This conceptual article concentrates on the insolvency and recovery reforms and business survival. The aim of the research is an evaluation of the impact of insolvency law reforms on the increase of businesses’ survival. The study focuses on a comparative analysis of insolvency reforms on EU level, including the advantages and disadvantages, with a special emphasis on the Polish case, which includes some similarities and differences to other EU countries’ insolvency procedures. The article presents the concept of the most effective insolvency framework and its efficiency (as well as legal and financial framework) that gives the best results for companies to survive, to start recovery procedures and restructuring, not to go bankrupt, and not to become liquidated and eliminated from a competitive market. Taking a critical thinking approach, the article indicates the weaknesses of the existing insolvency procedures that should be improved and offers some recommendations for the future. The study covers, from a scientific point of view, the important issues that, in the face of complexity, a global, turbulent environment, and the global financial crisis, deserve an investigation. The findings and the implications are crucial not only for scientists, but also for insolvency practitioners, business and financial institutions’ representatives, and policymakers.
The global financial crisis has pushed many businesses into insolvency. The annual number of failures still remains above the levels before the crisis in several EU member states, and some business leaders are struggling with distress and difficult choices about the future and their companies’ survival prospects. Based on these, significant bankruptcy and insolvency reforms at national and EU level have been implemented. Economies around the world have undertaken reforms aimed at improving their insolvency systems. The majority of them have focused on introducing or strengthening reorganization mechanisms that help to continue business activity and to survive in a competitive market. Providing an effective and efficient framework for saving viable businesses is the main purpose of internationally-established good practices in the area of insolvency. All across the world, from 2009 to 2014, 60 economies implemented 87 reforms on resolving insolvency. Reforms in the area of corporate reorganization were the most common: 10 economies introduced a new reorganization proceeding, and 21 promoted reorganization or made improvements to their existing reorganization framework (
The aim of this article is to present the insolvency reforms that increase the business survival opportunities at selected EU countries and at Polish level. The article presents the conceptual framework in the area of insolvency reforms that are the most efficient for business survival. This study discusses the impact of insolvency reforms on chances of business survival. The topic is very topical and significant for insolvency practitioners, financial institutions, government representatives, leaders, and researchers.
The main elements of the theoretical concept focus on institutional/governmental support, insolvency law changes, private and public aid and financial support of restructuring proceedings, early warning systems, second chance policy, and business survival (
Problems in the operation of an enterprise start to arise, but they do not cause significant changes; All irregularities deepen, and mistakes are made; Significant irregularities concerning particularly the sphere of solvency appear; The bankruptcy of an enterprise follows.
The trajectory concept of
There is still no developed bankrupt economics—something that would demonstrate the processes and mechanisms of survival and insolvency of managing entities. There is a lack of one, consistent theory of bankruptcies, and its elements are the part of separate economic theories.
A number of theories, whose purpose was to explain the probability of the survival of business entities on the market, were developed in the economic literature. One of them is the liability of smallness concept, related to the liabilities of small enterprises. According to it, small companies have a smaller chance of survival.
It is also worth indicating the liability of the newness concept concerning the liabilities of new enterprises. Research on the correlation between the duration of business entity activity on the market and survival plays an important role. According to this concept, young companies leave the market faster than the older companies. Competition that new enterprises must cope with is one of the underlying reasons behind this. Entering the market, enterprises compete with organizations with well-established positions, and they must gain a reputation in order to acquire clients, suppliers, and investors (
According to the concept, which has its roots in industrial economics, only after entering the market are enterprises able to state if they can exist in it. The representatives of this approach search for the factors which will allow the enterprises to survive on the market and, in a broader sense, not only at the level of the company but also at the level of the whole economy—assuming that structural characteristics of industry, such as market entry and withdrawal barriers and the intensity of applying new technologies, exert a significant influence on the survival and the development of new enterprises on the market (
Taking into account the scientific literature review, the authors note that legal factors’ (e.g., insolvency law reforms) influence on business survival has not been frequently presented; thus, this article gives a significant, preliminary outlook that could support developing the issue during further research. The Results part of this study presents the comparison of insolvency reforms at EU level and the Polish insolvency reform case emphasizing restructuring actions and, finally, business survival.
The sample covers EU countries. The scope of the study includes insolvency reforms across EU countries. The main methods include comparative analysis and a case study of Polish insolvency reform.
