The European Commission has unveiled draft insolvency rules aimed at avoiding bankruptcies and job losses.
The new law would allow companies in dire financial straits to continue trading while protecting firms from creditors and giving them time to restructure, rather than go bust. The suggested rules are similar to the US Chapter 11 bankruptcy code.
EU countries deal with bankruptcy far more harshly than in the US, with the result that a majority of insolvency procedures end in liquidation.
"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,” said EU Justice Commissioner Vera Jourova.
In the US Chapter 11 has been used by US car giants General Motors and Chrysler, as well as President-elect Donald Trump, to rehabilitate stricken businesses.
Another part of the Commission proposal would see legacy debts cancelled three years after a bankruptcy, a shorter than typical period in Europe. In Germany, failed business owners have to shoulder debts up to seven years, which has contributed to a stigma around insolvency.
The Commission draft law, which will require European Parliament and EU governments’ approval, is part of the capital markets union, a plan to spur growth in investment and risk-taking.