a policy of
promoting a second chance for entrepreneurs who have failed.

(c) The networking opportunities provided by the EU and Euro-

pean business organisations should be fully exploited.

4. General Remarks

(d) Insolvency laws should provide an option to restructure and

rescue rather than focus solely on liquidation.

3.4 Active support to entrepreneurs restarting after failure

3.4.1
The main constraints that entrepreneurs face when
setting up a second venture — resources, skills and psycholo-

The EESC endorses the emphasis placed by the Commis-
4.1
sion on the need to overcome the stigma of business failure.
The Commission is correct to assert that business creation, busi-
ness success and business failure are each inherent in the market
economy. It correctly highlights that as part of the general lack
of societal appreciation and understanding of entrepreneurship,
events such as business distress or business failure are neither
sufficiently understood as a normal economic development nor
seen as an opportunity for a fresh start.

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4.2
Even so, the EESC is of the opinion that while much of
the guidance embodied in the Communication is indispensable,
parts of it do not seem very credible. The Committee's reserva-
tions are highlighted at various points in sections 4 and 5 of the
Opinion.

now have the risk capital scheme proposed by the EIB but,
again,
its capacity will be limited. Funding usually becomes
available in tranches or rounds. If first phase funding produces
good results, follow on funding is much easier to achieve.

4.3
The purpose and goal of entrepreneurial activity is to
create a business which is both profitable and scaleable. Entre-
preneurs innovate to satisfy customer needs which are either
not being satisfied, or not being satisfied in the most efficient
way.

An entrepreneur may identify a trading opportunity. For
4.4
example, a London entrepreneur saw the opportunity for an
import/export business between the UK and India, meeting
needs in both countries. It filled a gap in the market. Other
entrepreneurs fill gaps in the market by, for example, opening
restaurants or hairdressing salons in communities that are not
well provided for.

4.5
Amazon is a prime example of meeting needs in a more
efficient way. Bookshops survive for those who have the time
and inclination to browse. Amazon meets the needs of a
different sector of the book-buying public.

4.6
Some entrepreneurs start a business to exploit advances
in science and technology. Such businesses are often spin-outs
from universities, research institutes or science based companies.
Four London University professors have founded a company to
provide image analysis services using proprietary software to
improve the ways in which the therapeutic effect of drugs under
development can be measured. Software IP is at the heart of
this business. One of the professors has been appointed MD and
he is in the process of finding out whether or not he is an entre-
preneur.

4.7
In order to succeed, the entrepreneur needs three things
above all else. First, he or she must have the necessary knowl-
edge and experience to correctly assess the market opportunity
and the know-how to make a reality of the business proposi-
tion, whether it is a new restaurant, an on-line travel service or
a breakthrough in the application of science. The first step in
any enterprise is to prove the proposition — ‘make it real’. It
means developing a product or service to the point where there
are customers willing to pay the price which is necessary for the
business to make profits and pay its way. Many would-be entre-
preneurs fail at this point. Some can learn from their mistakes
and start again. Others will never learn.

The second requirement is funding. Some start-up enter-
4.8
prises are sufficiently attractive to venture capitalists from the
beginning. Most venture capitalists will not get involved until
the entrepreneur has made the proposition ‘real’. We do

4.9 More often than not, funding for the start up phase
comes from family and friends. Bank loans are available, but the
banks need security. If the business has no assets, banks take
the assets of entrepreneurs as security. For the entrepreneur,
family and friends, the crunch comes when they give personal
guarantees. These guarantees will usually carry on beyond the
start up phase because private companies will generally have to
rely on the support of banks until the company goes public. If
the bank calls in its guarantees, the entrepreneur may lose his or
her home. In these circumstances tax and social security obliga-
tions can make the situation even worse.

4.10
In the Committee Opinions on ‘Tax incentives for
R&D’ (1) we have encouraged Member States to give tax relief to
private individuals who invest in start up companies. Clearly
such tax incentives could make it easier for entrepreneurs to
capitalise new businesses.

Beyond the start up phase, the entrepreneur depends on
4.11
the third indispensable component of success, a viable business
model. This is the key to scaling up the business. The model
depends on a set of ratios which encapsulate the elements of
the business. Sales less product costs give a gross margin which,
after the deduction of expenses, leaves a profit before tax suffi-
cient to service and pay down bank loans. When a business
model is dysfunctional, or when the management does not have
the skill or experience to manage sales etc. to make it work,
then those who have provided the bank guarantees are liable to
be bankrupted. Clearly such a bankruptcy is a learning experi-
ence. If the entrepreneur has learnt the imperatives of the busi-
ness model, there may be scope to restart.

4.12
Previously successful business models are always threa-
tened by change in staff, customers, markets, technologies and
competitors. After successfully founding a business, the entre-
preneurs will be continually tested by change, particularly in
businesses involved with technology. Entrepreneurs who fail the
test of change may learn from the experience. Others, particu-
larly second or third generation owners, may not.

4.13
In making the business model work, the role of the
entrepreneur and his team is paramount. In particular, financial
management skills are indispensable. A good business can be
too successful and overtrade so that it gets to the point where it
cannot pay its bills. In this case it may be put into administra-
tion by its creditors. Such businesses may offer every possibility
of a successful restart.

(1) OJ C 10, 15.1.2008.

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Another financial trap can arise when a major customer
4.14
defaults and fails to pay his bills,
leaving the entrepreneur
unable to pay his bills and the bank ready to foreclose.
According to Commission statistics, one in four insolvencies is
caused by late payment. In such a case, a restart may also be
viable. The vulnerability of small and young companies is well
recognised by both Member State governments and the
Commission. The issue is addressed by the Late Payment Direc-
tive and will be covered again in the upcoming Small Compa-
nies Act.

