|EP In-Depth Analysis - The Impact on SMEs of the Proposal of Preventive Restructuring, Second Chance and Improvement Measures
|This study was commissioned by the European Parliament's Policy Department for Citizens' Rights and Constitutional Affairs at the request of the JURI Committee. It looks at the effects the recent Commission proposal might have both on micro and small and medium-sized enterprise, thus reflecting the diversity of SMEs. It identifies and explains the issues at stake of concerned SMEs related to their capacity as both debtors and creditors.
The proposal for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU COM(2016) 723 final does not specifically address the needs of “micro, small and medium-sized enterprises (SME)”. It does, however, propose a preventive restructuring framework that should also facilitate the restructuring of SME debtors. Moreover, the Directive would provide for a robust second chance for failed entrepreneurs who have mostly run small businesses. The European Commission defines small and medium-sized enterprises (SME) in the Recommendation of May 6, 2003. This definition is rather broad and includes a wide range of enterprises that may have very little in common – from the sole entrepreneur or artisan to a company of 250 employees and €50 mill. annual turnover. It is necessary though to look separately at the classical small or medium sized enterprise and at the micro nterprise, because the differences as to their needs in the insolvency context are significant, both as creditors and as debtors.
•This paper reflects the diversity of SME by using two examples for illustrating the possible effects of the proposed Directive: a microenterprise and a medium-sized enterprise. The analysis reveals that specific rules may only be required for the small fraction of SME: micro and small businesses (MSME) or even only microenterprises.
•MSME creditors should receive protection from a stay and a restructuring plan impairing them.
•MSME debtors should be able to find a low cost advice institutions when facing a business crisis, not just a model restructuring plan in a brochure.
•MSME debtors should also benefit from a short minimum duration of a stay of one or two weeks.
•MSME debtors should benefit from a robust and quick discharge mechanism following a liquidation of their business.
Overall, this analysis also indicates that provisions regarding the scope of a stay as well as the scope of a restructuring plan should be more flexible. It must be mentioned that a full scale solution of non-performing SME loans in Europe would not only require a viable (preventive) restructuring option, but also an efficient liquidation process. The proposed Directive addresses the latter only in Title IV by setting rather general benchmarks for involved institutions (judges, courts, practitioners). The proposed Directive does not specifically address the needs of SME. The analysis reveals that specific rules may only be required for a fraction of SME: micro and small businesses, sometimes only microenterprises.
4.1. Improvement for SME under the Proposed Directive
For microenterprises the current shattered legislative landscape in Europe means that hey are treated quite differently in case of a business crisis and insolvency depending on their place of business. Some jurisdictions provide for a restructuring framework, others have no such framework; some have a specific insolvency regulation for SME, others have not. Some have a well-functioning out-of-court debt settlement practice while others face a significant non-performing loan problem that may involve a significant share of microenterprise debt considering the share of such businesses in the respective economy. Some have an efficient claim enforcement and insolvency regime, others have not. Some provide for a quick and full discharge for individuals, others make a rehabilitation process long and burdensome journey. In times of a business crisis, the “resource poverty” of microenterprises precludes such firms from moving their business to a jurisdiction with the best legal framework to restructure. It also prevents the failed entrepreneur from shifting to a better rehabilitation or debt relief regime. Harmonised best practice standards would eliminate these differences and allow for an equal treatment and equal chances for individual entrepreneurs across Europe. The situation may be a little different for small enterprises as they possess more resources which allows them to respond to a business crisis more actively. Still, placed in a jurisdiction with no or a malfunctioning restructuring and insolvency regime even such firms are not able to use the common market for a better regime. Shifting the place of business in order to access a foreign restructuring regime is expensive and may become even more difficult under the recast Insolvency Regulation. Overall, any harmonisation that improves national regimes on claim enforcement, restructuring and insolvency is particularly important for SME as they can hardly ever choose their legal forum.44 The proposed Directive offers a first step by setting standards for the institutional background of national regimes and a pre-insolvency restructuring framework.
4.2. Possible Harm for SME under the Proposed Directive
Any effort to harmonised legal rules must ensure that, while establishing a new common framework, it does not interfere with what works well.45 In addition, the proposed framework should not make things worse for those who should be doing better. The evaluation of the effects of the proposed Directive on SME revealed a number of issues
that could potentially hurt SME.
A stay of enforcement actions and contractual rights hits microenterprises as creditors disproportionately hard. As such firms work with fairly limited resources and are more vulnerable to disturbances, any longer stay and the resulting reduction of available cash may cause them to fail as well. This is particularly relevant for microenterprises with a principal business partner. To avoid such hardship, the Directive should either exempt microenterprises (but not all SME) from a general (collective) stay or, at least, limit it’s duration against this specific group of creditors. Under the currently proposed regime, the specific needs of microenterprise creditors may easily be overlooked by the authority (court) issuing a (collective) stay. Microenterprises are also disadvantaged by the proposed regime when they are in the debtor’s position. The strict connection between the duration of a stay and the duration of still ongoing and promising restructuring negotiations does not allow for a longer stay for such enterprises, because their talks with their very limited number of relevant creditors would commonly not last long. For such firms, a minimum duration of a stay (of max. 2 weeks) could be introduced. Overall, the evaluation of SME also indicates that preferably, a stay outside of formal insolvency or restructuring proceedings should not be issued automatically, should not automatically extend to all types of creditors (collective) and all types of creditor actions (full stay). Instead, a more flexible approach seems preferable – when a stay is ordered and when it’s lifted.
