New Insolvency Rules for Cross-border Matters aimed at keeping the Creditors and the troubled Business on Course came into force in June 2017
In June 2017 new rules relating to cross-border insolvency debt recovery came into force. The intention is of the new rules is twofold, to enable an easier path to restructure for the failing business and to assist the creditors of the company to recover their money from the insolvent company. The new rules focus on preventing and resolving conflicts of jurisdiction, which can arise, and crucially recognises insolvency-related judgments across the European Union.
Frans Timmermans, the European Commission First Vice-President commented, "In a real internal market, businesses that need to restructure should not be hampered by conflicts over which national rules apply, nor should national borders be an obstacle for creditors to recover their claims. These new rules will support companies and investment through increased legal certainty. We will need to go further and adopt common EU rules to make sure companies restructure early, as already proposed by the Commission." Commissioner Věra Jourová, EU Commissioner for Justice, Consumers and Gender Equality, supported the view that there should be the maximum opportunity to facilitate the recovery of a business so that it can go forward and become a viable entity once again; he also felt that the new rules would discourage bankruptcy tourism which has been seen in the past.
The new rules on restructuring and second chances will remove barriers for investments and support honest entrepreneurs and create even ground across Europe. The main features of the new regime aim to provide a different environment for the restructured business to operate within, removing many of the existing barriers to a successful turnaround for businesses that have experienced setbacks.
The platforms on which the new rules are based are as follows:
- The new rules offer a wider range of restructuring proceedings, employing efficient and up-to-date practices, not covered previously by the old rules, therefore they could not be used in cross-border matters.
- Bankruptcy tourism will be curtailed as the court will be able to examine the circumstances of a case if the debtor relocates shortly before filing for insolvency. The court can then make a decision as to whether the relocation was genuine or executed to take advantage of more lenient bankruptcy rules in a different jurisdiction.
- The limitation of "secondary rules" whereby proceedings are opened in a court within the EU but in a country other than the country that the business has its registered office. Avoiding this will make it easier to restructure companies in a cross-border context and will at the same time provide for safeguards guaranteeing the interests of local creditors.
- The new rules introduce framework for group insolvency proceedings, which will significantly increase the potential to rescue the entire group, rather than breaking up the organisation into separate parts.
- By the summer of 2019 it is anticipated that there will be an EU-wide interconnection of electronic national insolvency registers. This will signal a significant step forward by making it easier to obtain information on insolvency proceedings in other EU countries.
There has been an appetite for change in the way insolvency is managed across Europe to make it easier for a failing business to be turned around and be able to carry on trading whilst at the same time protecting the interests of the creditors since 2012 when a proposal was put forward by the European Commission. A framework supporting entrepreneurs and ensuring sound growth was created with a strong emphasis on early intervention and restructuring to facilitate a second chance whilst limiting the risk to creditors. It is hoped that businesses will come forward earlier when they start to experience problems to allow for a rescue plan to be put in place before there is a significant impact on both their creditors and the business. If caught early there is nearly always the opportunity to provide a solution which keeps the business on track and trading.
There is another aspect to insolvency that businesses can use as leverage against their debtors. Generally credit controllers do not want to discover that the debtor they are pursuing has become insolvent. However the threat of legal proceedings leading to insolvency nearly always results in the debtor taking the payment demand seriously. Debtors, particularly long term debtors, are frequently juggling a number of debts and will only pay at the very last minute when they have no choice. They frequently are well aware how long it takes to obtain a judgment in the courts and will just play a waiting game. When confronted with the threat of insolvency the debtor cannot take the chance that the creditor will not carry out the threat and take their money from the liquidated assets. This tactic should only be used for substantial debts and nearly always produces positive results.
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