Review of Insolvency Regulation part of EC Single Market Act II Proposal

The European Commission’s second round (list of intended) of proposals to shake up the Single Market, ‘Single Market Act II’, was presented yesterday, 3 October.  The Commission intends inter alia to shake-up the Insolvency Regulation.

There is one very important limit to the Insolvency Regulation in its current form: it does not harmonise insolvency law. There are substantial differences in the general approach to insolvency proceedings: what level of protection is given to ‘weaker’ creditors, such as employees; whether and how there is State intervention in the proceedings; whether courts play a central role or leave creditors (or certain categories of creditors) in the driving seat; etc. These are not at all addressed by the Regulation.

The Commission now announces that it will table a proposal with two angles:

firstly, what one could call a procedural angle (firmly within the Conflicts area, especially in terms of recognition and enforcement), which would continue the current focus of not harmonising insolvency law (although the last element of these comes close): SIMA II on this angle:

‘We thus need to establish conditions for the EU wide recognition of national insolvency and debt-discharge schemes, which enable financially distressed enterprises to become again competitive participants in the economy. We need to ensure simple and efficient insolvency proceedings, whenever there are assets or debts in several Member States. Rules are needed for the insolvency of groups of companies that maximise their chances of survival. To this end, the  Commission will table a legislative proposal modernising the European Insolvency Regulation.’

secondly, a more substantial angle which would actually aim to create a (step-up to a) European insolvency law: SIMA II on this angle:

‘However, we need to go further. At present, there is in many Member States little tolerance for failure and current rules do not allow honest innovators to fail ‘quickly and cheaply’. We need to set up the route towards measures and incentives for Member States to take away the stigma of failure associated with insolvency and to reduce overly long debt discharge periods. We also need to consider how the efficiency of national insolvency laws can be further improved with a view to creating a level playing field for companies, entrepreneurs and private persons within the internal market. To this end, the Commission will table a Communication together with the revision of the European Insolvency Regulation.’

The Commission effectively already throws in the towel on trying to convince Member States that some kind of harmonised Insolvency laws (especally with a view to installing a ‘right to fail’) ought to be agreed: the second leg of the exercise, as the above extract indicates, will merely consist of a Communication.

The announcement of SIMA II betrays two fundamental options:

Firstly, perhaps understandably, the list of 12 priorities has been compiled on the basis of what the EC thinks is realistically passable before the end of the current Parliament mandate (spring 2014). That inevitably means that some key areas have not been included, one assumes because the EC does not think it realistic to find agreement between Commission, Council and Parliament by 2014.

Further, disappointingly, deregulation does not feature at all in SIMA II. That is most definitely a missed opportunity. There are most certainly areas where reduced rather than increased Union Regulation, in conjunction with European Court of Justice case-law on primary EU law, would do a better job at increasing the Single Market.

Geert.

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