Small Firms, Big Gap: Rethinking MSME Rescue in EU Insolvency Law

Abstract

This paper argues that despite two decades of reform, the European Union’s (EU) insolvency framework remains structurally and behaviourally inaccessible to micro-, small-, and medium-sized enterprises (MSMEs). While policy rhetoric has embraced the idea of a “rescue culture,” practical implementation has prioritised larger, well-resourced firms. Drawing on international guidance and case studies from Ireland, France, and the United States (US), the paper shows that legal reform alone is insufficient. Structural complexity, cultural stigma, and weak institutional outreach continue to block MSMEs’ access to rescue. The paper proposes a forward-looking agenda for EU reform centred on three pillars: legal simplification tailored to MSMEs, institutional scaffolding to enhance visibility and support, and cultural reframing to normalise restructuring as a second chance. It concludes that a functioning rescue culture must treat MSMEs not as scaled-down versions of large firms but as distinct users with unique constraints and capacities.

1. Introduction

Micro-, small-, and medium-sized enterprises (MSMEs) make up over 99% of all businesses in the European Union (EU).1 They are the backbone of local economies, engines of employment, and essential contributors to innovation and resilience across the Union. According to the EU (European Commission 2003), micro-enterprises employ fewer than 10 people and have either an annual turnover or a balance sheet total not exceeding €2 million; small enterprises employ fewer than 50 people with thresholds of €10 million; and medium-sized enterprises fall below 250 people with respective ceilings of €50 million and €43 million. MSMEs account for nearly 90 million jobs—half of private sector employment (49.6% of jobs)—and generate more than half of the EU’s GDP.2 In 2022 alone, they produced approximately €12 trillion in turnover, about 36% of EU added value (Schulze Brock et al. 2025).3

European policymakers have long acknowledged the strategic importance of MSMEs. The 2008 “Small Business Act for Europe” (European Commission 2008) outlined ten guiding principles to promote entrepreneurship, notably the need to “think small first” and to “ensure a second chance for honest entrepreneurs” (p. 4). Subsequent initiatives, including the SME tests for new legislation and the establishment of the SME Envoy Network, reinforced the idea that policy frameworks should consider the needs of smaller firms. More recently, the 2023 “SME Relief Communication” (European Commission 2023) reiterated support for MSMEs through proposals aimed at improving access to finance, managing late payments, and supporting firms throughout their lifecycle.

Despite these efforts, a critical area of policymaking remains curiously underdeveloped: business failure and insolvency. MSMEs are at the centre of policy debates on sustainability (European Commission 2020), finance (European Investment Fund 2023), and digitalisation (European Investment Bank 2020), yet when it comes to insolvency and business rescue, they are systematically overlooked. This omission is problematic because most firms, including MSMEs, will at some point encounter financial distress. Yet, EU insolvency frameworks remain ill-suited to address this reality.

Over the past two decades, the EU has repeatedly declared its ambition to build a “rescue culture”—a framework of laws and institutions aimed at preserving viable businesses, facilitating early restructuring, and supporting honest but distressed entrepreneurs (European Commission 2016; Gant 2016). However, this rescue culture remains largely aspirational. EU reform efforts, including the 2014 Recommendation on a new approach to business failure (European Commission 2014) and insolvency Directive 2019/1023 (European Commission 2019), introduced procedural innovations such as early warning tools and debtor-in-possession mechanisms, but they have not meaningfully considered the specific conditions under which MSMEs operate. Optional simplifications have been permitted, but no structural design has been mandated.

This paper argues that EU insolvency frameworks remain structurally misaligned with the capacities and constraints of MSMEs. These frameworks presume access to legal advice, creditor cooperation, and institutional familiarity—features which are rare among the small business population. As a result, they remain functionally irrelevant for the vast majority of firms in distress.

