EU mulls more unified insolvency laws as wave of bankruptcies approaches

By Jan Strupczewski

BRUSSELS, April 16 (Reuters) - Euro zone finance ministers are discussing on Friday how to improve and possibly unify 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.

The expected surge in EU corporate bankruptcies will have a knock-on effect on the number of bad loans banks have to handle as the post-pandemic economic recovery starts to take hold and governments begin withdrawing state schemes that are now keeping many non-viable companies on life support.

But insolvency laws differ from country to country, making it more 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.

"National insolvency regimes across the EU differ in their design and in their practical implementation," the European Commission said in a paper for the ministers' discussions.

"(They) embody choices made regarding the appropriate balance between creditor and debtor interests ... the priority enjoyed by employees, public utilities and tax authorities in the process," the paper said.

It said euro zone countries should, for instance, agree on a definition of insolvency and when a company should be obliged to undergo formal insolvency proceedings.

It would also help if there was a common view on actions to replenish the insolvency estate in case of fraud, on asset tracing, the ranking of claims, including the position of secured creditors in insolvency and on court capacity, it said.

"The Commission will consider either proposing a legislative instrument for minimum harmonisation of certain targeted elements of corporate insolvency laws, or coming forward with a non-legislative initiative to increase convergence," it said.

Unifying these laws would involve justice ministries, adding an additional layer of difficulty, a senior euro zone official said. "It may be realistic that we will have to look for non- legislative steps to promote convergence," the official 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. Setting EU benchmarks to reach could help, the official said. (Reporting by Jan Strupczewski, editing by Larry King)