Insolvency update

Here is a quick overview on stories about insolvency.

European Parliament backs EC’s proposal to give viable businesses a ‘second chance’

Last week, the European Parliament announced that it has backed with an overwhelming majority (580 for, 69 against and 19 abstentions) the European Commission’s proposal to modernise Europe’s rules on cross-border insolvency (IP/12/1354).

The strong endorsement by the members of the European Parliament means the Commission’s proposal has now been approved by one of the European Union’s two co-legislators. Member States in the Council now need to reach agreement on the draft law, amongst themselves and with the European Parliament, in order for it to enter the EU’s statute book. The plenary vote follows a clear endorsement for the Commission’s initiative from the Parliament’s leading Legal Affairs Committee (JURI) on 17 December 2013 (MEMO/13/1164) as well as a first positive orientation debate by Justice Ministers in the December Council.

The new rules which were proposed by the Commission in December 2012 will shift the focus away from liquidation towards a new approach helping businesses to overcome financial difficulties, while at the same time protecting creditors’ rights to get their money back. The proposed law will increase the efficiency and effectiveness of cross-border insolvency proceedings, affecting an estimated 50,000 companies and 1.7 million jobs across the EU every year. This is a first step towards an EU “rescue and recovery” culture to help companies and individuals in financial difficulties. The European Parliament vote endorsed the main elements of the Commission’s proposal, particularly as regards:

  • extending the rules to cover rescue proceedings
  • the creation of an EU-wide system of web-based insolvency registers
  • the possibility of avoiding the opening of multiple proceedings, and
  • the rules dealing with the insolvency of groups of companies

Not yet but soon…
In order to become law, the Commission’s proposal needs to be adopted jointly by the European Parliament and by the EU Member States in the Council (which votes by qualified majority). The Council, which decides on this file on an equal footing with the European Parliament, has welcomed the Commission proposal, but is still in the process of discussing the draft law. It is expected that Ministers will be able to reach a general agreement at their meeting in June.

Insolvencies are a fact of life in a dynamic, modern economy. Around half of enterprises survive less than five years, and around 200,000 firms go bankrupt in the EU each year. This means that some 600 companies in Europe go bust every day. A quarter of these bankruptcies have a cross-border element. But evidence suggests that failed entrepreneurs learn from their mistakes and are generally more successful the second time around. Up to 18% of all entrepreneurs who go on to be successful have failed in their first venture. It is therefore essential to have modern laws and efficient procedures in place to help businesses, which have sufficient economic substance, overcome financial difficulties and to get a “second chance”.

The revision of the EU Insolvency Regulation seeks to modernise the existing rules so that they support the restructuring of business in difficulties and create a business-friendly environment. Creditors’ interests can also be served by a restructuring, as it can mean that they are more likely to get back their money which might otherwise be lost in a winding-up.

It will also increase legal certainty, by providing clear rules to determine jurisdiction, and ensuring that when a debtor is faced with insolvency proceedings in several Member States, the courts handling the different proceedings work closely with one another. Information to creditors will be improved by obliging Member States to publish key decisions – about the opening of insolvency proceedings, for example. All in all, these changes will improve the efficiency and effectiveness of cross-border insolvency proceedings.

This proposal is also intended as a first step towards an EU “rescue and recovery” culture in cases of companies and individuals in financial difficulties more generally. In the future, there could be separate rules for honest entrepreneurs and for cases where the bankruptcy was fraudulent or irresponsible. That is why on 5 July 2013, the Commission launched a public consultation on a European approach to business failure and insolvency, putting the focus on the differences in national insolvency law and seeking views from stakeholders on areas where approximation of national insolvency law could bring benefits (IP/13/655). In the case of honest bankruptcies, a shortened discharge period in relation to debts and the legal restrictions stemming from bankruptcy would make sure entrepreneurship does not end up as a “life-sentence” should a business go bust, for example.

European Insolvency Law is laid down in Regulation (EC) No 1346/2000 on insolvency proceedings (the “Insolvency Regulation”), which applies since 31 May 2002. The Regulation contains rules on jurisdiction, recognition and applicable law and provides for the coordination of insolvency proceedings opened in several Member States. The Regulation applies whenever the debtor has assets or creditors in more than one Member State.