To reflect this, the paper proceeds as follows. Section 2 outlines the evolution of the EU’s rescue culture agenda and demonstrates how Directive 2019/1023, while ambitious in its aims, remains structurally misaligned with the realities of MSMEs. Section 3 situates this misalignment within international guidance from the World Bank, UNCITRAL, OECD, and IMF before turning to two contrasting EU Member States whose experiences illuminate the limits of legal design: Ireland, which introduced a dedicated MSME rescue procedure, and France, which achieves high MSME rescue uptake through a dense institutional ecosystem rather than bespoke legislation. Section 4 then examines behavioural and cultural dynamics as independent determinants of access to rescue, drawing on socio-legal research and comparative insights, turning to the United States to illustrate how legal simplification can succeed when embedded within a mature institutional and cultural environment. Finally, Section 6 develops a forward-looking agenda for the EU, identifying structural, institutional and behavioural reforms necessary to create a rescue framework that meaningfully includes MSMEs.

Ultimately, this paper contends that the EU’s current legalistic approach to rescue is insufficient. MSME exclusion is not merely a legal gap but the result of a behavioural, institutional, and systemic mismatch. A truly effective EU rescue strategy must combine legal reform with ecosystem building; one that embeds law within trusted networks, visible information channels, and a culture of legitimacy and support. This is the missing piece in EU insolvency reform.

2. A Rescue Culture for Whom?

2.1. The Concept and Rationale of the “Rescue Culture”

Over the last four decades, insolvency law across many jurisdictions has undergone a profound transformation. Whereas liquidation was once the primary—and often only—response to financial distress, modern policy and scholarship increasingly emphasise the preservation of viable businesses and the maintenance of productive capacity. Within this context, the idea of a “rescue culture” has taken root in policy, legislation, and academic scholarship. Its central premise is that insolvency law is not merely a collection mechanism for distributing losses among creditors (Jackson 1982, 1986; Baird and Jackson 1984, 1990), but should, where feasible, seek to preserve productive value, maintain employment, and support continued economic activity.

The “rescue culture” has been defined as a “multi-aspect concept, having both a positive and protective role.” (Hunter 1999, p. 435). At one level, it is grounded in legislative and judicial efforts to adopt a more humane and constructive approach towards distressed debtors. At another, it embodies a purposive interpretive principle applicable to socio-economic statutes, articulated in the Latin maxim “ut res magis valeat quam pereat” (“so that the transaction shall not perish, but flourish”). More broadly, a rescue culture expresses a macroeconomic commitment to preserving productive value: the destruction of viable enterprises impoverishes not only business owners but also their creditors, employees, communities, and the wider economy (Hunter 1999, pp. 435–36). In short, the “rescue culture” reflects a commitment to helping companies weather temporary financial trouble, avoid liquidation, and continue operating (Insolvency Service 2000, p. 9).

Academic definitions mirror this multidimensional rationale. Corporate rescue is framed as an economic and social policy that seeks to rehabilitate viable firms in the interests not only of the company itself but also of its creditors, employees, communities, and the wider economy (Gant 2016, p. 73). Effective restructuring mechanisms can preserve supply chains, protect employment, attract new investment, and facilitate the reorganisation of underperforming segments of a business while maintaining the continuity of the enterprise as a whole (Wood 2022; Finch 2009, p. 188; Armour 2001; Gilson 2010).

Empirical evidence underscores the potential distributive and efficiency gains of rescue. In jurisdictions with effective restructuring regimes, creditors recover on average 83% of their claims, compared to just 57% in liquidation (European Commission 2016, p. 3). Rescue, in other words, is not simply a matter of debtor leniency; it is a mechanism for maximising value, stabilising employment, and mitigating the wider social costs of business failure.

Against this backdrop, it is unsurprising that the language of “rescue culture” has been taken up enthusiastically in European policy discourse. However, the practical realisation of this ideal depends crucially on the design and accessibility of the legal and institutional frameworks through which rescue is pursued.

