2. Bankruptcy and second chance for SMEs (Dimension 2) in the Western Balkans and Turkey

The performance of the WBT region in bankruptcy and second-chance policies has slightly improved since the last assessment. The region’s average score increased from 2.87 in 2019 to 3.02 in 2022, in part due to mitigation measures taken during the COVID-19 pandemic (Figure 2.1).

Further, the progress achieved by some of the economies is more pronounced than the regional average suggests. Compared with the previous assessment, Bosnia and Herzegovina has made the most significant improvement, with the harmonisation of its bankruptcy policies throughout the territory and its newly introduced hybrid pre-insolvency restructuring and settlement mechanism. Moreover, Turkey has further enhanced its preventive concordat, while Albania has introduced a new pre-insolvency, preventive, out-of-court restructuring settlement.

Implementation of the SME Policy Index’s 2019 recommendations on bankruptcy and second-chance policies has remained limited across the Western Balkans and Turkey. Most progress has been seen in the economies’ legal frameworks. However, as in the previous assessment, improvement has been limited. No concrete steps have been taken to establish bankruptcy prevention mechanisms, such as early warning systems, and little has been done to promote second-chance mechanisms for entrepreneurs (Table 2.1).

An efficient business environment depends on the stability of the businesses that comprise it. Enterprises that continuously generate debt and encounter financial distress can obviously impact a business environment’s health and prosperity. Thus, policies that ensure a seamless and timely market exit of enterprises whose further operation may negatively affect a business environment are crucial to ensuring any economy’s long-term sustainable economic growth.

Prior to the European Commission’s recommendations on the New Approach to Business Failure and Insolvency in 2014, bankruptcy liquidation procedures were typically initiated by interested creditors and managers and owners of debtor companies (European Commission, 2014[1]). In a minority of cases, insolvent companies were saved through recovery and restructuring plans agreed upon by a required majority vote of creditors during insolvency procedures and later confirmed by courts, resulting in a binding judicial decision. However, many cases ended in liquidation due to late interventions to turn such businesses around. There were also inadequate legal provisions in bankruptcy laws that required companies to be over-indebted, or have a debt greater than total assets, before courts could officially open bankruptcy proceedings.

According to the World Bank’s Resolving Insolvency indicator in its Doing Business Report, 70.2% of debt was recovered by creditors in OECD member countries in 2019, but only 38.2% on average in the WBT economies, implying an approximate 60% loss of value (World Bank, 2019[2]).

Following the 2008 financial crisis and a major wave of insolvencies, there were calls to establish a universal bankruptcy regime suitable for all affected parties. As a result, the European Commission adopted a Recommendation on the New Approach to Business Failure and Insolvency in 2014 (European Commission, 2014[1]), the European Insolvency Regulation Recast in 2015 (European Union, 2015[3]), and the Preventive Restructuring Directive in 2019 (European Union, 2019[4]).

The wave of new legislation aimed to refocus Europe’s policies on preventive restructuring and out-of-court insolvency prevention settlements between the debtor and its creditors; updating the rules on cross-border insolvency; and introducing new policies on early warning systems and second chance for failed entrepreneurs. The prevention of insolvency was recognised as a major factor in maintaining a financially healthy business environment. Meanwhile, the adoption of restructuring plans of financially distressed businesses by creditors became possible should the plan propose higher recovery for creditors than bankruptcy liquidation, thus allowing policies supporting restructuring plans to increase savings and recovery values for creditors and debtors, respectively.

The COVID-19 pandemic and the resulting restriction of economic activity in many sectors, which caused unexpected financial crises, coincided with the introduction of preliminary insolvency prevention recommendations by the WBT economies. The region focused its mitigation efforts on reallocating insolvency prevention efforts from company-specific cases to economy-wide prevention instruments to overcome widespread, systematic financial distress. Business support measures to help enterprises avoid current and future bankruptcy varied from temporary bans on filing insolvency of debtors and offsetting payments of debt to the rescheduling of debt payments, quasi loan subsidies, and direct financial aid and subsidies to businesses and citizens.