Read the Europa press release here.

Insolvency Statistics – Quarter 4, 2013

The Insolvency Service published the Q4 2013 insolvency statistics last Friday.

Corporate insolvencies
In the calendar year 2013, there were 14,982 compulsory liquidations and creditors’ voluntary liquidations in total – a decrease of 7.3% compared to 2012. This was made up of 3,624 compulsory liquidations (down 14.9% on 2012) and 11,358 creditors’ voluntary liquidations (down 4.5% on 2012). Additionally, there were 1,001 other corporate insolvencies in the fourth quarter of 2013 (not seasonally adjusted) comprising 236 receiverships, 642 administrations and 123 company voluntary arrangements (CVAs). In total these represented a decrease of 0.6% on the same period in 2012.

Individual Insolvencies
There were 24,282 individual insolvencies in England and Wales in the fourth quarter of 2013. This was a decrease of 4.6% on the same period in 2012. This was made up of 5,386 bankruptcies (which were down 22.2% on the corresponding quarter of the previous year), 6,563 Debt Relief Orders (DROs) (down 13.1% over the same period) and 12,333 Individual Voluntary Arrangements (IVAs) (up 12.3% over the same period). Bankruptcy numbers have been impacted by the introduction of DROs from April 2009, amongst other factors. The number of DROs has been higher than total bankruptcies for six consecutive quarters, while Bankruptcy Orders have been lower than IVAs for the last 11 quarters.  IVAs now make up more than half (51%) of all individual insolvencies.

For 2013 as a whole, there were 101,049 individual insolvencies in England and Wales, a decrease of 7.9% from 2012. This included 24,536 bankruptcies (down 22.8% on 2012), 27,546 Debt Relief Orders (DROs) (down 11.7% on 2012) and 48,967 Individual Voluntary Arrangements (IVAs) (up 4.9% on 2012). This is the first year in which the number of DROs has been higher than total bankruptcies and the third year where the number of bankruptcies has been lower than IVAs.  In the fourth quarter of 2013, 4,179 bankruptcies were made on the petition of the debtor (representing 77.6% of total cases); the level of debtor petition bankruptcies has been following a generally decreasing trend since the beginning of 2009 when there were 17,606 (86% of the total). Creditor petition bankruptcy numbers have also been falling over a similar period, though less rapidly and less consistently’

The percentage of bankruptcy orders where the individuals were self-employed was 24.4% in the third quarter of 2013 (fourth quarter 2013 figures for self-employed bankrupts are not yet available); higher than in earlier years.

You can get all the statistics from here.

Quarterly Insolvency Service Statistics: R3 commentary

On 7 February, the insolvency trade body R3 commented on the official quarterly insolvency statistics – which show both corporate and personal insolvencies in England & Wales falling from Q3 to Q4 2013.

It’s useful to read what Giles Frampton, vice-president of R3 said, here.

In particular, I noted he said:

  • It will be interesting to see how these figures change in the first quarter of 2014. Many people will have done their best to avoid insolvency in the run-up to Christmas, so there will be fallout from that in January and February.
  • The medium and long-term outlook is mixed. Consumer debt has started to climb again, while the expected rise in interest rates will very likely have a knock-on effect on insolvency numbers.
  • The corporate insolvency figures are in-keeping with the general downward trend in new cases since the recession. Insolvencies are now a third down from their peak at the end of 2008. Given the recent pick-up in the economic recovery though, it is not clear how long this trend will last.
  • The early stages of an economic recovery are often a lot harder for some businesses to negotiate than recessions themselves. Historically, corporate insolvencies increase as the economy exits recession. With corporate insolvencies still low, it may be the case that economic recovery hasn’t taken hold as firmly as it might otherwise appear.
  • Stuttering growth, low interest rates, and creditor forbearance have helped keep corporate insolvencies lower than they normally would have been since the recession. Some businesses will have taken advantage of the extended gap between recession and growth to put their finances back in order, but this won’t be the case for everyone.
  • The economic recovery and any future rise in interest rates is likely to put upward pressure on insolvencies. Indeed, recent R3 research found that 96,000 businesses would be unable to repay their debts if interest rates were to rise, while 166,000 businesses said they were having to negotiate payment terms with their creditors.”

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