Insolvency legislation should treat businesses as a social asset, says EESC

On 30 March 2017, the European Economic and Social Committee (EESC) adopted an opinion on the European Commission's proposed directive on business insolvency, which is intended to harmonise preventive restructuring procedures across Europe. While fully supporting the Commission's shift from liquidation to early restructuring in dealing with business insolvency, the EESC proposes a set of measures to help prevent its social damages. In particular, the EESCs suggests introducing a "social warning" mechanism to alert all stakeholders as soon as problems arise, creating specific funds to guarantee the payment of salaries, and making access to a second chance for failing entrepreneurs conditional to full disclosure of financial information.

Business failure is a major issue in Europe, where 50% of entrepreneurs experience economic failure in the first 5 years of activity. Companies go bankrupt for a number of reasons, some of them totally independent of their will, for instance the loss of markets as a result of trade sanctions, as was the case with many agrifood businesses when sanctions were imposed on Russia. Small businesses are especially vulnerable, and often go bankrupt because larger companies fail to pay their bills on time.

Legislation on business insolvency varies considerably across Europe, but statistics show that credit recovery reaches 83% in countries with a culture of restructuring, as opposed to a mere 57% in countries which opt for simple liquidation. The proposed directive is meant to make preventive procedures more homogeneous across the EU.

The EESC believes that companies are a social asset for Europe and should be treated as such.  The opinion rapporteur Antonello Pezzini (Employers' Group - IT), who has been following insolvency legislation for 40 years, said: We are striving to start a process which should lead to consider an enterprise for what it really is, that is to say, a fundamental good for society, where both employers and workers have a stake. A real culture of a second chance to entrepreneurs needs to be developed throughout the EU and support structures set up to provide the necessary assistance to entrepreneurs whose businesses undergo restructuring. Because of its makeup and expertise, the EESC believes it could usefully assist the Commission in putting in place such structures.

Because companies are a social asset, a social warning mechanism should be introduced, requiring company management to inform all stakeholders and provide early warning of the difficulties the company is facing. Co-rapporteur Franca Salis Madinier (Workers' Group - FR) said that: It is important for employees and their representatives to be fully informed upstream and as early on as possible, for it is by anticipating information that problems can be better managed. The longer companies wait before ringing the alarm bell, the more severe the damages will be, not only for employees, but also for their families, local communities and the social fabric.

In addition, specific funds should be set up in Member States and financed by employers to guarantee the payment of salaries when a company is in financial straits. Although such funds were already provided for in a 2008 directive, very few Member States – Belgium and France among them - have actually implemented them. Action should be taken to ensure the provision is applied throughout the EU. The EESC also recommends giving employees priority as creditors in all Member States.

Finally, the proposed directive reserves access to a second chance to the honest entrepreneur, but how can this be described? In the EESC's view, the honest entrepreneur should be transparent about his accounts and makes his/her financial records (balance sheets, banking and insurance documents, stock records, etc.) available to stakeholders early on to make it easier to find solutions.


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