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Proposed 'common principles' for EU insolvencies reflect UK's current, "more flexible" approach, says expert

Out-Law News | 14 Mar 2014 | 2:38 pm | 2 min. read

The European Commission's new 'common principles' for national insolvency regimes place more of an emphasis on giving viable firms the opportunity to restructure at an early stage and so stay in business, reflecting the UK's current "rescue culture", an expert has said.

However Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said that it would be "dangerous" for UK insolvency practitioners to assume that the EU's new approach negated current criticisms of the UK regime or would not lead to changes there.

"Most European insolvency regimes have until now been court-driven, creditor-focussed affairs borne out of the perceived need to punish debtors who default on their creditors," Lomax said. "The UK was one of these until the mid-1980s when the Cork Committee concluded that that sort of approach was commercially, economically and socially wasteful; leading to what became the UK's current insolvency regime. Many of the themes in the Commission's paper were therefore adopted in the UK a long time ago and the rescue culture has well and truly become part of the fabric of how we do business. I wouldn't be surprised if the UK government's response reflected that reality."

"That said, it would be dangerous for us to fold our arms, do nothing and assume that these developments won't affect us: there remain many critics of the UK's insolvency regime, from creditors campaigning against 'pre-packs' to debtors pointing to the additional protections that might be afforded them under the US Bankruptcy Code. Moreover the adoption of a similar 'rescue culture' across the Channel may amount to a double-edged sword – while it may make UK-led cross-border business rescues more viable and successful it may also remove a number of the reasons for debtors and their stakeholders to look to the UK for leadership in such matters in the future," he said.

The Commission's recommendation comes in five parts, and is designed to create a coherent national insolvency framework in each member state. It has asked national governments to introduce legislation allowing struggling businesses to restructure their debts at an earlier stage, without lengthy or costly procedures and before formal insolvency proceedings begin. This process should include the ability to request a temporary stay on enforcement proceedings, and the opportunity to avoid court proceedings. Early restructuring is currently not possible in a number of member states, while others require inefficient and costly procedures.

Restructuring plans should be based on increasing the chances of rescuing the business if it is viable, and take account of the interests of both debtors and creditors. The recommendation also proposes a maximum three-year period for personal bankruptcies, designed to encourage second chances for entrepreneurs. Member states should implement the recommendation by taking "appropriate measures" within one year, and the Commission will "assess the state of play" in 18 months time to see whether more formal measures should be taken to harmonise national regimes.

Around 200,000 firms become insolvent in the EU each year, according to the Commission, with a quarter of these insolvencies involving a cross-border element. The number of insolvencies has doubled since the financial crisis, and around half of new enterprises survive less than five years, it said. The recommendation follows a public consultation and comes alongside approval by the European Parliament of changes to the cross-border insolvency regime.

"With a growing number of firms facing financial difficulties across Europe, we need to rethink our approach to company insolvencies," said Viviane Reding, the EU's justice commissioner. "We should not be stifling innovation - if at first an honest entrepreneur does not succeed, he or she should be able to try again. Our insolvency rules should facilitate a fresh start."