2.2. The EU’s Rescue Culture

The EU’s contemporary focus on rescue can be traced to the early 2010s, when policymakers became increasingly aware that divergent national insolvency regimes hindered early restructuring, cross-border investment, and efficient allocation of capital.4 The European Parliament Resolution with recommendations to the Commission on insolvency proceedings in the context of EU company law (European Parliament 2011) called for greater harmonisation and drew attention to the absence, in several Member States, of effective rescue mechanisms for business rescue. This prompted the Commission’s 2012 Communication A New Approach to Business Failure and Insolvency (European Commission 2012), which marked a decisive shift in EU policy thinking. Insolvency was no longer framed purely as a terminal event but as a moment that should, where possible, trigger timely intervention, business continuity, and “second chance” entrepreneurship. Early restructuring of viable firms was presented as a key component of a more integrated and resilient internal market.

The Commission developed this vision in its 2014 Recommendation on A new approach to business failure and insolvency (European Commission 2014). The Recommendation urged Member States to introduce preventive restructuring frameworks to allow debtors in financial difficulty to restructure at an early stage, to facilitate debtor–creditor negotiations outside the shadow of formal insolvency, and to promote a genuine “second chance” for honest entrepreneurs. Although non-binding, it was the first EU instrument to articulate, in concrete terms, the elements of a rescue-oriented insolvency culture and to invite Member States to converge around them.

These policy initiatives culminated in Directive (EU) 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (European Commission 2019). Heralded as a milestone in EU insolvency policy (IMF 2021, p. 4), the Directive sought to embed rescue tools in national systems by requiring Member States to introduce preventive restructuring frameworks for debtors in financial distress but not yet insolvent.

Several of the Directive’s features visibly reflect the rescue culture logic. Early warning mechanisms (Recitals 17; 22; Article 3) were encouraged to help debtors and their advisors identify financial difficulties before they become terminal. Stays on enforcement actions (Article 6) were designed to provide companies with breathing space to negotiate with creditors, while limiting opportunistic enforcement. Debtor-in-possession regimes (Article 5) sought to keep existing management in control during restructuring, on the assumption that preserving organisational knowledge and avoiding displacement would support business continuity and reduce stigma. Provisions on new and interim financing (Article 17) aimed to encourage creditors to provide fresh liquidity to distressed but viable firms by granting statutory priority. The introduction of the cross-class cram-down (Article 11) was introduced to address hold-out behaviour and permit confirmation of restructuring plans even where one or more creditor classes dissent.

On paper, these developments represent a significant step in the EU’s attempt to cultivate a rescue culture. They signal an ambition to move beyond a purely liquidation-oriented paradigm, to harmonise key restructuring principles, and to reduce the legal fragmentation that had previously hampered cross-border investment and early intervention. In policy discourse, the Directive is presented as a cornerstone of modern, rescue-friendly EU insolvency architecture.

2.3. A Rescue Culture for the Few, Not the Many

Yet, despite this ambitious rhetoric, the rescue culture articulated and operationalised at EU level is structurally narrow. It has been built around assumptions that mirror the operating conditions of a small minority of firms—typically large enterprises with formal governance structures, institutional creditors, and access to professional advice (World Bank 2017, p. 11). MSMEs,5 which constitute 99.8% of EU businesses,6 sit uneasily within this framework.

This misalignment is particularly visible in the design of Directive 2019/1023. The cross-class cram-down, for instance, presupposes the existence of multiple creditor classes, sophisticated valuation exercises, and a negotiated environment supported by legal and financial advisors. In practice, most MSMEs have only a small number of creditors, frequently concentrated in tax authorities, a single bank, landlords, and a handful of suppliers. In such settings, class formation can be artificial, and the evidentiary requirements associated with cram-down—including expert valuations and projections—are prohibitively expensive.

A similar problem arises in relation to provisions on new and interim financing. The Directive assumes that distressed MSMEs will be able to attract fresh liquidity if lenders are granted statutory priority and protection. However, small firms often lack audited financial statements, unencumbered collateral, or long-standing institutional relationships with banks. For many lenders, the administrative burden and perceived risk of extending relatively small, high-risk loans outweigh the potential benefits, even where the law provides priority. As a result, the Directive’s financing protections, while conceptually aligned with the rescue culture’s objectives, remain largely theoretical for MSMEs.

