Entrepreneurship, business failure and starting afresh: the work of the European Commission

Horst Reichenbach, Director General
Sonia Herrero Rada
European Commission, Enterprise Directorate General

According to the latest edition of the Flash Eurobarometer survey on entrepreneurship, only four per cent of Europeans were involved in setting up a business in the past three years. Yet almost half of Europeans say they would prefer to be self-employed. Insofar as comparison with the number of people engaged in new entrepreneurial initiatives in the United States is concerned, examples of good performance do exist within the EU borders, with Ireland and Greece coming very close to matching US performance. On average, however, EU citizens are less inclined to become entrepreneurs and more risk averse than their American counterparts. The fear of bankruptcy is a key obstacle to entrepreneurship and business creation in the European Union. This chapter highlights EU efforts to foster a more entrepreneurial mindset and remove the barriers that can deter entrepreneurs from starting afresh.

The new entrepreneurial agenda in Europe

As a first step towards establishing a new agenda for entrepreneurship in Europe, the European Commission published a Green Paper on Entrepreneurship early in 2003. Addressing all interested stakeholders, the paper raised 10 questions on two fundamental issues for Europe: how to produce more entrepreneurs and how to help more firms to grow. Many events were organised around the Green Paper on Entrepreneurship and about 240 written responses were received. As a follow-up, at the Brussels European Council in March 2003 the Commission was requested to present an Entrepreneurship Action Plan at the 2004 Spring European Council. This was effectively presented to the member states in the Council in February 2004.

The European Charter for Small Enterprises, adopted by the General Affairs Council on June 13 2000 and welcomed by the Feira Council on June 20 2000, calls on the member states and the Commission to take action to support and encourage small businesses in 10 key areas. It is complemented by the Commission’s Entrepreneurship Action Plan, which reinforces it substantially, as policies to support entrepreneurship and small businesses are often closely linked. While the European Charter for Small Enterprises takes a top-down approach, the Green Paper on Entrepreneurship and the Entrepreneurship Action Plan aim to gather, from the bottom up, thoughts and recommendations on possible actions and decisions to support entrepreneurship in Europe in the years to come.

Since the adoption of the Risk Capital Action Plan in 1998, the Commission has published an annual communication on the progress achieved in its implementation. The fifth progress report, published in November 2003, points out that while the importance of entrepreneurship for job creation, innovation and economic growth is widely recognised, Europe is not yet fully exploiting its entrepreneurial potential.

The Entrepreneurship Action Plan aims to unlock the potential for entrepreneurship in Europe. It focuses on five strategic areas:

  fuelling entrepreneurial mindsets;

  encouraging more people to become entrepreneurs;

  gearing entrepreneurs for growth and competitiveness;

  improving the flow of finance to small and medium-sized enterprises (SMEs) and entrepreneurs; and

  creating a more SME-friendly regulatory and administrative framework.

Latest developments on business failure

In 2002 the Commission published “Bankruptcy and a Fresh Start”, a collection of data on the legal and social consequences of business failure. This study was the starting point of the Best Procedure Project on Restructuring, Bankruptcy and a Fresh Start, launched in 2002.

The Best Procedure responds to the European Council’s call for an open method of coordination, designed to help member states to develop their own policies. This method consists of fixing European guidelines for achieving specific goals within a specified timeframe: guidelines to be then translated into national and regional policies by setting specific targets and adapting measures to local conditions. In broad terms, a Best Procedure project is a benchmarking exercise in areas that are particularly important for the life of companies. The member states are increasingly drawing inspiration from measures developed in other countries to improve the business environment.

Under the Best Procedure Project on Restructuring, Bankruptcy and a Fresh Start, the Commission worked together with experts from the European Union, Norway and some candidate countries with a view to identifying a set of indicators, good practice examples and a strategy for improvement on early warning mechanisms for foundering businesses, legal systems and insolvency procedures, fresh starts and social attitudes towards business failure.

The European Commission welcomed the final report published in September 2003, which assesses the extent to which national bankruptcy laws act as a deterrent to business survival and a fresh start, as well as the effects of social stigma on the potential of failed entrepreneurs to try again. Aimed at giving fresh impetus to the process of law review in Europe, the report lists the key factors to save businesses from bankruptcy or to motivate fresh starts. Policy guidelines were issued on four topics, discussed below.

Early warning: how to prevent business failure?

Entrepreneurs sometimes have difficulties admitting that their business is in financial difficulty. Expert external advice should be made available at an early stage to enable earlier recognition of financial difficulties, thus improving the chances that restructuring and/or recovery measures will succeed. There is evidence that training courses for both new businesses and entrepreneurial advisers can play a key role in preventing bankruptcy. Specific training courses, during the whole life of a business, could help encourage entrepreneurs to self-assess.

Legal systems: is liquidation the only way out?

