Big shake-up in business insolvency rules looming

Sun, 01 Jan 2017 | DISTRESSED BUSINESSES

Deep reforms are designed to give trouble-hit firms the chance to restructure early and increase confidence among current and budding entrepreneurs. We take a look at what’s on the slate.

Big changes to European countries’ insolvency laws are on the horizon. The European Commission envisages a bloc-wide business landscape where it’s easier for companies - especially small ones - to bounce back from failure, where member states must legislate for the early restructuring of businesses in trouble and where entrepreneurs who’ve made mistakes are given a second chance.

Pulling together the EU’s varied strands of insolvency rules into one central, harmonious package is the aim, and it’s hoped the shake-up will boost entrepreneurship, reduce the number of firms going into liquidation, bring down legal fees, create jobs and give people thinking of starting a business the confidence to do just that.

All in all, it represents a real culture change when it comes to European attitudes towards doing business. And this will all happen quite quickly too - by 2018.

In a nutshell, the European Commission’s new directive on corporate insolvency reform is looking like this:

1. Increase opportunities for firms in financial trouble to restructure early, avoiding bankruptcy and shedding staff.
2. Give entrepreneurs a ‘second chance’ at doing business after going bankrupt by discharging them of their debt after three years at the most (in some countries right now, it’s 10 years).
3. Simplify court proceedings, increasing the efficiency of insolvency.
4. Give firms - especially SMEs - early warning tools to spot signs of financial problems.
5. Let debtors have ‘breathing space’ from enforcement action (four months maximum) so they can negotiate and restructure.
6. Protect new finance to increase the chances of successful restructuring.

Cultural shift
The EU wants to spur economic growth and see job growth across the bloc, and it thinks a modern insolvency and business restructuring system will help achieve this.

“Every year in the EU, 200,000 firms go bankrupt; which results in 1.7 million job losses,” the EU’s justice commissioner Vera Jourova said.

The EU says too many businesses are going into liquidation that, in fact, could have been saved through restructuring. What’s more, nearly half of Europeans (49 per cent) say they’re put off from starting a business because of the fear of failure, the social stigma associated with it and problems paying off debts.

“This could often be avoided if we had more efficient insolvency and restructuring procedures. It is high time to give entrepreneurs a second chance to restart a business,” Jourova added.

Andrew Tate, president of recovery body R3, welcomed the reforms. “The focus on early advice and restructuring in the new directive is welcome. The earlier companies seek advice about their problems, the more likely that businesses and jobs can be saved,” he said.

“Of course, the introduction of the directive is complicated by Brexit. There is still no clear timetable for when the UK will leave the EU, so while we expect the government to start work to ensure the UK is compliant with the directive, we don’t know how long the directive will apply for.”

Chapter 11-style procedures
Actually, these deep reforms will move European insolvency proceedings much more in line with the rules and regulations over the pond. There, failure isn’t such a dirty word. “One of the facets of the US start-up culture that Europeans often look at quite enviously is the ease with which people start one business, fail, start another and eventually get it right,” Michael Collins, chief executive of lobby group Invest Europe, told the Wall Street Journal.

“In Europe, it’s been the case that a failure is culturally frowned upon and actually has long-term financial implications for the entrepreneur.” Many others have noted how the reforms mirror the chapter 11 procedures in the States.

The proposals, now in the legislative process, will work to standardise insolvency rules across the EU. Perhaps more importantly, they will breathe new life into business activity and offer a helping hand to those who need it. In this way, the new rules will, to a degree, ‘normalise’ business failure in Europe, turning it into an opportunity, not The End.

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