The European Commission unveils US-style protection for insolvent companies

Oliver Gill
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EU commissioner Vera Jourova said the directive would mean job losses could be avoided (Source: Getty)

A radical cross-border shake-up of insolvency laws was today proposed by the European Commission.

An EU draft directive was issued proposing to give companies more breathing space to sort out debts instead of being forced to cease trading.

Similar to US-style Chapter 11 proceedings, companies would be shielded from creditors taking action against a company during a four month window. Such a shield could be extended to one year in exceptional cases.

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Chapter 11 is well-known in the US for helping companies sort their affairs out while continuing to operate. It is a process that President-elect Donald Trump used in the 1980s and 1990s when some of his businesses were on the brink of collapse.

"We take inspiration from the American system but we are not inspired by Trump," a senior EU official told Reuters.

The proposals need to be agreed by EU member states. Then, instead of it becoming law immediately, members would commit to altering their own legislation over the course of two years to reflect the directive.

The UK is already in the process of consulting on proposals to adjust corporate insolvency legislation. And, according to Ken Baird, a partner at law firm Freshfields, there is a "supreme irony" that much of what is on the table in the consultation overlaps with the contents the proposals from Brussels.

While the directive, if passed, would in theory be applicable to UK – if Prime Minister Theresa May triggers Article 50 by the end of March as planned – it is unlikely to be incorporated into English law.

Baird explained the two year window for member states to incorporate the directive would run almost concurrently with Britain's two year window to exit the EU. So by the time Britain needed to incorporate the directive, it would be well on the way to – or actually have – left the EU.

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Nevertheless, for EU member states, justice commissioner Vera Jourova hailed the directive as an important step forward.

"Every year in the EU, 200,000 firms go bankrupt, this could often be avoided if we had more efficient insolvency and restructuring procedures," she said.

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