3rd April 2014

Harmonisation of insolvency law at EU level

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3rd April 2014

Harmonisation of insolvency law at EU level


Europe is a hugely important market for the British economy and anyone involved in cross-border business has a right to expect certainty when it comes to the insolvency of businesses.

As matters stand, some Member States have no restructuring systems in place, others have inefficient or costly procedures and some do not allow entrepreneurs to be discharged from debt for a disproportionately long period. It has been argued that the divergence of national laws is impacting adversely upon recovery rates of cross-border creditors, on cross-border investment decisions and on the restructuring of groups of companies.

Following a detailed consultation on insolvency laws in 2013 and a proposal to revise existing EU level legislation on cross-border insolvencies (recently adopted by the European Parliament), the European Commission has published a Recommendation to Member States which would encourage the harmonisation of national laws to:

  • limit the recourse to liquidation by facilitating the restructuring of businesses in financial difficulties at an early stage, before starting formal insolvency proceedings and without lengthy or costly procedures
  • allow debtors to restructure their business without needing to open court proceedings
  • give businesses in financial difficulties the possibility to request a temporary stay of up to four months (renewable up to a maximum of 12 months) to adopt a restructuring plan before creditors can launch enforcement proceedings against them
  • facilitate the process for adopting a restructuring plan, keeping in mind the interests of both debtors and creditors, with a view to increasing the chances of rescuing viable businesses
  • reduce the negative effects of a bankruptcy on entrepreneurs’ future chances of launching a business, in particular by discharging their debts within a maximum of three years

The status of a Recommendation by the Commission is one of soft law but the Commission will assess the state of play within 18 months, using information gathered from Member States’ annual reports and then decide if it needs to take additional measures. The Insolvency Service has responded to say that the UK Government will review the details of the Recommendation in due course. In the meantime, leading insolvency commentators such as David Milman are saying that “[t]he US Bankruptcy Code Ch.11 idea will not go away”.

The UK insolvency regime is already one of the most flexible in the world, but the prospect of more debtor controlled procedures continues to fill some creditor groups with horror.

I appreciate that the Recommendation throws up a number of issues and if you feel that you may be affected in any way please feel free to give me a call.