Crucially, the Directive adopts a permissive rather than prescriptive stance towards MSME adaptation. Recital 17 allows Member States to introduce “special rules” or simplified procedures for micro-, small- and medium-sized enterprises but does not oblige them to do so. In practice, many Member States have either not developed dedicated MSME procedures at all or have done so only in a limited fashion. The result is a formally harmonised set of tools whose design, cost structure, and institutional assumptions cater predominantly to well-resourced firms and only incidentally (if at all) to small businesses.

The brief, and ultimately short-lived, attention to MSMEs in the Commission’s 2022 Proposal for a Directive harmonising certain aspects of insolvency law (European Commission 2022) underscores this point. For the first time, the Proposal contained a dedicated chapter on micro and small enterprises (Title V), but its focus was narrowly on liquidation efficiency rather than on rescue. Moreover, this chapter—arguably the most significant innovation of the 2022 Proposal—ultimately disappeared under the weight of interlocking objections. It was removed in the Council’s general approach (Council of the EU 2025) and did not reappear in the Parliament’s position (European Parliament 2025). Member States diverged on the very definition of a microenterprise. Spain, for example, deemed the EU threshold far too broad, potentially sweeping in firms that were not genuinely small.7 Insolvency practitioners opposed the possibility of dispensing with a practitioner altogether, warning of untenable risks to creditors and the survival of their profession,8 while MSME representatives argued that the debtor-in-possession model imposed unrealistic compliance burdens. Courts, meanwhile, objected that removing practitioners would overwhelm judicial capacity (Kononov 2025). These tensions made agreement impossible.

The cumulative effect is a rescue culture that is procedurally sophisticated but socially selective. It extends meaningful benefits primarily to those firms that already possess the legal, financial, and institutional capacity to navigate complex restructuring tools. For the vast majority of MSMEs, the EU’s rescue culture is largely aspirational: they are formally included within its scope but structurally excluded in practice.

The consequences are visible across Member States. MSMEs’ difficulty in accessing rescue procedures helps to explain the very low uptake of such procedures in many jurisdictions. In Germany, only 24 restructuring plan filings under the German Act on the Stabilization and Restructuring Framework for Businesses (Gesetz über den Stabilisierungs- und Re-strukturierungsrahmen für Unternehmen (StaRUG), sections 2ff.) were recorded in 2022, out of more than 14,500 company insolvencies—less than 0.2%. In Ireland, examinerships comprised just 2% of total corporate insolvencies in 2023.9 Lithuania recorded 1.146 liquidations but only 35 rescue filings in 2024.10 Even in the United Kingdom (UK), a jurisdiction often viewed as a restructuring model for the EU, rescue filings represented just 7.5% of corporate insolvencies11 (Ghio and Thomson 2023, 2024, 2025).

These figures starkly contradict the EU’s stated ambition to foster a rescue culture. They reveal that the existence of procedures on paper does not ensure their accessibility or use in practice. When over 90% of corporate insolvencies culminate in liquidation, a fundamental question must be asked: Are these firms genuinely beyond saving,12 or are they being locked out of rescue by a system that was never designed for them?

One might argue that MSME liquidations are of limited consequence because such firms are often asset-light, financially fragile, and leave behind little recoverable value. As Sandra Frisby cautions, “insolvency law should not undertake a ‘rescue as of right’ methodology: not all lame ducks can, or should, be rescued, and the appropriate procedure for the genuinely doomed is immediate liquidation.” (Frisby 2004, p. 248). Yet, this perspective risks overlooking the aggregate economic and social costs of a pattern in which MSMEs routinely fail through liquidation, even where some might have been viable under an appropriately designed and accessible rescue framework.

