EU backs ‘second chance’ cross-border insolvency reforms

The European Parliament has overwhelmingly backed reforms to cross-border insolvency rules that aim to offer viable businesses a ‘second chance’. The changes, proposed by the European Commission (EC), are part of plans to create a "rescue and recovery" culture to help companies and individuals in financial difficulty.

Under the plans, the focus moves away from liquidation towards a new approach of helping businesses to overcome financial difficulties. At the same time the EC wants to do all it can to protect creditors' rights to get their money back.

In particular, the MEPs backed plans for extending the rules to cover rescue proceedings; the creation of an EU-wide system of web-based insolvency registers; the possibility of avoiding the opening of multiple proceedings; and rules dealing with the insolvency of groups of companies.

The EC is concerned by the roughly 200,000 firms that go bankrupt in the EU each year. A quarter of these insolvencies have a cross-border element and it is these in particular that the new rules aim to tackle.

A key element of the reforms is the idea of helping individuals and companies have a second chance. According to the EC, those who fail in their first venture are often a lot more successful the second time around. About one-fifth of all successful entrepreneurs failed in their first enterprise.

"Europe needs modern rules on cross-border insolvency to help service our economic engine. The first option for viable businesses should be to stay afloat rather than liquidating,” commented vice-president Viviane Reding, the EU's justice commissioner.

The EU may also introduce separate rules for “honest entrepreneurs” and for cases where the bankruptcy was fraudulent or irresponsible. For example, ‘honest’ bankrupts could be offered a shortened discharge period in relation to debts, while legal restrictions as a result of bankruptcy would make sure entrepreneurship does not end up as a "life-sentence" if a firm goes under.

Member states must now agree to the plans, with a decision expected in June.