- Mateusz Medyński
EU’s new attempt to unify bankruptcy law
First of all, the attempt is hardly new as it dates back to 2014 and the work on the second bankruptcy directive. However, since 2016 work on the framework has been picking up speed, as data from EU countries confirms a growing number of insolvent businesses and a staggering increase in personal loan defaults and work on the project has recently greatly accelerated.
Those countries without an efficient consumer bankruptcy system and a second chance framework end up building an ever growing shadow zone for insolvent people trying to live with active debt enforcement on their heads.
Moreover, if we are to compete in the global innovation and technologies markets we must (as a continent) have a way to quickly cope with failed businesses, as these will surely grow in number.
In reality, if a brilliant scientist has 10 ideas for a product or service, usually 8-9 of them will fail eventually and the one remaining is the key to their future success. However if we do not have a system to quickly remedy the backlash of those 8-9 failures, the brilliant inventor, instead of focusing on the one product or service with real market potential, will remain mired in debt and litigation, or worse be forced to conduct his business illegally as a way to avoid official debt enforcement.
Therefore the EU wish to envelop the entire continent with a protective net of compatible legislation so as to allow international restructuring of company and personal debt. Currently the number of different approaches to bankruptcy and restructuring in member states is staggering, and the inability to understand how each bankruptcy legislation works in each country has been a major blocking factor in trans-border initiatives. Investors, quite understandingly fear participating in project outside their national jurisdiction as they do not know the laws of other countries sufficiently.
It is fun to say this (as we get to do it so little in other areas) but this time Poland has been ahead of the EU on this. We have already identified the problem with personal bankruptcies and changed the law accordingly (in 2014) and the number of personal bankruptcies grows by 25% each year (with 7000 estimated personal bankruptcies in 2019 we have still a long way to go compared to Germany of England and Wales, but its much better than 21 total personal bankruptcies in 2009-2013).
In 2016 the whole scope of bankruptcy law was reoriented from liquidation bankruptcies to restructuring and second chance scenarios. What are the results?
Compared to what the legislator intended the whole system is still inefficient and a operates at a loss. However, compared to what the return rates on bad debts were before the change (5-10% with the majority being taken by secured creditors, compared to 25% and growing now) the change was significant and shows that second chance frameworks are a step in the right direction.
To be absolutely honest, while working on the Polish restructuring procedures we did peak a little at what the EU was doing, but we produced results faster (as Poland did not have to take multiple jurisdictions into consideration when working on the white papers). Therefore Poland can and should be an case study of what happens if second chance frameworks come online. The results seem to confirm that the EU approach is a good one.
We know that the change was good, even if not drastic. We also know that it will take at least a decade for the judges and the companies to fully grasp the intention of the second chance idea. However even when taking baby steps, we are walking in the right direction and so should the EU (fortunately the EU knows that, so good luck with the directive!).