However, the financial measures adopted by the WBT governments only provided temporary relief to companies, after which increased insolvencies are expected. According to Allianz, a leading insurance company, the risk of debtor non-payment is expected to increase, and 7-15% of European SMEs are at risk of insolvency in the next several years (Kuhanathan and Boata, 2021[5]). Dutch Experian, another major EU insurance company, predicts that 1 in 16 (6.25%) small businesses will default by the third quarter of 2022 (Dutch Experian, 2021[6]).

It remains crucial for WBT economies to introduce appropriate measures and legal provisions that promote the prevention of insolvency. They will also need to create positive attitudes around giving entrepreneurs a fresh start and ensure that those starting again have the same market opportunities they had the first time. Likewise, adequate attention should be given to the criteria for granting second-chance procedures to honest entrepreneurs, focusing on those who can propose viable plans. In this context, effective bankruptcy regulations will be essential to ensure a positive impact on companies’ market exits and reduce the opportunity cost of entrepreneurship by creating more welcoming conditions for the establishment of new businesses.

This chapter focuses on bankruptcy and second-chance policies for SMEs. The assessment framework is divided into three sub-dimensions:

  • Sub-dimension 2.1: Preventive measures looks at the existence of alternatives to in-court bankruptcy processes, such as the establishment of early warning systems and out-of-court settlement mechanisms that the economies use to help SMEs avoid bankruptcy.

  • Sub-dimension 2.2: Survival and bankruptcy procedures focuses on legislation and practice and their alignment with international standards. It looks at whether survival procedures, such as reorganisation procedures, exist and how they operate. It assesses policy performance, first in design and implementation then in performance, monitoring and evaluation.

  • Sub-dimension 2.3: Promoting second chance examines how the economies facilitate a second chance for failed entrepreneurs, assessing attitudes towards giving honest entrepreneurs a fresh start. It specifically looks at the existence of training, information and second-chance campaigns.

Figure 2.2 shows how the sub-dimensions and their fundamental indicators make up the assessment framework for this dimension. For more information on the methodology, see the Policy Framework and Assessment Process chapter and Annex A.

Compared to the 2019 assessment, minor adjustments have been made to the framework to enhance the importance of the bankruptcy and second chance for SMEs, translated by a more in-depth analysis of Sub-dimension 2.2. The assessment also considers COVID-19 response measures, although no evaluation has been made in this regard. Moreover, the indicator on out-of-court settlements, previously considered under Sub-dimension 2.2, was split into: 1) out-of-court settlements without court involvement, as a preventive measure under Sub-dimension 2.1; and 2) out-of-court settlements with the involvement of the court, considered under Sub-dimension 2.2. However, it should be noted that in practice, there is no clear division, as the process is intertwined.

Outcome indicators play a key role in examining the effects of policies. They provide crucial information for policy makers to judge the effectiveness of existing policies and the need for new ones. Put differently, they help policy makers track whether policies are achieving the desired outcome. The outcome indicators chosen for this dimension are designed to assess the WBT economies’ performance in resolving insolvency. This section starts by drawing on the indicators to describe this performance.

The region’s performance has, on average, remained close to the same levels as in the previous assessment. No progress has been recorded in terms of the time required to resolve insolvency. Turkey remains the lengthiest economy to resolve an insolvency case, while Montenegro remains the fastest (Figure 2.3) (World Bank, 2019[2]).

The cost of resolving insolvency has remained at the same levels as the previous assessment. Bosnia and Herzegovina and Montenegro are the only economies that outperform the OECD average, while Kosovo1 and Serbia have the highest costs for resolving insolvency (Figure 2.4) (World Bank, 2019[2]).

Since 2018, the recovery rate has increased for all economies in the Western Balkans. In 2020, it averaged 42.8 cents on the dollar, while in Turkey the rate continued to decrease and dropped to 10.5 cents on the dollar (Figure 2.5). All WBT economies are still performing below the OECD average (World Bank, 2019[2]).

Swift government intervention in providing assistance to SMEs and entrepreneurs who foresee financial difficulties or failures is crucial. It hinges on timely detection of financial vulnerabilities that can impact an enterprise’s chances of survival. Therefore, initiatives such as diagnostic tools and information services form the backbone of a successful government strategy to prevent bankruptcy.