Despite the fact that Europe is a “single market”, insolvency processes differ significantly among its member nations. Each country adopts its own law for insolvency procedures, and there are considerable differences in the number and types of insolvency and restructuring proceedings, time limits for filing, the right of creditors and other stakeholders, and their priority (
Facing this reality, the Council of the European Union adopted the EC Regulation on insolvency proceedings in 2000, which came into effect in 2002. In all EU member states except Denmark, this Regulation takes precedence over domestic policy and applies in cases when a debtor has assets in more than one EU member country. In simple terms, the Regulation assigns the member state where the debtor has its center of main interests (COMI) to be the jurisdiction whose laws around insolvency proceedings are conducted under and provides “automatic” recognition of those proceedings in other member states. Despite the efforts to facilitate cross-border insolvency proceedings, the Regulation still has weaknesses, such as the lack of rules concerning the opening up of proceedings and groups of companies, the exclusion of pre-insolvency and hybrid proceedings, and so forth. These shortcomings were recently amended by improving the COMI determination. Along with the amendment, the Commission also provides “the Recommendation on a new approach to business failure and insolvency”, which aims to shift the focus of insolvency proceedings from liquidation to pre-insolvency restructuring, thus enabling viable companies to return to going concern status. In detail, the Recommendation supports the permission for the debtors to retain control of the business and provides lenders with various protections to provide new financing to assist with the restructuring plan.
In line with the reform at EU level and the Recommendation issued by the Commission, some EU member states have undertaken the reform in their insolvency proceedings. For example, Slovenia is introducing a preventive restructuring procedure; Spain, Hungary, and Romania have improved their personal insolvency regime; Croatia has done the same in both personal and corporate restructuring regimes; and the Netherlands is undertaking a reform process in order to improve the existing preventive restructuring procedure.
In order to increase the efficiency of restructuring procedures, the EC Recommendation ( Possibility to file early with the objective of avoiding insolvency; Position of the debtor; Possibility of a stay on individual enforcement actions; Adoption of the restructuring plans by creditors; Protection for new finance granted in restructuring procedures; Involvement of courts when third party rights could be affected.
Differences can be found among how EU member states deal with these conditions. While Austria and Germany set very strict access conditions, though still offering debtors the possibility to restructure before they are insolvent, Bulgaria, among others, does not allow debtors to have access to any type of structured procedure to restructure their debts with their creditors before they are actually insolvent. France and the Netherlands are the two countries where a debtor may lose certain powers of control over the business during preventive restructuring procedures; meanwhile, in most other countries, the debtor is still left in position along with an appointed insolvency practitioner. In terms of possibility of a stay on individual enforcement actions, there is no possibility to extend the stay period in Germany, Spain, Poland, and Greece, while it is possible to do so in most other member states.
In addition, providing a second chance for entrepreneurs is another focus of the Recommendation. In fact, it is recommended for member states to allow a reasonable discharge period of a maximum of three years from the opening of liquidation of assets proceedings. However, there is still huge divergence in this type of period. While there is no possibility to discharge in Bulgaria and Hungary, the discharge period is too long in some other countries, such as 5 yeas in the Czech Republic or Sweden, 7 years in Austria and Belgium or even 10 years in Greece (Directorate-General Justice and Consumers of the European Commission 2015).
Along with the Recommendation by the European Commission,
In brief, there have been quite auspicious reforms in EU member states in order to comply with the Recommendation of the Commission. However, differences in the implementation and insolvency proceeding reform among member states still represent a big gap to fill, since they have been causing legal uncertainty and additional costs for investors and hurdles for viable companies to restructure efficiently (
There are two main features of an efficient bankruptcy court. The first is that it should maximize the ex post value of the firm, while the second is that it should ensure that the bonding role of debt is preserved. The latter means that the bankruptcy procedure should not create incentives for debtors to resort to bankruptcy. Maximizing the ex post value of the firm may be interpreted as a restructuring (and possible commitment by the country to an economic adjustment program) to maximize the value of repayments to the creditors. To be sure, such restructuring may also be in the interests of the country (
This part of the article presents bankruptcy and insolvency law reforms in Poland that strongly support restructuring procedures. The main advantage is that they give the opportunity for a second chance and increase of business survival and allow taking proper restructuring actions in advance and in the right course. Poland is one out of seven EU countries (Denmark, Germany, Belgium, Italy, Poland, Greece, and Spain) participating in the Early Warning Europe program. The Early Warning Poland program helps businesses and the government to build mutual trust, protect companies and jobs, and protect the creditors rights. Poland follows the Danish experience, namely, with 10 years of program existence, 5000 companies supported, and an effective network of pro publico bono mentors. The Polish Ministry of Development supports business survival in many ways, especially through the second chance policy, the introduction of new legislation, and legal and financial support. This financial aid, namely, loans, is for the purpose of regaining financial liquidity for companies in the period of restructuring plan preparation. Poland receives the financial support from EU sources of 765 million PLN for the period of 2016–2020. The annual budget constitutes approximately 153 million PLN, which includes 53 million PLN for public liabilities restructuring.
