EC to roll out Chapter 11 style insolvency across Europe

by Rachael Singh

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13 Mar 2014

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EU justice commissioner Viviane Reding speaking in Brussels

THE EUROPEAN COMMISSION has approved insolvency changes across Europe which includes US-style Chapter 11 proceedings.

The EC proposal takes inspiration from the US insolvency regime by offering companies breathing space from their debtors. The proposal suggests companies are given up to four months, renewable up to a maximum of 12, to adopt a restructuring plan before creditors can launch a formal process.

Member states have been asked to put in place the recommendations in a year. After about 18 months, member states will submit an annual report to the EC which will evaluate at that point whether any further measures to strengthen this principle will be made.

The proposals also suggest bankrupts to be discharged after a maximum of three years. In the UK the discharge is usually about 12 months however, for some cases where a debtor is earning surplus income to repay creditors or there has been antecedent activity the discharge can be increased to 12 years.

However insolvency trade body R3, were not so happy with the proposals calling for evidence on whether there was any evidence that changes would increase rescue culture and return to creditors. 

"The proposals have laudable objectives, but the practicality of what is being proposed will depend on the details. For example, allowing a 4-month stay would appear to help the ‘rescue' culture, but key questions would need to be answered in any changes to national insolvency law that follows: who is supposed to fund the stay?," said Mike Pink, chair of R3's technical committee.

"What is allowed to happen to the business in that period? How would any abuse of the process be stopped? Would there be independent oversight?," he added.

A statement from the UK's Insolvency Service said: "The government will be reviewing the detailed recommendations in due course."

The UK already has a very stringent insolvency regime and some of the EC's proposals are already used here, such as negating the use of the court - the UK appoints insolvency practitioners.

"A new approach to business failure and insolvency" a set of common principles for business rescue was approved this week, following public consultation in October last year.

According to the EC the aim of the regulation is to shift focus away from liquidation and towards encouraging businesses to restructure at an early stage.

Divergence between member states can have a detrimental impact for creditors in cross-border insolvencies, the reason behind the push by the EC.

"Henry Ford's first automobile company went out of business after 18 months, but he went on to found one of the most successful companies in the world," said vice-president Viviane Reding (pictured), 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," she added.

A public consultation on a European approach to cross-border insolvencies was held at the end of 2013 and earlier this year was given European Parliamentary approval.

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