Overall, prevention mechanisms include: 1) early warning tools and systems designed to provide timely warning signals regarding financial distress, based on self-tests or other preferred methods; 2) business advisory and mentoring support services to companies in financial distress; 3) voluntary out-of-court settlements between a debtor and its creditors; and 4) hybrid or pre-insolvency prevention procedures negotiated out of court between a debtor and its creditors. The first three mechanisms are considered entirely preventive, while the fourth is a hybrid between an out-of-court settlement and a formal court rehabilitation procedure.

There continues to be a lack of strategic policy making in WBT economies when it comes to insolvency prevention mechanisms. Insolvency is only considered to the extent of formal bankruptcy legislation, limiting the scope of insolvency prevention mechanisms.

Overall, no major progress has been recorded since the previous assessment; preventive measures remain limited in the region (Table 2.2). While Albania and Turkey are the top performers when it comes to preventive measures for bankruptcy and insolvency, Bosnia and Herzegovina recorded the highest increase since the 2019 assessment.

Early warning systems can help prevent bankruptcy and liquidation by promptly detecting signs of financial distress so that businesses can obtain assistance to successfully restructure before irreparable damage is done. As SMEs can often underestimate their degree of financial difficulties and delay taking appropriate measures to lessen their financial burdens, governments can implement early warning systems that urge SMEs to initiate restructuring procedures quickly, helping lower the risks of bankruptcy by acting quickly.

WBT economies generally lack early warning mechanisms and have a limited notion of how to develop them or the type of best practice models most suitable to adapt and use. In all economies, except the Federation of Bosnia and Herzegovina enity, public institutions have established initiatives that act as early-stage warning systems, detecting indications of distress through financial tools, such as tax declarations or bank loans. However, these tools can miss signs of financial trouble, particularly when it comes to SMEs. For example, not all debtors apply for bank loans, as they often do not fulfil the conditions for institutional financing, such as collateral or credit requirements. Likewise, in cases where annual financial statements are submitted to the tax authorities, it may already be too late to resolve problems using only advisory services.

Nevertheless, some initial editions of early warning systems exist in the region. In Kosovo, for example, the tax administration monitors the performance of companies and implements basic insolvency preventive measures. It notably runs “basic” early warning tools based on companies’ annual financial statements. However, as this mechanism bases its warnings on yearly financial statements, which can lead to belated signals of distress, rendering it ineffective in preventing some bankruptcy cases, it is not considered a fully fledged early warning system.

Some banks and private credit registries have also developed their own mechanisms to assess customers’ credit performance by drawing on information from multiple sources such as tax declarations, social security declarations and balance sheets. These mechanisms have been designed to reduce the number of non-performing loans rather than avoid liquidation. In some cases, banks or private credit registries assign a risk classification. For instance, Montenegro’s Central Bank is obliged by law to collect data from different banks on entrepreneurs whose accounts are blocked and publish them on their website. While this system allows financially distressed companies to be identified before they file for bankruptcy, it still does not provide enough time, nor a solution, to reorganise the firm and the debt to prevent bankruptcy.

An out-of-court settlement is a practical tool used in situations where business advisory or mentoring services alone cannot resolve issues of financial distress for companies. It provides a softer solution to companies in pre-insolvency situations, where debt is rescheduled or refinanced based on the willingness of creditors. The debtor initiates this voluntary procedure, and the agreement is binding only to the creditors who voted for the restructuring of the debt in the presence of a public notary. The COVID-19 pandemic has accelerated the adoption of various effective out-of-court mechanisms, particularly in OECD member countries. The WBT economies could use these mechanisms as guidance for updating their own frameworks on alternative methods of insolvency resolution (Box 2.1).

In the current context, out-of-court settlement procedures in the region are scarce and generally underdeveloped in cases where they do exist. In Serbia, the Law on Consensual Financial Restructuring allows the debtor to initiate an out-of-court settlement, albeit only under the condition that it is supported by at least one financial institution, usually a bank, with the aim of resolving problematic non-performing loans. While Turkey has also introduced a similar procedure for financial restructuring, as a COVID-19 recovery measure, with the active support of the Association of Turkish Banks, the new scheme is temporary and expires in 2023. Nevertheless, approximately TRY 5 billion (around EUR 285 million) of debts have been successfully resolved through this procedure since its implementation. In February 2021, Albania introduced a new insolvency prevention regulation on accelerated extrajudicial reorganisation agreements, which is expected to enhance bankruptcy prevention, although certain deficiencies have been noted. Meanwhile, Montenegro has revoked a similar law since the last assessment and currently does not have a law regulating out-of-court settlements. The remaining economies in the WBT region do not have particular legal solutions on out-of-court settlements for financially distressed companies.

