European recommendations on bankruptcy and insolvency

I’ve already written about the Dutch draft “Business Continuity I Act” in my previous blog. Now, the European Commission has published  recommendations on a new approach to business failure and insolvency.

These recommendations were published on the Commission’s website on 12 March 2014.

Recommended minimum standard harmonises procedures

As in the draft “Business Continuity I Act”, here, too, the focus is on the pre-bankruptcy phase. The aim is to offer businesses a way of avoiding bankruptcy if they are viable in principle but are experiencing financial difficulties. The Commission believes there is a need for a new procedure available in all European countries, which meets certain minimum requirements laid down by the Commission in its recommendations. The moves are designed to make it easier to implement a restructuring procedure before bankruptcy in all European countries, give businesses a better chance of survival and simplify the process of restructuring cross-border businesses. What’s more, by harmonising bankruptcy procedures, the Commission hopes to encourage foreign creditors to register their claim in a bankruptcy and, if possible, recover that claim. Obviously, this measure is also meant to  benefit the workings of Europe’s internal market.

The principles

The Commission’s recommendation contains a number of principles which any restructuring procedure must satisfy, including keeping the involvement of the courts to a minimum. What the Commission is aiming for is an informal and flexible procedure, which slots in nicely with all kinds of situations and keeps costs down. The Commission does not see the need to make the appointment of a supervisor or mediator compulsory. Rather, the idea is to give entrepreneurs the scope to take measures by suspending individual enforcement measures and retaining control over their assets.

Guidance

In principle, every entrepreneur can restructure his business as he deems appropriate. The Commission’s recommendations serve as a guide to entrepreneurs so that they can maximise their chances of success. The restructuring plan lies at the very heart of this approach. To ensure that this procedure is not used to deliberately disadvantage creditors, all creditors must give their backing to the plan. They must be able to give their consent by letter or electronic means, enabling creditors based in another country to take part in the agreement process. If the creditors do not unanimously back the restructuring plan but a specified minimum number of them do approve it, the consent of the court is also required. The court will assess whether the proposed plan has a reasonable chance of successfully averting bankruptcy. If the restructuring plan is approved, it is binding on all creditors. The Commission also points out that entrepreneurs must have the option of raising new finance without risking the underlying juristic act being declared void on the grounds that it is detrimental to the creditors, should the company eventually go bankrupt. With this setup, the entrepreneur has leeway to restructure the business without the constant threat of collection measures.

Second chance

The Commission also wants to give entrepreneurs a second chance, post-bankruptcy, by introducing a discharge period of three years for all debts which form part of the bankruptcy. However, more stringent stipulations must be applied to entrepreneurs who have acted dishonestly and in bad faith. The aim is to enable entrepreneurs to set up a new business sooner, on the premise that entrepreneurs who have already experienced bankruptcy are more likely to succeed second time around.

Conclusion

In making these recommendations, the Commission’s primary aims are to enable honest entrepreneurs to potentially avoid bankruptcy by means of restructuring or to have another stab at launching a business sooner in the wake of a bankruptcy. The thinking behind this is very much in tune with the Dutch draft “Business Continuity I Act”. The availability of similar procedures in all European countries would surely be a good thing, potentially making it easier to do business across borders. Without doubt the most obvious difference compared with the Dutch draft Act is the central importance in that Act of the appointment of a prospective administrator or a prospective trustee. The advantage of this is that the entrepreneur always has access to legal advice, whatever the situation – and in the critical pre-bankruptcy phase, this can prove vital. Therefore, it is advisable to seek legal advice if you need to restructure your business.

Get expert advice on bankruptcy

GMW lawyers has a team of specialists in company law and bankruptcy law who are able to give you excellent advice on restructuring or the threat of bankruptcy.