MSMEs are numerous and economically significant. In the EU, they account for 99.8% of businesses and provide jobs to more than 85 million people.13 By contrast, large firms represent 0.2% of the corporate population and employ roughly half as many workers (46,918,978 employees versus 84,886,407) (European Commission 2023, p. 3). When viable MSMEs are liquidated due to barriers to restructuring, the value lost is not merely financial. Liquidation processes can be lengthy,14 impose substantial direct and indirect costs (Hardman and MacPherson 2023),15 deliver inefficient returns to creditors,16 create negative externalities (Bernstein et al. 2019),17 and cause social harm. MSMEs often play a vital role in their communities; they foster dense local networks between business actors, consumers, and residents and enhance social welfare by creating opportunities for disadvantaged groups (Sulismadi and Sofwani 2024).

Moreover, the consequences of an unattractive or inaccessible insolvency framework for MSMEs extend far beyond individual firm distress. Ex post, when restructuring procedures are too complex or costly, viable MSMEs that could be rescued are instead pushed into liquidation, and honest but unfortunate entrepreneurs are denied rehabilitation. Productive assets become trapped in unprofitable activities, weakening local employment and diminishing economic resilience. Ex ante, the absence of a credible, affordable exit route shapes behaviour: potential entrepreneurs may be deterred from starting a business, existing firms may avoid productive risk-taking or necessary borrowing, and lenders, anticipating low recoveries, may restrict credit or raise its cost. Together, these dynamics create a negative cycle in which an ineffective insolvency regime suppresses entrepreneurship, limits innovation, exacerbates financing constraints, and ultimately undermines economic growth (Gurrea-Martinez 2021).

At the same time, MSMEs are more vulnerable than larger firms to liquidity shocks, supply chain disruptions, late payments, and sudden cost increases (Davis et al. 2018, Chap. 1). Whereas large firms may be relatively robust across a range of legal and regulatory environments, the survival of MSMEs is highly sensitive to the quality and accessibility of their institutional context. Insolvency regimes can therefore have profound effects on whether the social wealth represented by MSMEs is preserved or destroyed (Davis et al. 2018, p. 1).

Consider, for instance, a small manufacturing firm employing twenty-five workers in a semi-rural region, producing specialised components for a larger industrial buyer. A combination of late payments from key customers, a temporary spike in energy costs, and the loss of a single contract pushes the firm into acute liquidity distress. Its order book remains strong, its products are competitive, and its workforce is skilled, but cash-flow pressures make it unable to service existing debts on time. Under a liquidation-only scenario, the firm would close, employees would lose their jobs, local suppliers would suffer knock-on losses, and the specialised machinery would likely be sold at a discount, with limited recovery for unsecured creditors. By contrast, an accessible restructuring framework could allow the firm to negotiate extended payment terms, write down part of its unsecured debt, and secure limited new working capital, while preserving jobs and maintaining supply relationships. Over time, the continued operation of the business would generate more value for creditors than a piecemeal sale of assets, sustain local employment, and avoid the negative spillovers associated with closure. It is precisely this type of viable but illiquid MSME that a functioning rescue culture ought to capture.

Seen from this perspective, the EU’s current rescue architecture does not merely leave MSMEs out by oversight; it entrenches a structural mismatch between legal design and user reality. The next section turns to international guidance and comparative experience to show how this mismatch has been recognised—and only partially addressed—by international organisations and to explain why formal frameworks, as currently configured, systematically fail small firms.

3. International Insights, the EU, and Member States

3.1. Structural Mismatch: Why Formal Frameworks Fail Small Firms

Around the world, international institutions have increasingly recognised that conventional insolvency systems are structurally ill-suited to the needs of MSMEs. Reports and recommendations from the World Bank, UNCITRAL, OECD and IMF have made MSME-specific reform a central priority, identifying the structural barriers that small firms face and the procedural adaptations required to address them. Their guidance is united by a common premise: insolvency systems designed around the assumptions of large firms—formal governance structures, extensive documentation, professional advice and creditor coordination—are structurally misaligned with the realities of smaller enterprises.

