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MEMO/07/402

Brussels, 8th October 2007

Promoting second chances for entrepreneurs

In the Commission Communication "Overcoming the stigma of business failure – for a second chance policy" the Commission proposes that second chances for entrepreneurs whose business failed in the past are promoted.

  • The Communication measures the costs of stigma attached to bankruptcy, takes a judgement on four groups of barriers to start afresh after business failure and makes proposals to remove them, as described below.
  • Its publication is accompanied by the launching of an online platform on this issue, http://ec.europa.eu/sme2chance, and relevant communication material.

The Communication in a nutshell:

  • Business closure and bankruptcy are something natural and not a synonym for fraud.
  • In general, past mistakes make failed entrepreneurs "stronger".
  • Stigma deters failed entrepreneurs from deploying their increased potential.
  • A second chance policy would be beneficial to the EU´s economy.

This memo informs on how stigma can be tackled, according to the Communication:

1. Changing attitudes: improving public image through education and media

2. The role of insolvency law

3. Actively supporting businesses at risk

4. Actively supporting restarters

1. Changing attitudes: improving public image through education and media

Even though only 1 in 20 bankruptcies would involve fraud, in the EU the general public often perceives bankruptcy as a criminal affair. Nowadays Europeans are reluctant to take up opportunities for self-employment and entrepreneurial activities and are clearly afraid of bankruptcy, a natural phenomenon in our economy that is clearly misunderstood.

The way forward

  • The benefits of a fresh start should be put forward in information campaigns and education programmes, showing that making several attempts goes hand in hand with a normal learning process, research and discovery.
  • The media can play a role in dissociating bankruptcy and fraud and disseminating the benefits of renewed entrepreneurship, thus improving the image of business restarters among the public at large and valuing their experience.
  • Further discussing the issue with all relevant actors should help uncover the many facets of stigma surrounding business failure.

Example:

In the last two years in Germany there has been a START AWARD with a category called RESTART. Sponsored by the two public support banks and a regional start-up support agency, it was given to honest entrepreneurs who learned from business failure and succeeded with their second start-up. Mainstream media were eager to report more on the topic.

2. The role of insolvency law

Making a fresh start after bankruptcy can be challenging from a legal standpoint. Lengthy proceedings are generally too time - and money-consuming and deter a fresh start through capital destruction. Still 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. Also, numerous rules impose restrictions, prohibitions and disqualifications on bankrupts solely on the basis of the existence of bankruptcy proceedings, debts relieves and discharge of remaining debts being difficult to obtain.

The way forward:

  • 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. Bankruptcy law should include a clear distinction between the legal treatment for non-fraudulent and fraudulent bankrupts.
  • 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.
  • An early discharge from remaining debts subject to certain criteria should be provided for in insolvency law.
  • Legal restrictions, disqualifications or prohibitions should be reduced.
  • Legal proceedings should be made simpler and faster, thus maximising the value of the assets in a bankruptcy estate when reallocating resources. Typically, proceedings should last a maximum of one year.

Example:

In the UK all bankrupts are subject to some restrictions during the period of their bankruptcy but honest bankrupts are discharged within a maximum of 12 months. Bankrupts whose conduct was dishonest, reckless or culpable may have severe restrictions imposed upon them for up to 15 years.

3. Actively supporting businesses at risk

Many entrepreneurs often lack the necessary resources and experience for successful crisis management and conceal their problems until it is too late. If mistakes occur at this stage, or if there is no proper advice available in time, bankruptcy can become inevitable.

The way forward

  • The number of insolvencies cannot be reduced to zero, but early support for viable enterprises will help keep insolvencies to a minimum. Support measures should focus on bankruptcy prevention, expert advice and timely intervention.
  • Attention needs to be paid to the accessibility of support, as businesses at risk cannot afford expensive advice.
  • The networking opportunities offered by the EU[1] and European business organisations should be fully exploited.
  • Insolvency laws should provide an option to restructure and rescue rather than focus solely on liquidation.

Example:

Denmark is introducing a pilot “early warning system” modelled on the Dutch Ondernemersklankbord. With 4-year funding, this system will help viable enterprises that are headed for insolvency owing to temporary problems by giving them practical know-how and advice.

4. Actively supporting restarters

Being alone as an entrepreneur is among the top four difficulties when starting up. The main constraints entrepreneurs face when setting up a second venture – resources, relevant skills and psychological support – are not sufficiently addressed by public support.

The way forward

  • Relevant authorities should devote sufficient financial means to fresh starts by removing barriers to public finance schemes for start-ups.
  • Banks and financial institutions should revisit 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.
  • EU countries should ensure that the names of non-fraudulent bankrupts do not appear on lists restricting access to loans in the banking sector.
  • Public procurers should be aware that public procurement directives do not allow for former non-fraudulent bankrupts to be disadvantaged.
  • Adequate psychological and technical support and specific training and coaching should be available for restarters.
  • Relevant authorities should facilitate getting support from customers, business partners and investors by fuelling links between them and potential restarters with the objective of meeting restarters’ needs.

Example:

Since 2004, Luxembourg has offered some 40 non-fraudulent bankrupts a tailor-made training course on management issues to better equip them for their fresh start.
For further information:

http://ec.europa.eu/sme2chance. It contains:

testimonials of real restarters

a self-assessment tool for entrepreneurs in the danger zone

national contact points to find advice

communication material (leaflets, posters, info clips...)

facts, figures and quotes

summaries of insolvency law


[1] The INTERREG IVC programme under the European Regional Fund is a strong tool to foster the exchange of good practices in the area of business support, http://www.interreg3c.net/web/fic_en.


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