EU (Finally) Moves Bankruptcy Laws Closer to the U.S. Model

This week saw the arrival of what could become a society-changing evolution in European law, with the proposal to (at last) modernize businuess bankruptcy models. The European Commission’s proposal would mark a dramatic change in the overwhelmingly negative landscape that entrepreneurs face when starting a business in Europe.

As many people know, if a business goes bust in Europe today, debt held by the business can be transferred to its owners and they must discharge it, even if that take a decade. Indeed, I know a couple in Paris who had a catering business that failed during the recent recession. That failure meant years of paying off creditors from their savings and subsequent employment income. At first glance, this may seem fair to some, but the reality is that Europe’s draconian bankruptcy laws have, time and again, discouraged the formation of new companies and led to unnecessary job losses.

In a recent WSJ piece on the new proposal, Vera Jourova, the EU’s justice commissioner lays out the rationale for the overdue change:

Every year in the EU, 200,000 firms go bankrupt; which results in 1.7 million job losses. This could often be avoided if we had more efficient insolvency and restructuring procedures. It is high time to give entrepreneurs a second chance to restart a business.

The WSJ also notes the high economic cost that Europe has paid for its current approach:

Europe’s disparate insolvency laws have been blamed for hindering fluid, cross-border investment across the bloc, which is struggling to revive its economy after the financial crisis. The EU commission forecasts EU growth at 1.6% in 2017.

The EU proposal would not go as far the U.S. Chapter 11 model, but it would attempt to harmonize the disparate bankruptcy models in the EU and to lessen the economic penalties and stigma that typically accompany business failure in Europe. It’s a step in the right direction, and should be a boon to Europe’s tech entrepreneurs especially. Indeed, the Comission itself notes that “one out of two Europeans stated in a survey they wouldn’t start a business because of such fear of failure, the social stigma attached, and the inability to pay off debts.”


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