Ladies and gentlemen,
It is a pleasure to be here in such a beautiful Baltic setting in Jurmala. I would like to thank Minister Rasnacs and the Latvian Presidency for hosting this conference which has been jointly organised with the European Commission. I am very pleased by the commitment and dynamism shown by the Latvian Presidency. That is underlined by your readiness to focus this conference on the important subject of insolvency law.
I don't need to remind you that in the wake of the economic crisis, the numbers of bankruptcies in all Member States has erupted – and although that trend seems to be stabilising, the fact is that the number of insolvencies is still much higher than pre-crisis levels.
High numbers of insolvencies have negative consequences for the economy and society, with the loss of jobs and know-how.
It is obvious that we must use all available tools to boost economic recovery. Modern and efficient insolvency rules that help rescue viable businesses and give entrepreneurs and consumers a second chance are such a tool.
Figures on insolvency
Let me give you some figures: Today in Europe half of all businesses do not survive the first 5 years of their existence. In the EU, 200,000 firms go bankrupt per year – that is 600 a day!, resulting in direct job losses of 1.7 million every year. Around a quarter of these bankruptcies concern businesses that work cross-border.
The latest crisis has led to a surge in non-performing loans in all Member States, without exception.
Let's not forget either that entrepreneurs and consumers still suffer the stigma of their failure for a very long time. We should ask ourselves whether this is the best approach to help entrepreneurs get back on their feet and to help build a dynamic economy across the European Union?
I am convinced that we have to modernise the legal framework for insolvency in the EU. We need a new approach; an approach that focuses on the restructuring of companies instead of their liquidation. An approach that gives viable businesses, and the people they employ, a chance to be rescued and to re-enter the productive economy when in financial difficulties.
Looking beyond Europe
When discussing modern insolvency regimes we must also look beyond Europe.
The U.S. is an interesting point of reference in that regard. In the U.S. bankruptcy is regulated through federal legislation with mechanisms to facilitate recovery and a second chance.
Even though the US was worse hit by the economic crisis, it was more efficient than the EU at reducing the number of non-performing loans. I can see from the Programme that we have a guest from the US with us today, so he will hopefully give us further insights into the possible explanations.
As for natural persons, in the U.S. the average debt discharge period is less than one year, while in most EU countries it's between five and seven years. There is evidence which shows that shorter discharge periods allowed U.S. households to recover more quickly from the crisis.
The first step: the revision of the Insolvency Regulation
When I took up my new position as Commissioner the task of modernising the Union's rules on cross-border insolvency was already underway.
Early in my mandate we reached agreement with the European Parliament and the Council on the Insolvency Regulation recast. This was an important first step and I welcome it.
The revised Regulation has brought a number of useful innovations. For example, it has extended the scope to cover also "preventive" insolvency proceedings which aim at rescuing businesses and to cover a larger range of personal insolvency proceedings. It also clarifies jurisdiction rules and establishes a system of interconnected insolvency registers to increase transparency on debtors.
The second and – I know - more challenging step could be a modernisation of substantive insolvency law in the EU.
Helping businesses to restructure
National insolvency laws differ substantially in the individual Member States. Let me give you some first examples of differences we can see.
First, in several Member States, the substantive rules still steer viable enterprises in financial difficulty towards liquidation, rather than restructuring. In particular, it is not possible in these cases to restructure a company at an early stage, before formal insolvency proceedings are opened. However, studies show that the earlier a company restructures, the higher the chance the restructuring will be successful, and the higher the returns will be to creditors.
It is no surprise therefore that recovery rates are generally higher in economies where restructuring is the most common insolvency proceeding.
Second, in some Member States, early restructuring exists, but the procedures can be inefficient or costly. The more expensive and lengthy these procedures are, the fewer incentives companies have to restructure at an early stage when the business can still be rescued.
Third, in many Member States it takes years for bankrupt, but honest entrepreneurs and consumers before they can be discharged of their debts and have a fresh start. And in some EU countries consumers don't have access to personal insolvency proceedings at all so they never obtain a discharge! Not all Europeans are equal when it comes to the possibility of having a second chance. And this despite compelling evidence that shorter discharge periods lead to more productive individuals.
Recommendation on a new approach to business failure and insolvency
To address these challenges, the Commission presented a Recommendation on a new approach to business failure and insolvency in March last year.
We invited Member States to set up an efficient framework that allows viable enterprises in financial difficulties to restructure early and avoid insolvency.
We also recommended that where an honest entrepreneur is insolvent, that person should be given a second chance.
Last but not least, Member States are encouraged to consider applying the principles of the Recommendation to consumers as well.
What has the Recommendation changed?
The Member States were invited to implement the principles set out in this Recommendation by 14 March 2015. To date, most Member States have sent their contributions to the Commission explaining how they have implemented the Recommendation.
We are now looking at Member States' contributions. In particular, we will evaluate how the Recommendation helps rescue companies in difficulty. We will also look at what has changed for small and medium enterprises and its impact on the cross-border flow of capital, the internal market and competitiveness of the Union's economy more generally.
The Recommendation is also a basis for the Commission when working with some Member States to correct macro-economic imbalances in the context of the European Semester.
We are now carrying out a comparative legal study in the 28 Member States to look also beyond the scope of the Recommendation. We are planning to complete the study by January 2016.
On the basis of the evaluation of the responses to the Recommendation and the accompanying study we should be able to get a better overview on whether these differences are an impediment to economic recovery and to prospects for households and businesses.
Insolvency in context: Capital Market Union and Internal Market Strategy
This conference comes at a very timely moment.
The relevance of having smart and efficient insolvency rules is well understood as part of the new Commission's commitment to boost investment, jobs and growth. Our work on insolvency fits well in two specific flagship initiatives of this Commission: the Capital Market Union and the Internal Market Strategy.
Investors, when making investment decisions, look at their rights and possible losses in the event of financial difficulties or insolvency of a debtor. The fact that we have 28 different insolvency regimes in the EU makes this assessment difficult and costly for foreign investors.
Insolvency law in general and restructuring procedures in particular are not only a matter to be faced when a company is winding up its activity. Such rules are important throughout the lifetime of a business, as they inform investment decisions and therefore businesses' access to funding – a difficulty faced especially by SMEs.
These difficulties have been recognised by others – you will hear tomorrow about a very interesting regional project to harmonise the restructuring laws of Nordic and Baltic countries!
The Capital Market Union Green Paper has outlined this close link between insolvency laws and improving investment conditions in Europe and the feedback so far has been strongly supportive of a EU response. We all look with interest to see the results of the public consultation on this Green Paper and what it will tell us when it comes to insolvency.
In conclusion, the 2014 Recommendation, in the short time of its existence, has become a reference point for good practice. Together with the new Insolvency Regulation on cross border insolvency proceedings, we have taken the first steps towards modern, efficient insolvency procedures at the disposal of debtors and creditors, everywhere in Europe.
Today we have an opportunity to discuss and exchange views on the way forward regarding EU insolvency law. Which actions at EU level are desirable and feasible in order to put in place the smart insolvency rules we need to boost investment, jobs and growth?
Today's discussions will provide us with precious insights from your different national perspectives.
I count on your help as we move forward in this interesting debate on the modernisation of insolvency rules.