New EU insolvency rules throw lifeline to struggling companies

Struggling companies will be given a second chance to improve their financial situation under new insolvency rules approved by the European Parliament (EP) at this week's plenary session.

Each year 1.7 million jobs are lost in the European Union (EU) due to companies going bankrupt. Under the new legislation on cross-border insolvencies, companies in financial difficulties, but otherwise sound, are to be given another opportunity to improve their situation.

The plans also include measures to help firms before they go bust.

Of the 200,000 EU businesses facing insolvency every year, 50,000 owe money to someone in another member state, which further complicates legal proceedings.

EU rules, which date from 2000, aim to clarify which courts should be handling the cases and help them to cooperate across member states borders. One important issue the new rules address is to determine which member state should launch the main proceeding. Normally this should be where the company has a registered office.

The rules are designed to prevent so-called "insolvency tourism" and "forum shopping," where people on either side of a legal action try to exploit differences between national laws.

In insolvency tourism, residents of one country try to declare bankruptcy in another country where the insolvency laws are more favorable.

Forum shopping involves litigants asking for a case to be heard in countries thought to be more "plaintiff-friendly." Endit