European recommendations on bankruptcy and insolvency
A whole raft of changes are being made to bankruptcy law. The European Commission has published recommendations on a new approach to business failure and insolvency. These recommendations were published on the Commission’s website on 12 March 2014.
Recommended minimum standard harmonises procedures
Similar to the Dutch draft “Business Continuity I Act”, the recommendations focus on the pre-bankruptcy phase. The aim is to offer businesses that are viable a way of avoiding bankruptcy when experiencing financial difficulties. The European Commission believes there is a need for a new procedure available in all European countries, which meets certain minimum requirements laid down by the Commission.
The moves are designed to make it easier for businesses to implement a restructuring procedure before bankruptcy in all European countries, to give businesses a better chance of survival and to simplify the process of restructuring cross-border businesses. What’s more, by harmonising bankruptcy procedures, the Commission hopes to encourage foreign creditors to register their claim in a bankruptcy and, if possible, recover that claim. Obviously, this measure will surely also benefit the workings of Europe’s internal market.
The Commission’s recommendation contains a number of principles which any restructuring procedure must meet. One of the principles is keeping involvement of the courts to a minimum. The Commission aims for an informal and flexible procedure, which slots in nicely with all kinds of situations and keeps costs low. The Commission does not see the need for a compulsory appointment with a supervisor or mediator. Rather, the idea is to give entrepreneurs the scope to take measures by suspending individual enforcement measures and retaining control over their assets.
In principle, every entrepreneur can restructure his business as he deems appropriate. The Commission’s recommendations serve as a guide to entrepreneurs so that they can maximise their chances of success. The restructuring plan lies at the very heart of this approach. To ensure that this procedure is not used to deliberately disadvantage creditors, all creditors must give their consent to the plan. They must be able to give their consent by letter or by electronic means. Electronic means enables creditors in other countries to take part in the agreement process.
If the creditors do not unanimously back the restructuring plan but a specified minimum number of them, it is necessary for the court to give consent. The court will assess whether the proposed plan has a reasonable chance of successfully averting bankruptcy. If the restructuring plan is approved, it is binding on all creditors.
The Commission furthermore points out that entrepreneurs must have the option of raising new finance. They should not risk the underlying juristic act of being declared void on the grounds that it is detrimental to the creditors, should the company eventually go bankrupt. With this setup, the entrepreneur has leeway to restructure the business without the constant threat of collection measures.
The Commission also wants to give entrepreneurs a second chance, post-bankruptcy, by introducing a discharge period of three years for all debts which form part of the bankruptcy. However, more stringent stipulations must be applied to entrepreneurs who have acted dishonestly and in bad faith.
The aim is to enable entrepreneurs to set up a new business sooner. The idea behind this is that entrepreneurs who have already experienced bankruptcy are more likely to succeed second time around.
With these recommendations, the Commission’s primary aims are to enable honest entrepreneurs to potentially avoid bankruptcy by means of restructuring or to have another stab at launching a business sooner in the wake of a bankruptcy. The thinking behind this is very much in tune with the Dutch draft “Business Continuity I Act”.
The availability of similar procedures in all European countries would surely be a positive development, potentially making it easier to do business across borders. Without doubt the most obvious difference compared to the Dutch draft Act is the central importance of the appointment of a prospective administrator or receiver in the Dutch draft. The advantage of this is that the entrepreneur always has access to legal advice, whatever the situation – and in the critical pre-bankruptcy phase, this can prove vital.
Therefore, it is advisable to seek legal advice if you need to restructure your business. GMW lawyers has a team of specialists in company law and bankruptcy law who are able to give you excellent advice on restructuring or the threat of bankruptcy.
Please do not hesitate to contact us should you have any questions.
Update article: December 2017
Martijn Dellebeke is a specialist in company and insolvency law. He focuses on insolvency law and dispute resolution and is often engaged as a receiver in cases of bankruptcy. Dedicated and solution-orientated, Martijn advises his clients and represents them in court proceedings.
Contact Martijn for help with questions about local and international bankruptcy, shareholder disputes, (directors) liability and commercial contracts.