Going through an insolvency procedure is painful for a company's employees, shareholders, creditors and clients alike. It is also an issue for banks who may not be able to recover their loans or collateral when a company fails. The build-up of non-performing loans in some EU countries weighs heavily on the functioning of the banking system and is a drag on economic growth. Both inefficiency and divergence of national insolvency systems are also a challenge for the EU economy as a whole. Investors are deterred from funding projects in other Member States where they do not know how they are protected in case of insolvency. This goes against the objective of a genuine single market for capital in the EU. It makes cross-border debt funding particularly difficult for innovative companies, which are among the main drivers for jobs and growth in the EU. As part of its work to build a Capital Markets Union, the European Commission is looking at measures to avoid insolvency of viable companies and deal with it in the smoothest possible way when inevitable. Insolvency law needs to strike a careful balance between helping creditors recover debt and avoiding the unnecessary insolvency of businesses that are basically sound.

Early restructuring

A key element of a modern and comprehensive insolvency regime is early restructuring. The aim of early restructuring is to avoid insolvency and allow viable businesses to carry on their operations and retain their employees. So the proposal for EU rules on business insolvency, put forward by the European Commission on 22 November 2016, has a strong focus on preventive restructuring, ensuring entrepreneurs can get a second chance after bankruptcy and measures to increase the efficiency of restructuring, insolvency and discharge procedures. Making it easier for businesses in temporary financial distress to continue and honest entrepreneurs to get back on their feet when they fail should help make the EU business environment more dynamic and promote innovation. Also, given that when a business is in trouble 'time is money', the proposal also encourages more efficient proceedings.

Insolvency law

When a business has no realistic chance of survival, insolvency law has to preserve the remaining assets and ensure creditors recover their money. The aim is to avoid knock-on effects on other businesses and to enable banks to use the money recovered to finance new, innovative companies.

In order to get a clearer picture of what works well and what doesn't work so well in terms of recovering money, the Commission is conducting a benchmarking review of insolvency and, more generally, loan enforcement regimes. With the benchmarking, the Commission is analysing what elements of insolvency regimes help resolve distressed debt more quickly, and their practical application. It aims to establish a detailed and reliable picture of how fast, how much and at what costs banks can recover money from defaulting debtors.

The benchmarking will help EU countries seeking to improve the efficiency and transparency of their national regimes. Insolvency law is at the core of Member States' national legal frameworks for businesses and reflects important national policy choices and traditions that require careful consideration when assessing potential reform. Practical implementation also has a considerable impact on how well insolvency frameworks work; for instance court overload is a major source of inefficiency in many Member States. More efficient debt recovery would help avoid the accumulation of non-performing loans and reinforce the stability and viability of banks. Effective insolvency systems could also increase investors' trust and encourage them to look for more investment opportunities in other Member States, therefore contributing to build a genuine Capital Markets Union.

Read more on insolvency proposal and the Capital Markets Union