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Modern Insolvency Rules: lending a helping hand to businesses in distress

European Commission - SPEECH/13/415   16/05/2013

Other available languages: none

European Commission

Viviane REDING

Vice-President of the European Commission, EU Justice Commissioner

Modern Insolvency Rules: lending a helping hand to businesses in distress

2nd European Insolvency & Restructuring Congress/Brussels

16 May 2013

Dear Dr Prager, Dr Lehne, Ladies and gentlemen,

Businesses are essential to creating prosperity and jobs. But setting one up – and keeping it going – is tough, especially in today's economic climate. This is why I tabled last December a modernisation of insolvency rules in the EU, as part of our "Justice for Growth" agenda.

Take a look at the figures: half of all businesses do not survive the first 5 years of their existence. An average of 200,000 firms go bust in the EU each year, resulting in direct job losses of 1.7 million every year. A quarter of these bankruptcies have a cross-border element.

And faced with these figures, I asked myself the question - are the European rules that manage cross-border business insolvencies since 2000, capable of responding to the challenge that businesses now face?

Let me first of all highlight some of the existing Insolvency Regulation's shortcomings before mentioning the key features of the revised version.

Why a reform?

While the Regulation is generally successful in facilitating cross-border insolvency proceedings, our research shows a few practical problems:

The Regulation is oriented towards liquidation. It does not accommodate national arrangements to restructure companies so they can stay in business. In particular, the existing Insolvency Regulation does not cover national procedures which provide for the restructuring of a company at a pre-insolvency stage (“pre-insolvency proceedings”). Also, the Regulation does not cater for proceedings which leave the existing management in place (so-called “hybrid proceedings”).

Yet, many Member States have recently introduced these types of proceedings, which increase the chances of businesses' successful restructuring.

In addition, 40 per cent of personal insolvency cases in the EU are currently not covered by the Regulation, this is not good for our Single Market.

Another challenge is to determine which Member State is competent to open insolvency proceedings. There is a consensus that insolvency proceedings should be opened in the Member State where the debtor's Centre of Main Interest (COMI) is located. Yet, applying this jurisdictional concept in practice has proved to be less straightforward.

The existing Regulation's jurisdiction rules have also been criticised for allowing "forum shopping". Major problems arise for private individuals where the residence of the debtor is transferred to another Member State prior to the application.

The evaluation study has revealed cases of evident abusive relocation of the "COMI" connecting factor. German and Irish debtors in particular have tried to take advantage of the discharge opportunities of English law which provides for a debt release within one year – such cases are sometimes described as "insolvency tourism".

Secondary proceedings are another area that needs attention. It is estimated that every year about 700 companies with branches in another Member State go bankrupt. As a result, several hundred secondary proceedings are opened every year.

The opening of secondary proceedings can hamper the efficient administration of the debtor's estate and lead to additional costs and delays. Moreover, secondary proceedings currently have to be winding-up proceedings which constitutes an obstacle to the successful restructuring of the business.

The lack of publicity of insolvency proceedings is another challenge we have to address: There is currently no mandatory publication or registration of the decision to open proceedings.

Judges and creditors are often unaware that insolvency proceedings have started in another Member State.

However at national level, there are examples of how transparency can work: 14 Member States publish decisions in an insolvency register that is publicly accessible online and free of charge. Nine other Member States make some information on insolvency available in an electronic database.

Creditors and especially small and medium sized enterprises find lodging a claim across borders particularly difficult and often expensive. Lodging a claim across borders often means dealing with foreign languages and different procedural rules that may require the assistance of a lawyer.

As a result, the average cost of lodging a claim for a foreign creditor is about € 2000 per case!

Last not least, group insolvency affects around 2000 SMEs every year. The starting point of the Insolvency Regulation is that separate independent proceedings must be opened for each individual member of the group. As the existing Insolvency Regulation contains no specific provisions for group insolvencies, the successful restructuring of the group is often difficult if not impossible.