For SME creditors, the evaluation of proposed regime for restructuring plans also showed that micro- and small enterprises (MSME) should be distinguished from medium-sized enterprises. While medium-sized enterprises may be involved in a restructuring of a business partner with relevant claims and thus may have leverage in negotiations, MSME are usually irrelevant in a system based on amounts of claims. While this fact can be good for them if the legal framework allows their class to remain unaffected by a restructuring, it can be very bad if they may have to participate in a class of unsecured creditors, but also in a separate class under a far-reaching cram-down rule. The proposed Directive could reflect the vulnerability of small claim creditors by exempting such claims from the scope of the restructuring framework. This could be done by limiting the scope of restructuring plans to claims of financial creditors.47 It could also be achieved by mandating a specific class for affected small claims while also exempting such a class from excessive cross-class-cramdown rules. As both options could work well, the Directive should allow Member States to choose which form of protection to implement. For SME debtors, a specific regime is again required for micro- and small enterprises (MSME). Their resource poverty limits their access to quality advice in times of a crisis, so low cost advice is required. Here, the Directive should mandate Member States to support private organisations (e.g. business angels or help desks in Chambers of Commerce), but also consider providing such advice directly through public authorities. In addition, the model restructuring plan approach should be developed into designing online templates for MSME.
The reduction of discharge periods is not relevant for SME creditors, because by that time they have long written off the defaulting claim. At the same time, a quick discharge is essential for a SME debtor, in particular again the entrepreneur of a micro and small enterprise, which are very vulnerable to any disturbance in their business operations. Here, a discharge may work as a good incentive to comply with relevant obligations against creditors particularly in times of crisis. At the same time, however, not every violation of a legal obligation by a small entrepreneur should suffice to deny a quick discharge as it is currently proposed in Art. 22 (1) (b). Instead, the higher threshold of a “substantial” violation would better reflect the ability of a single MSME entrepreneur to comply with all obligations in a crisis. In addition, any debtor should benefit from a presumption of honesty that would require dishonesty to be proven. Considering the passivity of creditors in small business cases, such a presumption would specifically promote the discharge of micro- and small business entrepreneurs.
The proposed Directive does not specifically address the needs of SME. The analysis revealed that specific rules may be required for the small fraction of SME: micro and small businesses or even only microenterprises. MSME creditors should receive protection from a stay and a restructuring plan impairing them. MSME debtors should be able to find a low cost advice institutions when facing a business crisis, not just a model restructuring plan in a brochure. They could also benefit from a short minimum duration of a stay of one or two weeks. Overall, this analysis also showed that provisions regarding the scope of a stay as well as the scope of a restructuring plan should be more flexible.
The analysis has resulted in highlighting a number of specific necessities for micro and small enterprises under the proposed Directive. Their special needs could be reflected in the text of the Directive by adding the following phrases (underlined and in italic):
Art. 3 (3)
Member States may limit the access provided for in paragraphs 1 and 2 to small and
medium sized enterprises or to entrepreneurs. For these types of debtors, Member
States shall also provide access to professional advice on a low cost basis.
Art. 6 (2)
[…]The stay may be general, covering all creditors, or limited, covering one or more
individual creditors, in accordance with national law. The stay may include all effects
listed in Art. 7 or only some of them, in accordance with national law.
Art. 6 (3)
Paragraph 2 shall not apply to micro and small enterprise claims and workers'
outstanding claims […].
Art. 6 (4)
Member States shall limit the duration of the stay of individual enforcement actions to a
maximum period of no more than four months. Member States may provide for a
minimum duration of a stay of two weeks in case of micro or small enterprises.
Art. 8 (2)
Member States shall provide access to professional advice for micro and small
enterprises on a low cost basis and make a model for restructuring plans available
Art. 9 (1)
Member States shall determine which types of creditors can be affected by a
restructuring plan and ensure that any affected creditors have a right to vote […].
Art. 9 (2)
[…].Member States shall also provide that workers and micro and small enterprise
claims are treated in a separate class of their own.
Art. 11 (2)
Member States may vary the minimum number of affected classes required to approve
the plan laid down in point (b) of paragraph (1), and exempt a class of micro and small
enterprise claims from any cross-class cram-down.
Art. 22 (1) (b)
[…] the over-indebted entrepreneur does substantially not adhere to a repayment plan
or to any other legal obligation aimed at safeguarding the interests of creditors;
Created: 07/06/17. Last changed: 07/06/17.
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