The EU is reportedly planning to introduce a kind of ‘early warning system’ to alert banks to the risk of corporate insolvency among their business customers.
According to Reuters, the move comes as lenders across the eurozone are owed around €1 trillion on non-performing loans, which is nearly a tenth of the region’s entire gross domestic product.
The newswire has seen a draft regulation drawn up by the European Commission, which would introduce new rules to help businesses avoid corporate insolvency, restructure more profitably, and pay their creditors.
But the ‘early warning system’ comes at a cost for creditors – as the proposals include a four-month grace period on outstanding debts, during which time any debtors who are genuinely restructuring their business would be allowed to stop meeting their repayments.
This is a substantial extension on the existing 90-day grace period on non-payment of loans, and Reuters quoted one unnamed bank official as saying four months would be too long.
Shareholders would lose some rights under the plans too, as decisions would be allowed with a majority vote in some circumstances where previously only unanimous agreement was acceptable.
In some instances, restructuring decisions might be made not by shareholders alone, but be placed in the hands of a company’s creditors – effectively allowing those who are owed money to have more of a say in how the funds are raised to repay them.
While this might sound more complicated, the plans have the ultimate aim of reducing company insolvency rates and corporate bankruptcy, as well as cutting down on the number of unpaid business loan cases that must be settled in court.
Instead, there would be more opportunity to restructure and recover businesses – and rather than going directly to court, some cases would be handled via mediation instead.
The European Commission proposal still needs to pass through several stages before being introduced – including the European Parliament and the Council of EU States – but if passed, it would then fall to member states to introduce suitable legislation into their own laws.