Main features of the revised Regulation

Let me briefly outline the five main points of the modernised Regulation. First, the revision accommodates new national insolvency laws which aim at rescuing businesses rather than winding them up. Giving honest entrepreneurs a second chance and allowing for a debt discharge for private persons will help to save businesses and jobs.

The second point is legal certainty. My proposal clarifies the jurisdictional criteria of the Centre of Main Interest of the debtor (the so-called "COMI"), and increases legal certainty for creditors. Clearer rules will also help prevent and prosecute fraudulent "forum shopping".

In addition the proposal reinforces the principle that the court competent on insolvency is also competent to deal with related civil actions.

The third point concerns the role of the liquidator. The new rules significantly increase the powers of the liquidator in the main proceedings. The revised Regulation also allows for better cooperation between liquidators in main and secondary proceedings.

The fourth point is about facilitating group insolvencies. Insolvencies of groups of companies need better coordination. To this end, the revised Regulation foresees a common legal framework for the coordination of group insolvencies.

You, the liquidators, play a key role here. The liquidators of an insolvent group of companies will have a wider range of tasks and responsibilities in the future. For example, you will be in charge of exploring the possibility for restructuring the whole group and negotiate the restructuring plan. I have full trust in the competence of the liquidators and I am confident that many a corporate group will be restructured successfully in the future.

Finally, the fifth main element of the revised Regulation is about transparency. Insolvency registers will increase the transparency of proceedings. The European Judicial Portal will help to better connect insolvency registers. Multilingual standard forms will make it easier to lodge a claim online – this is particularly useful for SMEs.

Benefits of the revised Regulation

The benefits of hybrid, pre-insolvency, and personal insolvency schemes lie in rescuing more company value, helping viable businesses to survive, creating better recovery rates for creditors and saving jobs. The new rules on secondary proceedings will further enhance these benefits.

The revision has a positive economic impact, especially on the security of investment, the functioning of the single market and entrepreneurship in general. The new rules will help viable businesses to survive and promote a culture of the "second chance". The revised rules will increase efficiency, fairness and transparency of cross-border insolvency proceedings.

Finally, and this is a point I'd like to emphasize, the revised rules will further strengthen mutual trust. Mutual trust between Member States' judicial authorities, between individual liquidators, and between liquidators and courts.

In making the proposal, I set out a step by step approach. The revision of the Regulation is a key first step in bringing EU insolvency laws into the 21st century. It allows us to make useful progress in the field of cross-border insolvencies, in particular, by building new bridges between the national insolvency regimes.

At the same time, it is clear that the revised Regulation cannot by itself address all the challenges and shortcomings – especially the underlying and sometimes marked differences in national insolvency laws.

It is also clear that some of these disparities between national insolvency laws can create legal uncertainty and an unfriendly business environment. Take for example, the differences between national insolvency laws in the time period for debt discharge, the conditions for opening proceedings, the filing of claims and the rules for restructuring plans. These can have an adverse effect on cross-border investment.

I am also aware that the European Parliament called for a proposal harmonizing specific aspects of national insolvency laws.

This step by step approach is elaborated in the Communication that the Commission adopted in parallel with last December's Insolvency Regulation proposal. The Communication launches a reflection process on a new EU approach to business failure in light of diverging national insolvency rules. As a follow-up, I will in the coming weeks publish a consultation seeking the views of stakeholders on how best to respond to these challenges. I know I will be able to count on your active participation.

Conclusion

Ladies and Gentlemen,

Delivering "Justice for Growth" means moving towards a "rescue and recovery" culture for businesses and individuals in financial difficulties. Honest business owners should get a second chance, so that entrepreneurship does not become a "life-sentence" if things go wrong.

I am delighted that both the European Parliament and the Member States have seized upon the insolvency reform proposal as a necessary and useful modernisation. Now is the time to harness our energies. We should make sure that it is put in the statute book without delay.

I know that you will do what you can to help. I wish you a successful congress and insightful discussions!


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