A new European approach to business failure and insolvency

In December 2012, alongside the new European Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters¹, the European Commission released its proposal for a new Insolvency Regulation which is put forward to amend the current European Regulation on insolvency proceedings² adopted on 29 May 2000.

The aim of the 2000 Regulation was to deal with jurisdiction and enforcement issues relating to insolvencies which spanned multiple member states, significantly reducing “forum-hopping”, and to harmonise to a limited extent the law applicable to insolvency proceedings in the different national courts.

According to the Commission’s accompanying notes, the proposed new scheme reflects a radical change in emphasis away from liquidation. It is intended to recognise that insolvent businesses are an inevitable part of modern economies but that entrepreneurs whose businesses fail often do better in future and should be assisted in their efforts. Regardless of the accuracy or otherwise of the statistics used to support that proposition, the Commission has therefore decided to shift the focus when dealing with failing businesses from liquidation to  “helping businesses overcome financial difficulties, all the while protecting creditors’ right to get their money back” and giving “honest entrepreneurs a second chance, especially in times of financial crisis”. It is also intending to extend across Europe developments in national insolvency laws which have increasingly aimed at restructuring rather than closure. The Commission summarises the proposal as “a first step towards an EU ‘rescue and recovery’ culture for companies and individuals in financial difficulties”. It notes that support is particularly vital for small and medium sized enterprises whether as debtors or as creditors, and that restructuring is currently often prohibitively complex and expensive for them.

The need to try something different in the current economic climate is understandable. The statistics published by the Commission show that across the EU about 200,000 businesses are declared insolvent each year causing 1.7 million jobs to be lost, and that a quarter of those failing businesses have a cross-border element. If it is possible to create a clear and consistent system in which fundamentally sound businesses suffering in the present circumstances can survive without unduly penalising their creditors, then it is easy to follow the argument that it must be in everyone’s interests to do so³. Whether the political will exists to harmonise national laws in this way and whether the current proposal can achieve such an effect are two more difficult questions, the answers to which will emerge in time.

What, then, would the proposed new Regulation do? The principal changes fall into six categories:

1. It extends the scope of the existing Regulation from applying only to those forms of insolvency process which involve a liquidator to cover also pre-insolvency and hybrid proceedings⁴ aimed at restructuring or debt-discharge relating to any natural or legal person where the assets and affairs of the debtor are subject to control or supervision by the Court.
2. It clarifies the rules on jurisdiction by extending the definition of the centre of main interest for a debtor and tightens the procedure for identifying the correct jurisdiction, ensuring that this is done early and can be challenged effectively by dissatisfied foreign creditors, and enabling a national court with jurisdiction in the insolvency to handle also derivative or otherwise associated actions.
3. It gives more flexibility in respect of secondary proceedings, including allowing a national court to dismiss them at the request of the main-proceedings liquidator or to hear any of the range of proceedings as a secondary action rather than only permitting winding up proceedings as at present, and requiring the national courts and liquidators to communicate and co-operate with one another.
4. It requires greater publicity and the provision of connected national electronic insolvency registers accessible through the European e-justice portal by the public without charge.
5. It introduces two standard forms, one for the notice to creditors (giving a minimum of 45 days for response) and the other for the initiation of proceedings, both of which would be available in all EC languages.
6. It provides for greater co-ordination of insolvency proceedings involving different companies within a group, once again requiring the national courts and liquidators to communicate and co-operate with one another.

The proposal is expressed to be the first of a series of steps which the EC wishes to take in order to address the problems currently being experienced in relation to failing businesses. Apparently we can also expect a European Entrepreneurship Plan and proposals for greater standardisation of insolvency and restructuring process across member states, including country-specific recommendations for amendment to their insolvency laws. Let us all try to contain our excitement as best we can!

¹Regulation (EU) No 1215/2012, substantially coming into force on 10 January 2015

²Council Regulation (EC) 1346/2000

³See the European Parliament’s 2010 and 2011 studies on the harmonisation of insolvency law (2010 PE 419.633 and 2011 PE 432.766) and its Resolution on insolvency proceedings dated 15 November 2011 which led to the present proposal.

⁴At present it seems that the only form of corporate process in England and Wales which is generally not currently within the scope of the 2000 Regulation but would fall within the new version is a Scheme of Arrangement under Part 26 of the Companies Act 2006, but other member states have more extensive options which would be caught by the proposed new provisions.