Rethinking Insolvency Fragmentation in the EU

Insolvency proceedings in the EU can take up to 3.5 years, with court costs consuming up to 15 per cent of the insolvency estate. “Without clear and legally certain insolvency rules, investors cannot properly price in the risk of default,” says cep lawyer Anastasia Kotowski. Inefficient and protracted proceedings also lead to the emergence of so-called zombie companies – economically unsustainable firms that are kept artificially alive and burden banks with non-performing loans.

Despite several attempts at reform, insolvency law in Europe remains highly fragmented. The EU has repeatedly attempted to harmonise individual aspects in recent years. However, full harmonisation has so far failed to materialise. According to Kotowski, differences in political interests, limited EU competences and deeply rooted economic, institutional and legal traditions in the Member States have so far prevented comprehensive harmonisation.

The cep therefore recommends a four-pillar reform approach: targeted harmonisation of key elements such as the ranking of creditors, closer integration with financial market regulation, and greater transparency through a European insolvency portal. As a further proposal, the study also puts forward an optional “28th regime”: a voluntary European insolvency law for cross-border cases that companies can opt into by contract. Such a system would create legal certainty without replacing national legal systems.

“An integrated European capital market also needs a minimum set of common insolvency rules,” says Kotowski. An optional European insolvency regime could therefore function as a kind of ‘virtual Delaware’ for Europe – a common legal framework for international companies that facilitates investment.