Hybrid insolvency procedures combine both out-of-court and formal court elements and can be an effective solution for minimising the cost and delay associated with formal restructuring procedures. This type of process can also help circumvent long-term disagreements between debtors and creditors by overruling dissenting opinions among creditors (IMF, 1999[10]). These procedures are initiated as out-of-court settlements and are then finalised during an in-court process, binding the agreed-upon restructuring schemes for all creditors.

The insolvency frameworks of all WBT economies, with the exception of Albania and Montenegro, comprise either pre-insolvency restructuring plans, pre-packaged reorganisation plans or preventive concordat hybrid procedures. Similar to good practices implemented in OECD member countries, a debtor’s pre-insolvency plans that are not accepted by creditors and/or not confirmed by the court can be subject to superseding the court’s authority in overruling the initiation of liquidation processes. Consequently, the debtor remains in possession of its assets and manages its operations under the supervision of a bankruptcy administrator, making the process faster and cheaper than in-court reorganisation procedures.

The length of pre-insolvency proceedings varies in the region. In 2021, proceedings in Bosnia and Herzegovina and North Macedonia took, on average, eight months to close a case. In Serbia, pre-packaged, fast-track insolvency reorganisations were generally completed within three months, while preventive concordats in Turkey took approximately one year. However, there is no comparable data for the remaining economies, making it difficult to draw region-wide conclusions.

  • Develop insolvency prevention policy measures, including a fully fledged early warning system, as SMEs tend to underestimate the importance of maintaining a sound financial status and avoiding riskier decisions. If appropriate corrective actions are not taken promptly, companies are likelier to face financial distress and later insolvency, especially in the aftermath of the COVID-19 pandemic. One option could be to widen the scope of the existing advisory support services, including the creation of anonymous self-check tests to identify possibilities to resolve early financial distress. The selection of the right system is subject to the size of the economy, the number of registered entities, digitalisation of financial reporting and public awareness of existing preventive measures. Experience and good practices implemented in EU member states could serve as a good example for WBT economies in selecting an appropriate model of early warning systems (Box 2.2).

  • Provide permanent advisory and mentoring services to financially distressed companies. The provision of business advisory services for companies in financial distress should be converted to permanent services in cases where such services are temporary, as a sort of a so-called “pre-insolvency clinic” instead of a time-bound project. Consistent new market entries are accompanied by a higher proportion of companies that may potentially find themselves in financial distress and thus need support to avoid negative externalities that could spread to other operating entities in the business ecosystem. Adding early restructuring services to existing ones, such as export promotion services, partner networking, business planning or financial management, would help strengthen preventive measures.

Insolvency frameworks protect a debtor’s and creditors’ rights in cases of imminent insolvency or over-indebted insolvent companies. Such legislation offers legal protection to viable parts of businesses, allowing debtors to negotiate restructuring agreements with their creditors (OECD et al., 2019[12]). As also highlighted by the European Commission’s recommendation from March 2014, transparent and well-defined legislation translates into efficient bankruptcy proceedings, creating less of a burden on the judiciary system and leading to a higher number of reorganisations instead of filed bankruptcies (European Commission, 2014[1]).

The WBT economies have well-established legal frameworks for survival and bankruptcy procedure regulations (Table 2.3). Future progress will depend on the streamlining of reorganisation and liquidation procedures. Overall, each economy’s performance is comparable in this assessment, with few disparities across the region.

An efficiently designed insolvency regime is vital for facilitating the orderly exit of failing firms from the business environment. Ideally, an insolvency regime would prevent hasty and inefficient practices by creditors rushing to collect on individual claims that could result in lower recovered assets. Optimal insolvency policies, which equally rely on enforcement quality and judicial efficiency, should encourage debtors to address financial difficulties early on. Aspects of well-organised insolvency agreements include clear triggers to initiate insolvency proceedings, fair and strategic liquidation options that prioritise rehabilitation options for viable firms, and the inclusion of personal insolvency regimes in cases of merged personal and corporate assets (McGowan and Andrews, 2018[13]) (Box 2.3).