4.15
Some companies fail through no fault of their own for
reasons that could not have been anticipated such as the fall out
from the 9/11 event or the impact of extreme weather condi-
tions. Even so, with foresight, insurance could have softened the
flow. Therefore organisations which support small businesses
are encouraged to introduce entrepreneurs to the benefits which
prudential instruments can provide.

4.16
In summary, there are many ways in which an enter-
prise can fail, even with the best intentioned entrepreneur. In
the start up phase, it may not be possible to establish a viable
enterprise. Beyond the start, a flawed business model may still
mean that the company has no future. On the other hand,
potentially viable companies can fail because of mistakes made
by the entrepreneurs as well as for reasons right out of their
control. Such companies can and should be saved by receivers
with most of the jobs protected.

4.17
It is important to distinguish between the company and
its directors. Directors may go bankrupt while a receiver is
rescuing the company and its employees. When a company fails
the entrepreneurs may well be bankrupted because of the bank
guarantees which they have given, even though their personal
conduct was not fraudulent. It is these non-fraudulent entrepre-
neurs with which the Commission is concerned. Others, who
fail through incompetence and a lack of vision probably have
little to offer the economy, even if
they can find financial
backers. Not all bankrupt entrepreneurs deserve a second
chance.

5. Specific Comments

5.1 Public Image, Education and the Media

5.1.1
Clearly the most powerful message which Member
State governments can give to the general public will follow
from the changes to insolvency law. When the law clearly
encourages a second chance for entrepreneurs,
this will be
reflected in media messages.

5.1.2
Governments can also work with organisations and
institutions which work closely with entrepreneurial businesses.

The most clearly involved institution is the accountancy profes-
sion, while representative organisations for SMEs and sole
traders can also play a part.

The Communication mentions the idea of an award
5.1.3
the organisations
programme
mentioned above would adopt such schemes, favourable media
comment might follow.

successful

restarters.

for

If

5.2 The role of insolvency law

5.2.1
The EESC fully endorses all the points made in the
Communication in respect of insolvency law, subject of course
to the detail of the laws ultimately put in place. These points are
detailed in section 3.2 above and involve the formal recognition
of non-fraudulent bankruptcies, early discharge from debts and
reduction of legal restrictions, disqualifications and prohibitions
with accelerated proceedings. The medium term target should
be that proceedings take no more than twelve months.

5.2.2
The EESC believes that it is imperative that all Member
States complete the revision of their insolvency laws with the
least possible delay. In addition to changes in the law, it is vitally
important that bankruptcies be handled expeditiously by the
courts. The process needs to be well organised. These changes
are the centre piece of the Second Chance programme.

5.3 Active Support to Businesses at Risk

This is the second message contained in the Communi-
5.3.1
cation. It is not part of the Restart programme per se. Instead it
is a programme designed to avoid bankruptcy and to preserve
businesses and jobs. In this respect the thrust of the Communi-
cation is to head off avoidable failures through early warning,
the provision of temporary funding and the services of advisors.

the pro-active identification of businesses at

5.3.2
The only problem is that this programme is not very
practical for the generality of SMEs since there are few mechan-
isms for
risk
amongst the tens of thousands of SMEs in each Member State.
Even so, Member States are encouraged to make the most of
such possibilities as do exist, e.g. the French use of the VAT
authorities to provide an early warning of possible company
cash flow problems. The Commission says
support
measures should focus on bankruptcy prevention, expert advice
and timely intervention. The problem arises when directors do
not realise that their business is at risk. Member State govern-
ments will need to work with the Accountancy profession and
SME support organisation to develop such pro-active measures
as are appropriate to their SME culture.

that

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5.3.3
The EESC does not underestimate the difficulties
involved in providing such support. Government intervention to
reverse market forces has the potential to be counter-productive
and undermine market disciplines.

5.3.4
In public limited companies there is the double obliga-
tion that accounts are filed in a timely fashion and that the
accountants and management certify that the company is a
going concern, i.e. that it can pay its debts. The enforcement of
such disciplines on all companies, especially the early filing of
accounts, would improve the system of early warning alerts.

5.3.5
To the extent possible, the EESC welcomes this focus
on businesses at risk since it offers the prospect of job preserva-
tion and continuity of employment.

5.4 Active Support to Entrepreneurs Restarting after Failure

5.4.1 Whereas between twelve and seventeen Member States
have either changed or are changing their insolvency law, there
is virtually no observed Member State activity in respect of this
group of Commission recommendations.

The reason for this low level of activity is that, once
5.4.2
again, a number of
the proposal can be seen as running
contrary to market forces. This is particularly true of the propo-

Brussels, 29 May 2008.

sals that banks should be less than cautious and that relevant
authorities should create support networks for restarting entre-
preneurs.

5.4.3
It should be possible for the proposals which fall
within the competence of Member State governments — public
finance schemes, access to loans by non-fraudulent bankrupts
and public procurement — to be implemented without too
many problems even before the insolvency laws are changed.

5.4.4
It should also be possible for those who offer training
to entrepreneurs to offer training to restarters as the demand
emerges.

5.5 Other Commission Proposals

5.5.1
The EESC is pleased to endorse the new Commission
website ‘for a second chance policy’ at: http//ec.europa.eu/
It will be of particular help to organisations
sme2chance.
involved in supporting Member State 2nd chance policy initia-
tives.

5.5.2
In its 2009 SME Spring event the Commission will
feature fresh start and other second chance issues. The EESC
would expect that this initiative will give added impetus to the
‘soft’ elements of the Second Chance programme.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS