A new policy approach on business insolvency procedures is being promoted by the European Commission. A new EU recommendation on insolvency proceedings has been adopted by the Commission with the main aim of giving honest entrepreneurs a second chance.
The Commission recommendation will help to provide a coherent framework for national insolvency rules, asking member states to facilitate the restructuring of businesses in financial difficulties at an early stage, before starting formal insolvency proceedings, and without lengthy or costly procedures to help limit recourse to judicial liquidation.
This new approach is a welcome initiative in the context of the promotion of entrepreneurship. Up to 18 per cent of all entrepreneurs who go on to be successful would failed in their first venture. In some countries it can take years before honest entrepreneurs who have gone bankrupt can be discharged of their old debts and try another business idea.
Business organisations have been urging the Commission to promote a more business-friendly approach to insolvency proceedings by providing EU-wide speedier procedures for unwinding bankrupt companies, including provisions for cross-border business ventures. The draft EU recommendation should not only improve returns to creditors and the flow of cross-border investment, but also have a positive impact in terms of entrepreneurship, employment and improved scope for more innovative business endeavours.
In practice, the Commission recommendation encourages public authorities to allow debtors to restructure their business without necessitating the opening of court proceedings. The recommendation calls on member states to provide debtors with the right to request a court to grant a temporary stay of individual enforcement actions as long as the stay does not interfere with the performance of ongoing contracts.
Another recommendation is to give businesses in financial difficulties the possibility to request a temporary stay of up to four months (renewable up to 12 months) to adopt a restructuring plan before creditors can launch enforcement proceedings against them. The durations of the stay should therefore be determined on the basis of the complexity of the anticipated restructuring. Member states may provide that the period can be renewed based on progress in the negotiations on a restructuring plan. This is intended to facilitate the adoption of business restructuring plans, keeping in mind the interests of both debtors and creditors, with a view to rescuing viable businesses.
The recommendation also calls for the reduction of the negative effects of a bankruptcy on entrepreneurs’ future chances of launching a new business, in particular by discharging their debts within a maximum of three years. The negative effects of bankruptcy on entrepreneurs should be limited in order to give them a second chance.
In Malta, this new approach could bring about improvements to aspects of national insolvency rules that have been criticised by the Commission. The adoption of the recommendation shows promise of delivering second-chance opportunities for honest entrepreneurs.
It is unfortunate that many genuine entrepreneurs, particularly in Europe, have to carry the reputation burden of business failure for a lifetime, thus undermining the potential of launching new enterprises that may turn out to be beneficial to the economy and employment.
In view of the Commission recommendation, a balance needs to be struck to safeguard debtors and creditors. But most importantly, this policy should not be implemented in isolation. More effort and actions are required in the area of entrepreneurial education for instance, to prepare future entrepreneurs to confront the challenges of running an enterprise. This could help reduce the instances of insolvency issues that the Commission recommendation is trying to address.
For more information on EU business-related affairs, contact the Malta Business Bureau on info@mbb.org.mt or 2125 1719.
Omar Cutajar is the Malta Business Bureau’s permanent delegate in Brussels.