All WBT economies have formal bankruptcy reorganisation and liquidation procedures in place, with some economies having introduced additional reorganisation procedures for SMEs since the previous assessment. Overall, bankruptcy reorganisation plans in the WBT region can be proposed by the debtor, some creditors or bankruptcy administrators, allowing for the submission of multiple, competing reorganisation plans. However, none of the economies has clear rules for selecting the most beneficial plan for all creditors in the case of multiple options.

The prevalence of hybrid insolvency regimes in the region, which combines judicial control in formal proceedings with out-of-court procedures, has also increased in recent years. Several economies, such as Bosnia and Herzegovina and North Macedonia, have introduced hybrid pre-insolvency restructuring procedures. Both Serbia and Turkey have implemented hybrid schemes, with Serbia using a pre-packaged hybrid bankruptcy reorganisation procedure and Turkey introducing a hybrid preventive concordat restructuring agreement.

Since the previous assessment, all WBT economies, except Kosovo, have made a number of amendments to their insolvency legal frameworks. The most significant amendment was made in Bosnia and Herzegovina, whereby the Brcko District abolished its Bankruptcy Law in 2019 and introduced a new insolvency regime that is fully harmonised with Republika Srpska. The Federation of Bosnia and Herzegovina synchronised its legislation with the Brcko District and Republika Srpska by introducing a new pre-insolvency restructuring and an electronic insolvency register. Meanwhile, North Macedonia prepared a new draft Bankruptcy Law in September 2021; however, it had not yet been submitted for parliamentary vote at the time of writing.

Table 2.4 summarises the amendments made in the region’s insolvency frameworks since 2019 and the foreseen additions, which were not yet implemented at the time of writing. However, it should be noted that following the changes in their regulatory frameworks, none of the economies provided formal training to ensure greater professional standards and high-quality services to the implementation bodies, such as the bankruptcy administrators, bankruptcy judges, appraisers and creditors’ associations.

Digitalising the liquidation process can enhance transparency; save time and lower the costs of lengthy liquidation; anticipate potential conflicts between the creditors’ committee; and protect creditors’ rights as claims are recovered from the best market price reached at a competitive bidding procedure (OECD et al., 2019[12]). The digitalisation of liquidation processes in the region is generally underdeveloped, with a relatively low number of electronic services for liquidation processes compared to OECD member countries. However, North Macedonia stands out as a top performer in this regard, having substantially simplified its liquidation process by digitalising the sale of assets through e-auctions and automated distributions if there are no appeals from creditors (Box 2.4).

In 2021, Turkey introduced its e-auction system for liquidation proceedings via the National Judiciary Informatics System. Through this structure, both debtors and creditors can initiate the process of selling assets. However, some shortcomings, such as the lack of obligation to seek debtors’ consent to grant sales authorisations, have yet to be addressed. In addition, the appraisal costs of individual sales requests could potentially increase the length and the cost of bankruptcy and insolvency proceedings.

Simplified bankruptcy reorganisation and liquidation procedures aim to assist micro and small companies that may not have substantial assets, as the standard debt restructuring or liquidation procedure may be too costly to be practical. Ideally, a pre-packaged arrangement should be agreed upon between the debtor and creditors that requires fewer administrative steps and a lower approval threshold, unlike a traditional scheme, where the debtor should call the creditors board to negotiate and reach an agreement with the majority.

The bankruptcy and liquidation procedures in the WBT region are generally complex and difficult for small enterprises to navigate. With the exception of Kosovo and North Macedonia, WBT economies’ current legal frameworks are designed for medium-sized and large enterprises, which have more administrative capacities than small firms.

