On 12th March 2014, the European Commission published a proposal that all member countries should reform their insolvency laws to create a genuine rescue culture. Key points from the paper are:
- 200,000 businesses face insolvency every year across the EU and 1.7m people lose their jobs
- Insolvency frameworks in many EU countries channel viable enterprises in financial difficulty towards liquidation
- Much better to keep viable businesses alive, safeguard jobs and improve the recovery for creditors
- Need to distinguish between honest and dishonest entrepreneurs and give the honest ones a second chance
- Need to create an environment where businesses seek help at an earlier stage without lengthy and costly procedures
- Allow businesses to restructure without formal court proceedings
- Give businesses a temporary stay of four months (extendable to a max 12) to adopt a restructuring plan during which creditors cannot launch enforcement proceedings
- Facilitate the adoption of such plans, presumably by thresholds for majority approval that prevent hold-outs
- Shorten the period for an honest bankrupt to be discharged to a maximum three years
The proposal asks member states to put measures in place to achieve this within one year. See the full proposal here: http://europa.eu/rapid/press-release_IP-14-254_en.htm
Realistically, the chances of all EU countries achieving this in a year are pretty much zero. In the UK we have a general election in 2015 so no chance before then. There is then the question of exactly what our membership of the EU will look like with a referendum possibly in 2017.
But that should not detract from the merits of this proposal. We agree with everything it says about the shortcomings of the current rescue culture in the UK. The value destruction and collateral damage of insolvencies is huge and formalising genuine rescue procedures as suggested would be a big step forward. The UK’s insolvency laws haven’t changed in over 10 years. Other countries in Europe have introduced laws as suggested by this proposal and it’s time for the UK to catch up. This could be a major step forward for a genuine business rescue culture.
Inevitably the devil will be in the detail. France, Italy and Spain have all introduced such laws and had to go back and revisit them quite quickly. The UK can learn from those mistakes and should have a better chance of getting it right first time.
The UK also needs to ensure such rescue activity is not hijacked by the insolvency profession. They are the people least suited to help businesses through such a process. Far better to have experienced turnaround professionals involved. As it becomes established around Europe the EACTP qualification should be the recognised professional standard for those that can genuinely help businesses to survive and thrive.
All we need now is for the government of the day to pick up the baton and run with it. Hopefully the business community will lobby for that to happen.
David Bryan – Principal, BM&T
24th March 2014