Bankruptcy in Europe

This year has been hard on global economy, especially for countries that are still struggling to contain the COVID-19 outbreak. Although China has bounced back from the virus quickly, the same cannot be said for Europe, which is unfortunately experiencing another wave of the pandemic. Beyond the obvious health concerns, this has put many businesses into insolvency. In terms of legal recourse, regulations related to insolvency and bankruptcy vary from country to country.

The European Union (‘EU’) issued Directive 2019/1023 (Insolvency Directive) which aims to harmonize local regulations concerning restructuring, insolvency, and discharge of debt. The highlight of this Directive certainly is found in an innovative and progressive approach to preventive restructuring frameworks. While the provisions are expected to be incorporated into national regimes by 17 July 2021, it is valuable to examine some of the foreseeable effects on bankruptcy in the EU in order to anticipate what the future holds.

Q: What is the bankruptcy rate in the EU?
A: According to last years studies, around 200,000 companies in the EU go bankrupt annually, which causes massive job losses. Some estimates put the number in the range of 1.7 million jobs lost. The new Insolvency Directive introduces mechanisms to improve the restructuring process in the hopes of preventing insolvency and allowing for more workable bankruptcy instead.

Q: What does the Insolvency Directive change?
A: By harmonizing national laws, the Insolvency Directive aims to improve preventive restructuring and to make the associated processes more efficient, both in terms of time and cost.
One of the other key benefits of unifying insolvency laws is enhancing the security of cross-border investment due to predictability. With predictability comes a wider variety of funding sources, which in turn makes the market more attractive. Moreover, the European Commission estimates that all of this could add up to saving three million EU jobs annually.

Q: Are there any particular laws regulating European Cross-Border Insolvency?
A: Yes, EU Regulation 2015/848. One of the economic pillars of the EU is the free flow of capital, business, and people. The EU issued the above Regulation to clarify which international jurisdiction, laws, payment systems, and financial markets should apply in insolvency proceedings.

Anticipated Changes
It seems clear that the above discussion indicates a tendency to reform insolvency in Europe towards a ‘prevention is the better cure’ approach. We hope to see an increasing number of businesses saved by restructuring wisely. If you have any questions about insolvency procedures, restructuring plans, or bankruptcy in Europe, China, or other cross-border related cases, don’t hesitate to reach out!