The World Bank’s report (2017) on MSME insolvency identifies key structural barriers. These include, inter alia:

(i)

Informality: many MSMEs operate without formal accounting, corporate structures, or regularised creditor relationships;

(ii)

Recordkeeping deficiencies: poor documentation hampers the ability to present financial data or business plans required by restructuring procedures;

(iii)

Limited financial literacy: entrepreneurs often lack the technical knowledge to navigate legal and financial processes effectively;

(iv)

Lack of professional support: high costs of legal and insolvency advice place formal procedures out of reach;

(v)

Disengaged creditors: creditors of MSME debts are frequently uncoordinated or uninterested in supporting their debtors through complex processes;

(vi)

Weak institutional scaffolding: courts, agencies, and advisors are rarely equipped or incentivised to assist small business debtors.

These constraints do not reflect business failure so much as system failure: the framework itself does not match the users it is supposed to serve. Accordingly, international guidance converges on a set of reforms that emphasise simplification, cost reduction, minimal court involvement, standardised templates, accelerated timelines, and supportive institutional entry points such as ombuds offices, tax authorities, or chambers of commerce (UNCITRAL 2021; OECD 2023; IMF 2021).

Taken together, these international reports and recommendations reveal a striking consensus: legal design must be tailored to the structural realities of MSMEs. Complexity, cost, and opacity are not neutral features of insolvency law; they are active barriers. Without targeted procedures, most small businesses will remain locked out of rescue.

Despite this global shift, the European Union has not followed suit. While the Union has invested heavily in building a modern “rescue culture”, its reforms have not been designed around MSMEs as distinct users. Directive 2019/1023 introduces sophisticated tools—cross-class cram-down, stays on enforcement, debtor-in-possession models, and protections for new financing—but it does so on the operational assumptions of larger, well-resourced firms. Crucially, the Directive allows, but does not require, Member States to introduce simplified MSME adaptations and provides no guidance on how such adaptations should be designed.

Seen through the lens of international guidance, this is a significant gap. The EU has harmonised the upper end of restructuring sophistication while leaving the lower end—the part relevant to 99.8% of its businesses—untouched. Member States, therefore, must determine for themselves whether, and how, to adapt restructuring frameworks to the realities of MSMEs. The result is substantial divergence across the Union, with only isolated national initiatives addressing MSME needs in a meaningful way.

This variation creates an analytical opportunity. Although the EU has not adopted an MSME-centred agenda, individual Member States have taken different paths in responding to small-firm distress. Ireland and France provide particularly revealing contrasts. Ireland represents a significant attempt to create a dedicated MSME restructuring mechanism aligned with international simplification principles. France, by contrast, has achieved comparatively high MSME engagement with rescue procedures without MSME-specific legislation, relying instead on dense institutional ecosystems and early-intervention practices. Ireland and France, therefore, are not presented as an exhaustive comparative sample but as two analytically valuable models that illuminate the broader structural and institutional conditions shaping MSMEs’ access to rescue across the EU.

3.2. Ireland’s SCARP: Promise in Design, Limits in Practice

Ireland provides one example within the EU of a Member State attempting to create a dedicated restructuring mechanism for MSMEs.18 The Small Company Administrative Rescue Process (SCARP), introduced by the Companies (Rescue Process for Small and Micro Companies) Act 2021, emerged following concerns—made more acute during the COVID-19 pandemic—that Ireland’s primary corporate rescue mechanism, examinership, was structurally unsuited to the realities of smaller firms.19 Policymakers highlighted three barriers that rendered examinership unsuitable for MSMEs: high costs, heavy court involvement, and complex procedural requirements.20

Examinership requires court supervision at multiple stages, imposes substantial evidentiary burdens, and routinely costs between €80,000 and €130,000,21 a level identified by the Revenue Commissioners as prohibitively expensive for the 250,000 small companies in Ireland.22 SCARP was therefore conceived as a lower-cost, administrative alternative—an “examinership-lite”23 procedure—intended to bridge this accessibility gap.

