BRUSSELS (Reuters) -Euro zone finance ministers discussed on Friday how to improve and make more similar insolvency laws across the 19-nation bloc, to better prepare for a wave of bankruptcies expected when companies are weaned off government emergency pandemic support.
Insolvency laws differ from country to country, making it difficult for the euro zone to deal with the problem. The issue threatens to hamper economic growth as assets of insolvent companies are frozen during lengthy legal processes rather being quickly re-deployed in the economy.
“Well-functioning insolvency frameworks can make a big difference to recovery,” the chairman of the ministers, Paschal Donohoe, told a news conference.
The expected surge in corporate bankruptcies will boost bad loans in banks when the post-pandemic economic recovery starts and governments begin withdrawing schemes now keeping many non-viable companies on life support.
“Cross-country differences in insolvency regimes lead to fragmentation of EU capital markets. This convergence is also important to avoid the build-up of non-performing loans in the coming months and for future crises,” European Economic Commissioner Paolo Gentiloni told the news conference.
“We intend to take an initiative to enhance convergence of insolvency laws,” he said.
In a note for the ministers’ discussion, the Commission said national insolvency regimes across the EU differed in design and in practical implementation when it came to a balance between creditor and debtor interests and the priority enjoyed by employees, public utilities or tax authorities.
There isn’t even a single definition of insolvency or when a company must undergo formal insolvency proceedings. Nor are there any common rules on replenishing the insolvency estate, asset tracing, claim ranking, including the position of secured creditors or on court capacity, the Commission said.
Unifying laws would involve justice ministries, adding an additional layer of difficulty, which is why ministers for now agreed to a more realistic path of strengthening the system in other ways than through changing laws.
“The discussion today showed support for additional non-legislative measures to help our frameworks to converge, and we agreed to revisit this topic again,” Donohoe said.
Such non-legislative steps would involve making sure that judicial systems in every country have proper resources and that backlogs of cases in courts are tolerable as well as setting EU benchmarks.
(Reporting by Jan Strupczewski, editing by Larry King)