Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties – if they keep a close eye on the financial situation of their business.
When filing for bankruptcy is the only option left for a business owner, it pays to cut losses, initiate proceedings sooner rather than later, and move on to a new business project.
The EU supports simpler and faster procedures for bankruptcy and encourages giving a second chance to honest entrepreneurs who have failed, putting them on an equal footing with new entrepreneurs.
In 2011, the European Commission published a report of a group of experts presenting policy recommendations on each of the four sub-areas that comprise the bankruptcy process in its widest sense:
- early warning systems (prevention of bankruptcy);
- out-of-court settlements;
- in-court procedure;
- second chance (facilitating a fresh start for formerly bankrupt entrepreneurs).
The EU has established common rules, notably covering:
- jurisdiction to open cross-border insolvency proceedings and recognition of one country's court rulings throughout the EU to prevent insolvent entrepreneurs from transferring their assets or avoiding legal proceedings in a given country;
- protection for employees in insolvency cases;
- government support to rescue and restructure firms in difficulty.
Simpler and faster bankruptcy procedures
When a business cannot be saved by restructuring or selling shares, a swift decision to file for bankruptcy may minimise the losses for all concerned.
Effective bankruptcy procedures enable a reasonable balance to be struck between the interests of the business, investors, staff and owners when reallocating assets from the bankrupt company, and save as much of their value as possible.
The EU encourages national authorities to design bankruptcy procedures that are quick and easy – lasting no more than a year.
Starting again after bankruptcy
When only 4 to 6% of bankruptcies are fraudulent, it is key for the economy to offer a second chance to honest entrepreneurs who have failed.
Studies show second attempts by entrepreneurs are more profitable and create more jobs. Entrepreneurs learn from their mistakes and become better at assessing risks and opportunities.
The EU puts forward solutions to help entrepreneurs tackle practical and psychological difficulties when setting up a second business:
- sufficient financial means should be devoted to fresh starts;
- banks and financial institutions should reconsider their cautious attitude towards re-starters;
- names of those involved in non-fraudulent bankrupts should not appear on lists restricting access to bank loans;
- former non-fraudulent bankrupt entrepreneurs should not be at a disadvantage when applying for public contracts;
- re-starters should enjoy adequate psychological and technical support;
- getting support from customers, business partners and investors should be fuelled by links between them and potential re-starters.
The communication on the review of the Small Business Act invites EU countries to "promote a second chance for entrepreneurs by limiting the discharge time and debt settlement for an honest entrepreneur after bankruptcy to a maximum of three years by 2013 ".
Prior to this the Small Business Act devoted one of its 10 principles to bankruptcy and giving a second chance to honest entrepreneurs who have failed. EU countries are encouraged to:
- further promote a positive attitude in society towards re-starters;
- shorten the winding-up procedures to one year ;
- ensure equal treatment between re-starters and start-ups, e.g. in support schemes.
Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.
The Second chance in business website provides hints on spotting early signs of trouble, a financial health check tool, golden rules for new businesses and firms in difficulty, as well as first-hand accounts from successful re-starters.
Check also the legislation on this topic in: