Internal Market, Industry, Entrepreneurship and SMEs

Study on ''Bankruptcy and second chance for honest bankrupt Entrepreneurs''

Study on ''Bankruptcy and second chance for honest bankrupt Entrepreneurs''
Published on: 03/12/2014
The fear of failure is one of the most important factors affecting the creation of new enterprises.

50 % of new businesses close down or fail during their first five years in operation. The 2012 Eurobarometer survey among European citizens shows that: 43% of EU respondents in the survey said that they would be afraid of the risk of going bankrupt, while more than a third - 37% -  said that the risk of losing their property/home would concern them the most. In United States, the tolerance for failure is much higher and one of the crucial reasons for higher levels of entrepreneurial activity.

Research has shown that that the second-time starters are more successful and survive longer than the average start-ups. Up to 18% of all entrepreneurs who go on to being successful have failed in their first venture. And those grow faster and employ more workers. In this context, failure should be seen as an opportunity - for learning and for improving.
In December 2013 the European Commission launched a study to review progress in the policy area of ''Bankruptcy and second chance for honest bankrupt Entrepreneurs'' in Member States and CIP Participating Countries. 

The objectives of the study were

  1. To provide an update and verify to what extent EU Member States comply with the May 2011 Competitiveness Council recommendations on promoting a second chance for honest bankrupt entrepreneurs and limiting the discharge time and debt settlement for them after a bankruptcy to a maximum of three years by 2013;
  2. To analyze two of the sub-areas of the overall bankruptcy process – i.e., “prevention” (saving a company and avoiding a court procedure) and “treatment of the entrepreneur post-bankruptcy and conditions for a second chance”– in European countries; and
  3. To provide an outline of the work of private credit rating companies in European countries, including an overview of the actors and their role in the bankruptcy and 'second chance' procedures.

Information was collected country by country on how the complexity and length of bankruptcy procedures. Information was also collected on available support measures that aim to avoid bankruptcy. On the basis of the collected date, composite indices on the entrepreneur-friendliness of bankruptcy procedures and ease of second chance for an entrepreneur were constructed for each country.

The study report was finalized in November 2014.

The main conclusions and recommendations of the Study are the following:  

  • There seem to exist more prevention than second chance measures in European countries since more of the former have been found.
  • On prevention of bankruptcy:
    • Entrepreneurs should be encouraged to take action at a very early stage of financial problems to increase the probability of survival;
    • Training on financial planning and management to small entrepreneurs could also help detecting and solving financial problems at an early stage;
    • Establishing automatic early warning systems could be worthwhile to study further for example by using information from delayed tax payments;
    • Preventive tax support measures can be considered to help companies overcome temporary liquidity problems;
    • The creation of an efficient system of exemptions could enhance the second chance for restarting honest entrepreneurs, such as temporary tax breaks;
    • Entrepreneurship education at secondary school is recommended to change the prejudice that a bankrupt entrepreneur is a “loser”;
    • A uniform/harmonized bankruptcy legislation, which can contribute across the EU to an equal treatment of honest entrepreneurs as well as the recognition of out-of-court and hybrid procedures can avoid regulatory arbitrage/"bankruptcy tourism".
  • On a smoother second chance:
    • Entrepreneurs should know what the ways forward are after a bankruptcy and after discharge; they should also know how a bankruptcy procedure looks like as well as the steps and the "content" of each step;
    • The discharge process should be as fast and short as possible to save the resources of the failed entrepreneur for a possible restart.
    • National bankruptcy legislation should make a distinction between honest and fraudulent failed entrepreneurs and introduce a different treatment for these two categories;
    • Obstacles that prevent second starters from accessing start-up finance should be eliminated;
  • On Private Credit Scoring Bureaus (PCSBs) and Credit Databases:
    • Honest entrepreneurs' negative credit scorings should be cancelled upon or almost immediately after discharge; thus, the length of time that negative information is kept on honest bankrupt entrepreneurs by the PCSBs and Credit Databases should be monitored and limited
    • Minimal standards and quality control (somewhere along the lines of the ECAI system) are recommended for the PCSBs to increase their legitimacy.
    • monitor or/and to limit;
    • Credit Databases should available in all countries in the EU to increase the use and usefulness of such databases;
    • Financial information from PCSBs and Credit Databases should be accessible across the EU;
  • Micro enterprises should be enabled to provide financial information with less administrative burden (by for example using new ICT techniques and software) than small and medium-sized enterprises.

Study on ''Bankruptcy and second chance for honest bankrupt Entrepreneurs''

Final report

Annex VI: summarised country reports