Structurally, SCARP aligns with many recommendations offered by the World Bank, UNCITRAL, the OECD and the IMF for MSME-oriented procedure design. It is initiated by directors rather than creditors,24, avoids an upfront petition,25 and is governed by strict statutory deadlines—typically a 49-day timeline, extendable by 21 days. 26 A Process Adviser oversees the procedure, prepares the rescue plan, and convenes meetings of impaired creditors. These features reflect key elements of international guidance: reduced formality, accelerated timelines, director-led initiation, simplified evidentiary demands and lower entry cost.

Crucially, SCARP retains the core restructuring tools necessary for effective rescue while attempting to deliver these instruments through a streamlined administrative route. In conceptual terms, SCARP therefore represents a significant attempt by an EU Member State to translate international MSME-focused guidance into domestic law. It provides a valuable case study for evaluating whether targeted legal simplification can meaningfully expand MSMEs’ access to restructuring.

Yet, despite this strong alignment on paper, early evidence indicates that SCARP has struggled to achieve meaningful uptake. By October 2025, only 19 SCARP filings had been recorded.27 In 2024, only 30 out of the 875 total insolvency cases proceeded under SCARP (3.5%), while 76% were Creditor Voluntary Liquidations.28 Earlier figures reveal a similar pattern: just 22 SCARP applications were reported in 2022 and 33 in 2023.29 This is striking given SCARP’s reported 80% success rate in preserving business continuity among those who enter the process.30 The discrepancy between design potential and real-world usage suggests the presence of deeper systemic obstacles.

Several obstacles explain this limited engagement. First, costs remain a significant deterrent. Although SCARP is cheaper than examinership, professional fees typically range from €20,000 to €100,000 depending on complexity.31 This is still prohibitively expensive for many MSMEs operating with thin margins or in acute cash-flow distress. It was initially suggested that SCARP would cost around €15,00032, but in practice, the figure has proven far higher, undermining the procedure’s accessibility.

Second, access to fresh financing during a SCARP procedure remains limited. Unlike examinership, SCARP does not offer statutory protection or priority for new or interim financing, offering no clear incentive for lenders to support a restructuring. As a result, Irish banks and private investors remain cautious, particularly where distressed MSMEs lack audited accounts or unencumbered collateral. For many firms operating with thin margins or accumulated tax arrears, these conditions are difficult to meet. Practitioners emphasise that “[p]romoters struggle with raising equity to fund a Scarp. It is easier to fund a new entity without legacy debt”33 and that “[a]lthough Scarp is more cost-effective and quicker than examinership, it is still a costly process as it requires payment of professional fees, a dividend to creditors and investment in working capital and/or capital expenditure. This type of investment is not always readily available to smaller companies, often making it difficult for them to utilise the process.”34 This reality significantly limits SCARP’s capacity to deliver viable turnarounds for liquidity-constrained MSMEs.

Third, institutional dynamics further constrain the effectiveness of the process. The Revenue Commissioners—frequently the largest unsecured creditor in MSME cases—may “opt out” of SCARP where a debtor’s compliance history is weak.35 This power is exercised in around 20% of cases36 and can destabilise a prospective restructuring, given that tax liabilities often form a significant proportion of MSME debt. Insolvency firms highlight this feature as a structural vulnerability: when Revenue disengages, the feasibility of a plan is often extinguished at the outset.37 More broadly, SCARP offers no automatic stay on enforcement. Creditors may initiate or continue legal proceedings during the process unless the Process Adviser, the company, or its directors seek a court-ordered stay. This requirement for court intervention introduces additional cost, delay, and uncertainty, diluting the intended accessibility of the process.

