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Prof. Tibor Tajti on insolvency law:"EU and China should fight the insolvency stigma"

Prof. Tibor Tajti, CEU, summons lawmakers in China and Europa to closer examine the social stigma related to business failure in order to improve insolvency law. This could rescue many companies – and at the same time eradicate the competitive advantage of the United States of America.

"There has been a major shift in European and Chinese bankruptcy law in the past decade,” says Tibor Tajti, Professor of Law at Central European University (CEU) in Budapest, Hungary. In his new article “Bankruptcy stigma and the second chance policy” published in the China-EU Law Journal, he examines the legislation. Brussels and Beijing for instance, endorse a new approach to help businesses to bounce back and give honest entrepreneurs a second chance – basing on the “top model” insolvency law of the United States, as Tajti puts it. This new approach is recorded in writing in the European Commission’s Recommendation of 2014 as well as in the 2007 enterprise insolvency law of the People’s Republic of China. Both papers recommend shifting the focus away from liquidation towards encouraging viable businesses to restructure at an early stage, thus preventing insolvency.

Despite all initiative, the number of business failures in Europe and China compared to the US, remain high. The EU counted around 200,000 businesses facing insolvency with 1.7 million people losing their jobs in 2014. Responsible managers face damage to their career and are in fear for their own economic survival and social loss of face. “In Europe and China, a negative perception of bankruptcy is present, while in the United States, its effects are much less disastrous and stigmatization is rather an issue in the context of consumer bankruptcies and not in the field of business bankruptcies,” Tajti says. Very often in China, there is a strong linkage between local authorities and corporations operating in their city so that authorities are also afraid of losing face. For all these reasons, businesspeople often open insolvency proceedings much too late and therefore, miss the chance of an optimal new start.

"Legal scholars must better understand and acknowledge the impact of bankruptcy stigma,” Tajti says. Moreover, he recommends finding appropriate, interdisciplinary tools to combat the stigma. “Otherwise lawmakers’ efforts aimed at forging a legal environment that would incentivize restructurings of financially distressed businesses hardly will yield success.” As conceivable solutions to this problem, he suggests starting an information campaign to widely spread knowledge on the advantages of a second chance policy and on better legal education in the field of insolvency law as well as publicizing best practice examples of successful restructuring.

Prof. Tibor Tajti is a Professor of Law at Central European University (CEU) in Budapest, Hungary. In 2005, he was awarded the Dr Elemér Hantos Prize for promoting cooperation in Central and Eastern Europe. He was a director at the Machine Tool and Foundries Company Potisje in Ada, Yugoslavia, in the 1990s. At the China-EU School of Law, he teaches and researches insolvency law since 2013.

· Full article “Bankruptcy stigma and the second chance policy” (Springer, China-EU Law Journal, 2017)