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Overcoming the stigma of business failure

Many well established companies exist only because their founders did not give up after initial failure. Business failure can be overcome if entrepreneurs are given a second chance. In this Communication, the Commission calls upon the Member States to improve the national framework conditions in the field of business failure.

ACT

Communication from the Commission of 5 October 2007 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 - Not published in the Official Journal].

SUMMARY

Half of all businesses do not survive the first five years. However, the death of businesses is not incompatible with economic dynamism. Public opinion often associates failure with fraud or personal inability. Yet only 4 to 6 % of bankruptcies are fraudulent. Most of the time, bankruptcy is simply the direct consequence of business renewal.

Business failures have a high cost in terms of employment, purchasing power (unpaid wages) and finance (unpaid debts). This cost could be reduced if businesses in difficulty received better assistance and, in the event of bankruptcy, if it was made easier for them to make a fresh start. Furthermore, entrepreneurs who restart a business learn from their mistakes and subsequently enjoy greater success. For all these reasons, a second chance should be given to failed businesses.

Public image, education and the media

Europeans fear business failure. They need to be shown that new attempts are part of a normal process of learning, research and discovery through, for example, information campaigns and education programmes. The Commission has created awareness-raising tools which can be used for this purpose. The media also have a role to play, particularly when it comes to combating the cliché according to which bankruptcy is a crime, regardless of the cause. Lastly, sustained dialogue with all involved parties should make Europeans aware of the advantages of a fresh start.

The role of insolvency law

Many European bankruptcy laws treat fraudulent and honest business failure in the same manner. Sometimes, they impose restrictions, prohibitions and even disqualifications on bankrupts. Legislation should make a greater distinction between the treatment of fraudulent and non-fraudulent bankruptcies. Furthermore, legal proceedings should be made simpler and faster, lasting no longer than one year. Lastly, legislation should provide for early discharge from remaining debts subject to certain criteria. Overwhelming debts can in fact dissuade an entrepreneur from setting up another business.

Actively supporting businesses in difficulty

Business failure must be prevented by supporting entrepreneurs at as early a stage as possible. The Commission recommends that the Member States introduce support measures such as expert assistance. As businesses in difficulty cannot afford to pay for costly advice, it is essential to make such support more accessible. The Commission has in fact developed an early warning instrument: it has put a self-assessment tool on-line to help entrepreneurs make a rapid estimate of their financial health. In addition to this, the INTERREG IVC programme and European business organisations offer many possibilities for networking and the exchange of good practices in the field of business support.

Lastly, it is also possible to prevent bankruptcies by considering other alternatives: the Commission advises Member States to shift their focus to restructuring and rescuing businesses in difficulty.

Actively supporting restarters

Entrepreneurs who create a second business face psychological, technical and financial difficulties. Training and coaching should therefore be made available to them. It is also necessary to promote the link between these entrepreneurs and their clients, business partners and investors, who are often suspicious of bankrupts.

Furthermore, entrepreneurs who are restarting a business need financial resources. Public bodies should remove barriers to public financing. Banks and financial institutions should be less cautious vis-à-vis restarters, and the names of non-fraudulent bankrupts should not appear on lists restricting access to loans in the banking sector.

 
Last updated: 12.02.2008

See also

  • To find out more about bankruptcy management, obtain advice, the addresses of experts, communication material or examples of good practice, visit the website of DG Enterprise, which focuses on the European second chance policy.
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