For Kosovo and North Macedonia, expedited proceedings for micro and small enterprises are permissible under their current legislative frameworks. North Macedonia offers an accelerated out-of-court settlement procedure for “small value” enterprises with bankruptcy assets amounts up to MKD 1 million (approximately EUR 16 200) and fewer than ten employees. However, this scheme only removes a small portion of the overall process in which the Board of Creditors’ authorisation is required for liquidation, limiting the general impact of this accelerated track. Meanwhile, the Insolvency Law of Kosovo extends the option for expedited reorganisation to SMEs with an annual turnover of up to EUR 1 million or fewer than 25 employees on a voluntary basis. Under Kosovo’s framework, the court holds an accelerated hearing to determine if the debtor’s pre-filing solicitation of votes discloses all the required information and whether voting conditions were met, common impediments that typically prolong the process.

Monitoring and evaluation of insolvency regimes is crucial for assessing the overall health of economy-specific and regional business environments. Well-developed and reliable indicators to monitor insolvency proceedings, such as the treatment of failed entrepreneurs, prevention and streamlining techniques, restructuring tools, and quantitative markers, can help support informed policy making that helps streamline access to swift and effective insolvency proceedings for small enterprises.

Monitoring and evaluation systems of bankruptcy proceedings in the WBT region are primarily based on the performance of the judiciary system. The overall level of data collection varies widely among the economies. In Montenegro, North Macedonia and Serbia, data are collected on the number of opened and closed cases by the regional court of jurisdiction. In contrast, data in Turkey are only collected at the national level.

However, in most cases, the monitoring and evaluation of collected data remains very weak, as most WBT economies do not collect information, such as the cost of the bankruptcy proceeding as a percentage of the bankruptcy estate, the number of backlog court cases related to bankruptcy or creditors’ recovery. Moreover, none of the economies tracks the final status of the reorganisation plans, eliminating the possibility of assessing the efficiency of implemented legal frameworks.

Nevertheless, some efforts have been made to collect a handful of data indicators related to insolvency procedures in a few economies. Serbia and Turkey monitor the size of court case backlogs annually, while Albania and Turkey also measure the length of bankruptcy procedures.

  • Streamline liquidation processes by introducing digital tools. Digitalising the liquidation process would enhance transparency, save time and cost of the currently lengthy liquidation procedures, anticipate potential conflicts within the creditors’ committee, and protect creditors’ rights as claims are recovered from the best market price reached through a competitive bidding procedure. This could be achieved by introducing e-auctions and automatic e-distributions mechanisms. Moreover, information about insolvency procedures should be publicly available and contain information such as rules on data protection and privacy.

  • Introduce simplified bankruptcy proceedings for SMEs. As SMEs have smaller scales of business and simpler operations, short-tracking proceedings, for example, for SMEs with a maximum debt set at a given threshold, determined based on the average size of an economy’s micro and small-sized firms, at the time of filing for bankruptcy would ease the cumbersome and expensive administrative burdens for small companies. Additionally, only debtors should be able to file for bankruptcy reorganisations, and restructuring plans should be simplified to reflect the fewer resources of small businesses, e.g. there is no need for creditors’ committees (see Box 2.5for a good practice example). Simplified and fast-track procedures are particularly relevant in the aftermath of the COVID-19 pandemic. They allow for quicker reintegration of businesses into the economy and avoid potential increases in unemployment.

  • Improve monitoring and evaluation mechanisms. Policy making is effective when it is well-informed and evidence-based, which requires appropriate monitoring and evaluation mechanisms. As highlighted above, WBT economies collect very little bankruptcy-related data, which does not allow for the effective and regular monitoring of the implementation of insolvency measures. Therefore, all economies should predefine a set of key performance indicators to enable monitoring and evaluation of the progress made to better determine required changes to the introduced measures and legal frameworks. For more information on data that WBT governments could consider collecting in this area, please see Annex C. Improved co-ordination between different public institutions is also recommended. It may lead to an increase in the number of relevant indicators collected and ensure an improved evaluation of the impact of insolvency policies.

  • Maintain the administrative capacities of the bodies implementing the insolvency framework to harmonise legislative changes among the WBT economies. Despite changes to their insolvency regimes, none of the economies provided training to bankruptcy administrators, bankruptcy judges, appraisers or creditors’ associations. Providing training would ensure that implementation bodies offer high-quality services and would help to improve administrative capacity.