Legal systems should provide an option to restructure. The likelihood that restructuring will succeed can be boosted, for instance, by:

  improving information on the range of rescue procedures available;

  lowering thresholds for entry;

  intervening via crisis managers;

  encouraging debtors who are aware that they will no longer be able to pay their debts to initiate insolvency procedures;

  introducing simpler, more efficient and faster proceedings; and

  reducing the degree of protection that certain groups of creditors may enjoy during the procedure.

An up-to-date and predictable insolvency law can encourage settlements.

Firms that are clearly not viable should be liquidated as quickly as possible, in an organised way, taking into consideration the interests of all creditors.

Fresh start: should failed entrepreneurs start again?

Usually, failed entrepreneurs learn from their mistakes and are more successful at the next attempt. Since encouraging bankrupts to try again would contribute positively to economic growth, a fresh start for honest bankrupts should be promoted.

Measures to improve the chances of continuing or starting a new business include removing outdated and harmful restrictions, disqualifications and prohibitions imposed on those subject to bankruptcy proceedings, as well as early discharge from remaining debts, subject to certain criteria.

The report points out the benefits of a European campaign showing the advantages of a fresh start and new entrepreneurship.

Social attitudes: how to eliminate the stigma of business failure

According to Flash Eurobarometer, more than 50 per cent of Europeans would not invest in a business that had previously failed. To combat negative social attitudes towards business failure, information and education programmes are needed.

Similarly, where the debtor’s bankruptcy is declared ‘excusable’, such information should be freely and publicly available.

Moreover, the report recommends that public authorities support business and financial communities that seek to assist a struggling business to continue trading, where appropriate.

Next steps

To transform the five strategic objectives of the Entrepreneurship Action Plan into concrete results, the Commission has defined, together with member states, nine key actions which are now being implemented. The detailed key actions were published online in July 2004.

The key action sheets provide more detailed information on what the Entrepreneurship Action Plan means in practice. They describe the 38 sub-actions envisaged, their objectives and the impact which these activities are expected to have.

The key action sheet also sets out the roles of the different players involved, ranging from the European Commission to national and sub-national authorities and business support organisations. It also includes a list of good practice examples demonstrating how some member states have already implemented actions that support the objectives of the action plan. Best practice examples have a vital role to play in inspiring legal reform.

A progress report on Commission developments on phase I key actions was adopted on June 6 2005.

For insolvency purposes, the most relevant key action is Key Action 2 - Reducing the Stigma of Failure - which aims to:

  promote a better understanding of failure;

  break the automatic conceptual link of ‘bankruptcy’ with ‘bad behaviour’;

  demonstrate the benefits of starting afresh for economy, employment and growth; and

  encourage prevention among entrepreneurs in the ‘danger zone’.

To achieve these objectives, work has focused and will continue to focus on the following axes:

  The Commission asked member states to report (via the European Charter for Small Enterprises reporting procedure) actions taken to comply with the recommendations of the Best Procedure expert group report on the basis of a series of indicators.

  The Commission will prepare and make available information to promote better understanding of failure. This information can be complemented by country-specific material (on national laws and existing support services) and used by business support providers, for entrepreneurship campaigns or for entrepreneurship education. The information could deal with common reasons for failure and present portraits of failed entrepreneurs.

  A European conference on insolvency matters organised by the Commission will address the psychological aspects of failure and stigma and the general societal attitudes and mindsets, and cover the regulatory issues.

  The Commission will elaborate, together with member state experts, self-evaluation tools (tests) for entrepreneurs for risk assessment. Nationally adapted, these would indicate where advice can be sought and should be distributed through information packs, the Internet and business advisers.

Further work within the European Commission

Directive 2002/74/EC amended Directive 80/987/EEC, which aims to provide a minimum degree of protection for employees in the event of the insolvency of their employer. To this end, it obliges member states to establish a body which guarantees payment of the outstanding claims of the employees concerned. One of the objectives of the amendments is to protect employees facing not only liquidation proceedings, but also other situations of insolvency of their employer. The concept of ‘insolvency’ is based on that contained in the EU Insolvency Regulation. A new section in Directive 2002/74/EC contains provisions on transnational situations. In line with the jurisprudence of the European Court of Justice (Case C-117/96, Mosbæk and Case C-198/98, Bell Lines Ltd), it refers to the competent guarantee institution and to the sharing of relevant information between the competent administrative authorities. Member states must bring into force the laws, regulations and administrative provisions necessary to comply with Directive 2002/74/EC before October 8 2005.

The European Commission adopted new guidelines on rescue and restructuring. These replace the 1999 guidelines as of October 10 2004 and apply to all aid notified after October 10 2004. The guidelines set out the conditions under which short-term rescue aid and longer-term restructuring aid can be granted to firms facing bankruptcy. These guidelines are an essential state aid policy instrument because they make Commission decisions in individual cases more predictable for companies and the public at large.