BRUSSELS (Reuters) - Companies would be given more breathing space to restructure their debts in times of crisis under a European Union draft law unveiled on Tuesday, inspired by U.S. insolvency rules and aimed at avoiding bankruptcies and saving jobs.
In a bid to encourage risk-taking start-ups, the proposal would make it easier for entrepreneurs in Europe to get a second opportunity after a business failure, as in the United States.
President-elect Donald Trump was a prominent beneficiary of the U.S. Chapter 11 insolvency rules, which allowed him to relaunch his real estate business after having been on the brink of collapse in 1990.
“We take inspiration from the American system but we are not inspired by Trump,” a senior EU official said, describing the Republican businessman’s ability to benefit from U.S. bankruptcy rules as “a very professional way to use Chapter 11”.
The rules proposed by the European Commission would allow troubled firms to stop paying suppliers and banks while restructuring their debt during a four-month “breathing period”, extendable to a maximum of one year in exceptional cases.
Trump had a multi-billion-dollar bank loan restructured after the 1987 U.S. stock market crash hit New York real estate and brought him close to filing for bankruptcy.
“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,” said EU Justice Commissioner Vera Jourova.
The proposal would allow entrepreneurs to have their legacy debts cancelled three years after a bankruptcy, much shorter than the current period in many EU states. In Germany, failed businessmen have to wait up to seven years.
The proposal will need approval from EU states, which have so far closely guarded their powers on insolvency law and shown little appetite to back common EU rules. The Commission stressed the lenient measures would apply only to “honest” entrepreneurs.
To foster start-ups in Europe, it has also decided to set up a venture capital “fund of funds” backed by up to 400 million euros ($425 million) of EU money in a bid to increase funding for innovative and riskier business.
The proposal is also meant to help banks reduce bad loans, which have skyrocketed in some euro zone countries since the global financial crisis as more companies went bust.
Non-performing loans neared 1 trillion euros last year in the euro zone's top lenders. Between 2007 and 2015, NPLs as a share of total loans grew threefold in Italy to almost 18 percent, the highest in the euro zone after Greece. They rose nearly five times in Portugal and almost seven times in Spain, according to the World Bank. ( tmsnrt.rs/2dtNHd1 )
The Commission’s plans would give banks a stronger say in pushing failing firms to restructure, as they would be allowed to trigger the process with early warnings.
Banks could also outvote other creditors, a procedure not contemplated at the moment in most EU countries, where unanimity is necessary in restructuring.
Corporate restructuring would be conducted as far as possible with professional mediators and not in national courts which in some countries often take too long to decide, increasing costs and uncertainty for business.
($1 = 0.9407 euros)
Editing by Mark Trevelyan