Economies are increasingly recognising the importance of giving a second chance to entrepreneurs who have experienced bankruptcy. This is vital for stimulating economic growth, creating jobs and improving the business environment, especially in the aftermath of the COVID-19 pandemic. However, due to the stigma associated with failure and the difficulty distinguishing honest entrepreneurs from fraudulent ones, giving businesses a second chance is not always easy.

A second-chance policy allows failed honest entrepreneurs to start up fresh businesses again. Promoting second chance through public awareness campaigns for previously bankrupt entrepreneurs allows for both their quick reintegration into society and the change of cultural stigmatisation of failure into new opportunity. Studies show that entrepreneurs at risk or who have failed and are willing to make a fresh start based on lessons learnt can bring more benefits to an economy than start-ups. Such benefits can include additional new job openings and growth (Startup Genome, 2021[16]).

In this context, the discharge of debt and personal responsibility and liability is extremely important for failed entrepreneurs as it allows them to reintegrate into the economy. As discharge duration can be lengthy and imposed sanctions for failed entrepreneurs are relatively strict, bankruptcy can effectively prevent these companies from making a new start. Even when this is not the case, tailor-made support to restart a business is often limited.

As in the previous assessment, second-chance promotion remains underdeveloped in the region (Table 2.5). Although second-chance policies form part of the SME-related strategic documents in almost all WBT economies, no concrete support measures in this context have been envisaged. However, Bosnia and Herzegovina is slightly ahead of its regional peers, thanks to its project-based support for second chance, provided through business advisory services in Republika Srpska.

Debt discharge procedures relieve debtors from remaining debt in bankruptcy procedures, including personal liabilities. In reorganisation procedures, debt discharge is granted by court decision following confirmation of the restructuring plan, which explicitly states that only the debt foreseen in the proposal approved by creditors has to be paid. In bankruptcy liquidation, on the other hand, the debt discharge depends on whether the liquidation is caused by the negligence of the debtor’s management or an ordinary or fraudulent bankruptcy.

All WBT economies have automatic debt discharge subject to confirmation of the restructuring plan under the bankruptcy reorganisation procedures. Albania, Bosnia and Herzegovina, Kosovo, Montenegro, and Turkey have formal discharge procedures for entrepreneurs. In Serbia, the law only regulates discharge for legal entities and does not provide any reinstatement of rights for natural persons upon liquidation. Similarly, in North Macedonia, there is no discharge from debt except for natural persons registered as a legal person or an incorporated (one-person) company. However, this procedure should be initiated separately upon the closing of bankruptcy liquidation procedures by the court.

The negative effects of failure on honest entrepreneurs, such as sanctions or the loss of civic rights, should be limited in order to provide them with the opportunity for a second chance at building a business. Thus, legal frameworks should be formulated in a way that avoids barriers to the regeneration of businesses and endows second-time entrepreneurs with services to avoid repeating mistakes that previously resulted in failure. Governments should also be active in supporting unsuccessful entrepreneurs through second-chance schemes as the cultural stigma of business failure may have negative impacts, for example when failed entrepreneurs apply for bank loans.

Like in the previous assessment, second-chance promotion is underdeveloped in the region. However, on a positive note, WBT economies do not envisage sanctions or civic consequences for failed honest entrepreneurs following bankruptcy, which lifts barriers to entry for entrepreneurs returning to the economy.

None of the WBT economies promotes second-chance programmes among entrepreneurs at risk of failing or those who have already failed. Public awareness campaigns and action plans on second-chance opportunities for failed businesses are also lacking. On a positive note, Republika Srpska has been supporting second-chance opportunities through business advisory services as part of the DanubeChance2.0 EU Interreg project. In particular, it established an annual budget line for its second-chance programme of BAM 100 000 (around EUR 50 000). While almost all of the remaining economies in the region highlight the importance of second-chance policies in their SME strategies, none of them provide details on concrete plans/measures to be implemented.

  • Promote second chance to honest entrepreneurs. All WBT economies should promote second chance as an option to honest entrepreneurs to have a fresh start and to reduce the cultural stigma related to business failure. Table 2.6 provides an overview of potential policy options that economies could implement at different stages of their bankruptcy processes.

  • Introduce amendments to legislation to support second chance. The WBT economies should adjust their legislation to provide second-chance support for entrepreneurs at risk of failing or who have already failed. Potential options include: 1) free business advisory services; and 2) interest-free financial support in the form of short-term loans to finance ongoing operations.


