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EU proposes bankruptcy protection for small business

The EU is considering a change to its bankruptcy system to help companies stay in business, the Financial Times has reported. 06 Oct 2016

According to draft plans seen by the newspaper, the European Commission is looking at a system similar to that in the US, where companies are able to fight 'winding up' orders from creditors while negotiating debt restructuring.

Protection would be granted by national courts and would last for up to a year, the Financial Times said.

The Commission is also keen to cancel the legacy debts of failed businesses after three years, to encourage entrepreneurs to start afresh, the report said.

National insolvency rules in Europe "vary greatly in respect of the range of procedures available to debtors facing financial difficulties", the draft plans said. In some countries restructuring is only possible at a late stage, through formal insolvency proceedings, and this can prevent some potentially viable companies from recovering, the Commission said, according to the Financial Times. 

Insolvency expert Richard Williams of Pinsent Masons, the law firm behind Out-Law.com said that the EU proposal, if adopted in the UK, would be likely to "add another layer of complexity" and that the UK government is already consulting on a new insolvency approach of its own.

The UK began a review of its corporate insolvency framework in May and recently published a summary of the responses it has received.

Two thirds of respondents agreed in principle to the introduction of a pre-insolvency temporary moratorium to help with business rescue and there was support for helping businesses to continue to trade through the restructuring process, the government said.