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Insolvency in Europe: tackling the key obstacles to cross-border markets

On 7th December R3 and ICAEW co-hosted an event in Brussels on recent developments in EU insolvency law. R3’s CEO Graham Rumney was joined on the panel by Ondrej Vondrácek (Civil Justice Policy, European Commission), Marie Luise Graf – Schlicker (Director General, German Ministry of Justice for Consumer Protection) and Werner Derijke (Counsel, Jones Day). The event was chaired by the chair of ICAEW’s insolvency committee, Samantha Bewick.

The event brought together a number of interested parties and stakeholders to encourage a thoughtful and informed discussion on how to reform insolvency regimes in the EU. The event was an opportunity to exchange views on likely EU insolvency legislative action to address differing legal frameworks and practices within the context of the Capital Markets Union (CMU) initiative – and to thereby encourage the free flow of capital across borders.

Kicking off proceedings, Ondrej Vondrácek, DG Justice – European Commission, provided a useful overview of the current ‘insolvency landscape’, highlighting how the Commission’s intended initiative fits into the past and existing policy initiatives adopted in recent years. The call for action has been repeatedly made – not only in the context of the CMU but also in other key documents including the ‘Semester Programme’, the recent Single Market Strategy, the so-called Five President’s Report and the European Parliament’s 2011 Recommendation. All these drivers will need to be brought together into a single legislative proposal, expected to be published towards the end of 2016.

The Commission is now focused on preparing the grounds for a draft law. A comparative legal study from the University of Leeds will provide an overview of the key differences between insolvency regimes and a separate economic study will help inform an evaluation of the economic impact of those differences and options to reduce them. An expert group has been convened with 22 independent experts and will meet eight to ten times during the course of 2016. Public comments will also be sought both via feedback on the Commission’s Inception Impact Assessment Report (expected in January) and the standard 12-week stakeholder consultation in Q2. Member states are also keenly following the matter, with two Council formations (Justice and ECFIN) likely to be interested.

Ultimately, it is important not to forget the economic rationale for reform. Data shows that non-performing loans in the US have decreased significantly, whilst credit growth has increased substantially. The same is not true in the EU. In a low-inflation era, reforming insolvency regimes becomes even more pressing to deal with the overhang of accumulated private debt and free up investment into the productive economy.

Directly responding to the Commission’s announced initiative in the CMU Action Plan to ‘propose a legislative initiative on business insolvency, including early restructuring and second chance’, Marie Luise Graf-Schlicker, German Ministry of Justice and for Consumer Protection, noted that a harmonised approach could be desirable in leading to quicker resolution of cross-border insolvencies but that this would be difficult to achieve without potential negative side-effects.  Such unintended consequences could offset the overall benefits of reform in the first place. Without careful consideration of the multiple interactions between insolvency and other areas of business law – rarely, if at all, harmonised at European level – could disrupt established business frameworks.

It is essential that any legislative measures deliver ‘step-by-step approximation’ of legal frameworks rather than attempt to find an immediate and comprehensive solution. Action must be based on a sound economic analysis of the impact of legislation at both EU and national levels – and allow for an informed discussion which considers alternative pathways to an agreed outcome. Identifying the specific impediments to CMU, building on conclusions of the Commission’s 2014 Recommendation, would be a more fruitful approach than seeking to harmonise insolvency laws more widely. Indeed, the focus in the short- to medium-term should be procedural harmonisation.

Several key questions need to be considered: how will the EU determine which regimes work well? How can regimes be compared across the EU? There is some reliance on World Bank rankings to answer these questions. Germany does well in these rankings but has a different approach to that being put forward by the Commission, for instance focusing on improving restructuring during formal insolvency rather than pre-insolvency proceedings. Germany has recently reformed its insolvency laws and is due to evaluate the impact of change in 2017: the timing of the Commission’s initiative is consequently not ‘optimal’ from Berlin’s perspective. Discussion on key elements of reform – such as the introduction of hybrid proceedings – would benefit from understanding the experience of a number of member states, including Germany, that have recently reformed their restructuring laws.

On another key issue, Germany agrees in principle that entrepreneurs should have a second chance.  However there may be different views on the three-year time-limit for debt discharge. The new German law also includes a three-year limit, but only if a certain faction of creditor claims have been satisfied. Unconditional discharge after three years would be very difficult politically and would be likely to be opposed by those SMEs who are also creditors

Werner Derijke, Jones Day, also provided an insight into member state developments, outlining the key elements of insolvency reform currently being worked on in Belgium – while also noting the important developments taking place in the Netherlands. Belgium is looking to merge existing laws into a single legal instrument, modernising the insolvency regime by also drawing upon best practices from elsewhere in Europe and beyond.  Key elements of the law are likely to include: (a) full e-processing and databases of insolvency proceedings; (b) rationalisation of the scope of application to all enterprises rather than private persons; (c) rationalisation of the continuity between reorganisation and liquidation; (d) transnational elements, including the encouragement of cross-border contractual proceedings; and (e) better coordination between national and supranational law.

Reflecting on previous speakers’ comments on the World Bank rankings, it would be surprising to see Belgium on such lists as at the moment there is no centralised data on insolvency cases nor is there any data on the value of reorganisation versus bankruptcy or liquidation. So far there is no evidence to show that reorganisation is better than liquidation. Ultimately, insolvency law should be based on ensuring that creditors are paid back as much as possible while keeping as many businesses alive as possible. This does not mean that laws should necessarily be ‘merciful’ towards creditors – after all insolvency may also be due to their carelessness. Finally, it may be a better law-making process if lawyers stay away and allow politicians to determine what will constitute success and how to get there.

As outlined by Graham Rumney, R3, the UK takes a somewhat different approach to insolvency – generally the ‘province’ of accountants rather than lawyers and where work tends to be undertaken out of court. The UK does well in three key areas: the amount of money returned to creditors; the speed at which money is returned; and the cost of recovery. Yet this is not reflected in the more recent World Bank rankings which, since a change in methodology, have seen the UK fall behind a number of other countries, including Germany and the US.

The challenge for the Commission will be to establish, firstly, how good member states’ existing insolvency regimes are – and, secondly, how good they should be. Clarity on what success looks like is essential. This must also take into account the human dimension: in 2013-4, the UK insolvency profession saved 230,000 jobs and rescued 41% of insolvent businesses. Equally, it is critical to understand the real drivers of reform to avoid any unintended consequences. Different legal systems and cultures impact the way insolvency practitioners work and in a diverse EU, there may be four or five different ways of achieving the desired outcomes. In the UK, for example, insolvency practitioners are licensed, undertake specific exams and are monitored by regulators. There is a complaints gateway for the public and sanctions are published. This all creates a very transparent system. These indicators are not however considered in the World Bank rankings.

Elsewhere in Europe, some member states are still in the process of embedding their insolvency regimes; others are in the middle of reform. There are different routes to success – and success does not necessarily mean replicating a ‘US model’. Work needs to be done to understand how individual national regimes work before they are changed. A step-by-step approach would help improve insolvency regimes over time without taking a single ‘bold leap’: convergence rather than harmonisation may be more appropriate. The changes eventually proposed by the Commission must be based on sound evidence that they will indeed ultimately lead to increased investment, understanding that there are different drivers for large firm and SME investment.

During the moderated panel discussion and open Q&A, debate focused on a number of aspects, including what success might look like, the need for better data, the consequences of non-performing loans on the economy, the impact of different pre-insolvency regimes on harmonisation attempts, how to avoid insolvency in the first place and the stigma still associated with insolvency in many EU member states. 

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.