Polish insolvency legislation includes two types of proceeding for businesses in financial distress: bankruptcy and restructuring. These two types of procedures that were entered into force on 1 January 2016 have different statutes: 1. Bankruptcy Law (Dz.U. from 2015, position 233), and 2. The new act on the Restructuring Law (Dz.U. from 2015, position 978). This new act on the Restructuring Law is a new legal framework for pre-insolvency/restructuring/hybrid proceedings. The following four restructuring proceedings are available: Arrangement approval proceedings; Accelerated arrangement proceedings; Arrangement proceedings; Remedial proceedings.
Apart from these procedures, bankruptcy proceedings also exist.
All restructuring proceedings may be entered into if the debtor is insolvent within the meaning of the Bankruptcy Law or at risk of insolvency (their economic situation indicates that they may soon become insolvent). According to
The arrangement requires court approval. Accelerated arrangement proceedings include arrangement proposals, a preliminary restructuring plan, an up-to-date inventory of the assets, with the estimated valuation of component parts and the list of creditors (containing the amount of receivable debts owed to each of them). Arrangement proceedings concentrate on arrangement proposals, a preliminary restructuring plan, and the list of creditors (containing the amount of receivable debts owed to each of them).
Objective data on business rescue are difficult to establish, and elements contributing to successful results are difficult to isolate.
Young enterprises are more vulnerable to the risk of bankruptcy. The entities which are best adjusted to the market conditions survive in it. The issue addressed in the article becomes increasingly important from the point of view of the entities whose aim in the initial phase of their functioning is, first and foremost, survival. The topic is very fresh not only for practitioners but also for scientists and policymakers.
The purpose of the Bankruptcy Law is to equally satisfy all creditors of a debtor, who is not able to satisfy each creditor separately. Bankruptcy should prevent carrying out enforcement against a debtor only by some creditors (in the event where the others do not have the enforcement title yet, e.g., when their claims have not been paid yet) and in cases when there is a priority system in enforcement proceedings. This means that the fact of bankruptcy is established judicially on the basis of the request either from a debtor, or from some of creditors or a few creditors. Bankruptcy and liquidation processes generate a lot of private and public costs (
The authors are grateful to contributions from insolvency representatives for sharing their knowledge on insolvency proceedings.
Key elements of implications of insolvency reforms to business practice. Source: Own study.
Comparison of Polish bankruptcy and insolvency proceedings.
Specification | Bankruptcy Law | The new act on Restructuring Law proceedings | |||
---|---|---|---|---|---|
Bankruptcy proceedings | Arrangement approval | Accelerated arrangement | Arrangement | Remedial | |
Initiation of the procedure | Debtor or by any debtor’s personal creditor. | Only the debtor by entering into a contract with a licensed restructuring counselor chosen by the debtor. | Only the debtor by filling an application to the court. | Only the debtor by filling an application to the court. | Personal creditor of the debtor or by the debtor himself. |
Main criteria to benefit from the proceedings | Bankruptcy may be declared in the case of a debtor who becomes insolvent. | The total disputed claims that give the right to vote on an arrangement not exceeding 15% of the total claims, giving the right to vote on the arrangement. | The total disputed claims that give the right to vote on an arrangement not exceeding 15% of the total claims, giving the right to vote on the arrangement. | The total disputed claims that give the right to vote on an arrangement exceeding 15% of the total claims, giving the right to vote on the arrangement. |
The debtor has to cover the cost of the proceedings and the liabilities arising after its opening. |
Purposes | Main aim is to satisfy the claims of the creditors to the maximum extent possible and, if feasible, for the existing business of the debtor to continue operating on the market. | The debtor is entitled to negotiate the terms of the arrangement without court involvement. | Restructuring proceedings combined with a court supervision when the debtor is not able to successfully negotiate terms of the arrangement without court involvement. | Restructuring proceedings combined with court supervision. The proceedings require greater involvement of court supervision than an accelerated arrangement. | Entered into when ordinary proceedings are not effective. |
Possible outcomes | A bankruptcy proceeding usually leads to the liquidation of the debtor’s assets, but it is also permissible to: |
The arrangement is concluded as a result of collecting creditors’ votes by the debtor themselves, without involvement of the court. |
Pending execution proceedings concerning a receivable debt covered by the arrangement are suspended by operation of law on the day when the proceedings are opened. |
Pending execution proceedings concerning a receivable debt covered by the arrangement are suspended by operation of law on the day when arrangement proceedings are opened. |
After the opening of the proceedings, the debtor loses the authority to manage their assets (as a rule) and the court appoints the receiver, who is authorized to manage the debtor’s assets. |
Source: Own study based on