EU plans 'Chapter 11' style debt rules
Companies would be given more breathing space to restructure their debts in times of crisis under a European Union draft law, inspired by US Chapter 11 rules, unveiled yesterday.
The aim is to avoid bankruptcies and save jobs. Ireland already has an examinership system, modelled on the US rules that allows the courts to impose deals on creditors in order to save jobs.
The proposed EU rules go further. In a bid to encourage risk-taking start-ups, the proposal would make it easier for entrepreneurs in Europe to get a second opportunity after a business failure, as in the United States.
The rules proposed by the European Commission would allow troubled firms to stop paying suppliers and banks while restructuring their debt during a four-month "breathing period", extendable to a maximum of one year in exceptional cases.
"Every year in the EU, 200,000 firms go bankrupt, which results in 1.7 million job losses.
This could often be avoided if we had more efficient insolvency and restructuring procedures," said EU Justice Commissioner Vera Jourova.
The proposal would allow entrepreneurs to have their legacy debts cancelled three years after a bankruptcy, much shorter than the current period in many EU states.
In Germany, failed businessmen have to wait up to seven years. Here, personal bankruptcy has been slashed from 12 years to one year, after the Crash.
The proposal will need approval from EU states, which have so far closely guarded their powers on insolvency law and shown little appetite to back common EU rules.
Both corporate and personal insolvency rules vary widely in Europe, and in many cases companies move address to the UK in order to execute large corporate insolvencies and restructurings quickly.
The Commission stressed the lenient measures would apply only to "honest" entrepreneurs.
However, in some countries the Commission's plans would give banks a stronger say in pushing failing firms to restructure, as they would be allowed to trigger the process with early warnings.
Banks could also outvote other creditors, a procedure not contemplated at the moment in most EU countries, where unanimity is necessary in restructuring. The plan also wants restructuring conducted as far as possible with professional mediators rather than in courts. (Reuters)