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What are the consequences of declaringthe debtor’s bankruptcy in the EU?


Author: Federico Giamporcaro

Publication date: 16.04.2024


The world of commerce is characterized by a delicate balance between risk and reward. Businesses operate with the understanding that unexpected circumstances can lead to financial difficulties. Regulation (EU) 2015/848, also known as the Insolvency Regulation, established a framework for handling such situations within the European Union. This framework aims to simplify insolvency proceedings (bankruptcy and related processes) when a debtor – a business or individual – with activities across multiple member states encounters financial trouble. While declaring bankruptcy can offer a fresh start, it also causes a series of consequences for both the debtor and its creditors.


Impact on the Debtor


A debtor company facing insolvency can seek court-appointed administration under the Insolvency Regulation. This results in a period of restructuring or liquidation, with the ultimate goal of maximizing the value of the debtor's assets to settle outstanding debts. However, this process comes with significant implications for the debtor:


  • Loss of Control: Management of the company is often transferred to an insolvency practitioner, appointed by the court. This individual becomes responsible for taking care of the situation, overseeing the restructuring or liquidation process and making crucial decisions for the company's future. The debtor's original management may be sidelined or even dismissed.


  • Operational Restrictions: The debtor's ability to conduct business as usual may be reduced. The insolvency practitioner might impose restrictions on new transactions, asset sales, or hiring practices to ensure a fair and transparent process for creditors.


  • Reputational Damage: Filing for insolvency can damage the company's reputation, potentially leading to a loss of customer confidence and making it difficult to attract new business partners in the future.


Implications for Creditors


For creditors owed money by the insolvent debtor, the consequences of bankruptcy can be equally significant:


  • Uncertainty and Delay: The insolvency process can be long and complex, leaving creditors in a state of uncertainty regarding the ultimate recovery of their debts. The value of the debtor's assets after liquidation may not be sufficient to pay all creditors in full, resulting in potential losses.


  • Priority of Claims: The Insolvency Regulation establishes a hierarchy of creditors. Secured creditors, such as those with collateral backing their loans, have a higher claim on the debtor's assets than unsecured creditors like suppliers or trade partners. This means unsecured creditors may receive a smaller portion of what they are owed, or even nothing at all.


  • International Considerations: Cross-border insolvency cases, involving debtors with activities in multiple EU member states, can be particularly complex. The Regulation aims to simplify such cases, but facing legal and administrative differences across countries can still be challenging for creditors seeking to recover their debts.


A Balancing Act: Protecting All Stakeholders


The Insolvency Regulation aims to create a balance between the interests of the debtor and their creditors. By establishing a standardized framework for insolvency proceedings across the EU, the regulation promotes:


  • Efficiency: The simplified procedures aim to make the process faster, minimizing delays and costs associated with bankruptcy.


  • Fairness: The hierarchy of creditors ensures a more equitable distribution of the debtor's remaining assets, prioritizing those with a greater legal claim.


  • Cross-Border Cooperation: The Regulation fosters communication and collaboration between courts and insolvency practitioners in different EU countries, facilitating the resolution of cross-border insolvency cases.


While declaring bankruptcy undoubtedly carries consequences for debtors and creditors, the Insolvency Regulation plays a crucial role in mitigating these effects and ensuring a more predictable and efficient process for all parties involved. Ultimately, the Regulation serves as a vital tool for facing insolvency problems, facilitating a more controlled environment for resolving debt issues and potentially allowing debtors a chance for future success.


 

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