[7] Allen & Overy (2020), “WHOA: The new Dutch scheme”, web page, https://www.allenovery.com/en-gb/global/news-and-insights/publications/whoa--the-new-dutch-scheme.

[15] Bonapfel, P. (2021), A Guide to the Small Business Reorganization Act of 2019, https://www.ganb.uscourts.gov/sites/default/files/sbra_guide_pwb.pdf.

[9] CMS Germany (2021), The Stabilisation and Restructuring Framework from the Perspective of Financing Creditors, CMS Germany, https://cms.law/en/media/local/cms-hs/files/publications/publications/starug-financing-creditors-04-2021.

[17] Commission of the European Communities (2007), Overcoming the Stigma of Business Failure – For a Second Chance Policy: Implementing the Lisbon Partnership for Growth and Jobs, Commission of the European Communities, Brussels, https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0584:FIN:en:PDF.

[6] Dutch Experian (2021), “SMEs in the Netherlands risk delayed bankruptcies and declining credit scores as COVID-19 situation continues”, web page, https://www.experian.nl/over-experian/2021/02/18/smes-in-the-netherlands-risk-delayed-bankruptcies-and-declining-credit-scores-as-covid-19-situation-continues.

[1] European Commission (2014), Commission Recommendation of 12 March 2014 on a New Approach to Business Failure and Insolvency, Official Journal of the European Union, L 74/65, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014H0135&from=EN.

[4] European Union (2019), Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on Preventive Restructuring Frameworks, on Discharge of Debt and Disqualifications, and on Measures to Increase the Efficiency of Procedures Concerning Restructuring, Official Journal of the European Union, L 172/18, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32019L1023.

[3] European Union (2015), Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings, Official Journal of the European Union, L 141/19, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32015R0848.

[11] IMF (2021), Restructuring and Insolvency in Europe: Policy Options in the Implementation of the EU Directive, International Monetary Fund, https://www.elibrary.imf.org/view/journals/001/2021/152/001.2021.issue-152-en.xml.

[10] IMF (1999), Orderly & Effective Insolvency Procedures, International Monetary Fund, https://www.imf.org/external/pubs/ft/orderly.

[5] Kuhanathan, A. and A. Boata (2021), European SMEs: 7-15% at Risk of Insolvency in the Next Four Years, Allianz SE, https://www.allianz.com/en/economic_research/publications/specials_fmo/2021_09_01_EuropeanSMEs.html.

[13] McGowan, M. and D. Andrews (2018), “Design of insolvency regimes across countries”, OECD Economics Department Working Papers, No. 1504, OECD Publishing, Paris, https://doi.org/10.1787/d44dc56f-en.

[12] OECD et al. (2019), SME Policy Index: Western Balkans and Turkey 2019: Assessing the Implementation of the Small Business Act for Europe, SME Policy Index, OECD Publishing, Paris, https://doi.org/10.1787/g2g9fa9a-en.

[14] SCBL Project (2017), Compilation of Laws and Regulations: Bankruptcy and Liquidation, https://economy.gov.mk/Upload/Editor_Upload/Projekti/ENG%20-cocompilations%20of%20laws.pdf.

[16] Startup Genome (2021), The Global Startup Ecosystem Report: Agtech & New Food Edition, Startup Genome, https://startupgenome.com.

[8] UK Government (2020), Corporate Insolvency and Governance Act 2020, https://www.legislation.gov.uk/ukpga/2020/12/contents/enacted.

[2] World Bank (2019), “Resolving insolvency”, Doing Business, https://archive.doingbusiness.org/en/data/exploretopics/resolving-insolvency.


← 1. This designation is without prejudice to positions on status and is in line with United Nations Security Council Resolution 1244/99 and the Advisory Opinion of the International Court of Justice on Kosovo’s declaration of independence.

Metadata, Legal and Rights

This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Extracts from publications may be subject to additional disclaimers, which are set out in the complete version of the publication, available at the link provided.

© OECD 2022

The use of this work, whether digital or print, is governed by the Terms and Conditions to be found at https://www.oecd.org/termsandconditions.