EU Insolvency Proposals Aim to Rescue More Struggling Businesses

The modernisation of EU insolvency regulations is set to facilitate the restructuring of viable businesses and make it easier for creditors to get paid.

European Justice Ministers have backed new insolvency law proposals designed to encourage an approach which is more conducive to the rescue and recovery of viable businesses. The new rules aim to give businesses experiencing cross-border financial difficulties a second chance at success and company rescue.

The regulations, which are not expected to come into force until 2017, will make it easier for businesses to restructure and increase the likelihood of creditors getting paid. The modernisation of the existing insolvency regime will also improve the effectiveness and efficiency of cross-border insolvencies.

An important milestone for growth and investment

The modernisation of the existing rules, which have been in force since May 2002, has been welcomed by Ministers as an effective method of reinforcing the single market.

The EU Justice Commissioner, Vĕra Jourovà, said: “Every year in the EU, 50,000 companies are faced with cross-border insolvency proceedings. This equates to one in four of all EU insolvency proceedings. Currently, an estimated 400,000 people lose their jobs as a result of cross-border insolvencies every year.

“This political agreement is an important milestone on our path to creating the best possible environment for growth and investment in Europe. We have risen to the challenge of the financial crisis and will soon have insolvency rules will reinforce the single market.

“The new rules will give viable businesses a much-needed second chance and will improve the effectiveness of EU insolvency proceedings. With these new rules we are building solid foundations for boosting growth and jobs in Europe. Workers will know that if their company faces difficulties, there is a bigger chance for it to recover and their job to survive.”

The current cross-border insolvency regulations

Under the current cross-border insolvency rules, all property belonging to the insolvent entity, wherever it is situated, is covered by the terms of the Insolvency Act 1986. Under English law, the liquidator has the power to deal with all the assets, regardless of their location. However, in practice, the process is not so straightforward.

It is commonly the case that the country the assets are held in will retain control of the property, regardless of the presence of an insolvency order in England and Wales. The problem comes with the vast differences in insolvency law between EU member states. This can result in difficulties when trying to deal effectively with the insolvency of entities whose interests straddle international borders.

New insolvency rules could protect 50,000 businesses

Insolvency proceedings currently affect an estimated 200,000 businesses across the EU every year. According to figures from the European Commission, around a quarter of these cases contain a cross-border element.

Once the new regime comes in, the rules will be extended to cover an additional 19 personal and commercial insolvency mechanisms, adding to liquidation proceedings currently covered by the existing regulations.

The new rules would also apply to a number of pre-insolvency procedures designed to help businesses restructure and avoid the onset of formal insolvency proceedings.

A publicly accessible register of information

At the heart of the new regulations is a test to determine a debtor’s ‘centre of main interests’ (COMI). This will become the starting point for all cross-border insolvency cases and help reduce the instances of debtors relocating shortly before filing for insolvency.

EU member countries will also be required to create a publicly accessible register of information, to be held online, which will contain information relating to the insolvency proceedings involving independent professionals, the self-employed and companies. Each national register will be connected to a central EU-wide portal.

Overseas creditors will be able to submit claims relating to the repayment of debts by submitting a standardised form within 45 days of the publication of the insolvency proceedings on the national register.

If you have concerns surrounding a liquidation or if your company is trading whilst insolvent call 08000 746 757.

Written by: Mike Smith