Fourth, the creditor-challenge architecture introduces further procedural burdens. Even where a rescue plan is approved, any creditor may lodge an objection during a 21-day cooling-off period.38 If an objection is made, the Process Adviser must seek court approval of the plan. At this stage, objecting creditors may argue that the proposal unfairly prejudices their interests;39 (that it is unfair and inequitable;40 or any such other grounds as may be prescribed,41 requiring the debtor to provide comparative valuations, viability assessments, and a liquidation analysis. These evidentiary requirements can resemble the very hurdles that rendered examinership inaccessible for MSMEs in the first place. While these safeguards protect creditor interests, they also increase costs and reduce the predictability of the process from the debtor’s perspective.

Finally, awareness of SCARP remains strikingly low. Ireland’s insolvency regime is generally unfamiliar to the public, and MSME directors often possess limited understanding of formal restructuring options. Insolvency experts confirm that directors do not meaningfully understand examinership, let alone SCARP, and that low legal literacy inhibits engagement with rescue procedures. Professional advisors—particularly local accountants and solicitors, who act as primary points of contact for smaller businesses—also display limited knowledge of the process.42 In this environment of low awareness and weak professional diffusion, SCARP remains practically invisible to many of the firms it was designed to serve. Therefore, despite its legal simplification, SCARP simply has not proven to be the “game changer” (Woodcock 2021, p. 41) or the “silver bullet that [was] needed to save the MSME sector” (Hutchinson 2021, p. 123).

In principle, SCARP represents the kind of targeted reform that many international institutions, as well as the EU, have encouraged: a simplified, lower-cost restructuring mechanism embedded within the existing insolvency framework. However, even with a relatively accessible MSME-specific procedure, Ireland has struggled to achieve high uptake. This suggests that legal reform alone—no matter how well intentioned—is insufficient to ensure meaningful MSME rescue. To date, SCARP remains an important and commendable experiment, but one whose early experience suggests that broader behavioural and institutional reforms are needed to make rescue a meaningful reality for small firms.

3.3. France’s Experience: A Contrasting Member State Within the Structural Landscape

While Ireland illustrates the limits of a targeted MSME-specific procedure, France offers a contrasting example within the broader EU landscape. Despite the absence of a bespoke MSME restructuring procedure, it records a high rescue uptake. In 2024, approximately 40.6% of all corporate insolvency proceedings in France involved restructuring, rather than liquidation43—a proportion significantly higher than that observed in other European states (Ghio and Thomson 2023). This engagement is all the more striking because it has not been driven by a single simplified MSME tool but by the gradual construction of a rescue-oriented ecosystem in which preventive and restructuring procedures are embedded in institutional practice and professional routines.

French insolvency law offers a broad menu of procedures capable of accommodating firms of different sizes, sectors, and degrees of distress. On the collective side, it includes safeguard (procédure de sauvegarde) (French Commercial Code, Articles L620-1 to L627-4), accelerated safeguard (procédure de sauvegarde accélérée) (French Commercial Code, Article L628-1) and judicial rehabilitation (procédure de redressement judiciaire) (French Commercial Code, Articles l631-1 to l632-4). These are complemented by two confidential, amicable and preventive mechanisms: the ad hoc mandate (mandat ad hoc) (French Commercial Code, Articles L611-1 to L611-6) and conciliation (procédure de conciliation) (French Commercial Code, Articles L611-1 to L611-6). The ad hoc mandate permits a debtor to confidentially appoint a mediator to negotiate with creditors, while conciliation takes place under the supervision of the Commercial Court and provides a structured but non-collective framework for reaching consensual solutions (Ghio 2019). Preventive procedures are not merely symbolic: they achieve business continuity in around 60% of cases.44

Crucially, MSMEs are not marginal users of these procedures. Across the main rescue tools, small firms consistently represent the majority of cases. In 2024, MSMEs accounted for 81% of conciliations, 72.4% of safeguard cases, 60% of ad hoc mandates and 53% of judicial rehabilitations.45 These figures indicate that, even without a dedicated MSME procedure, small businesses actively engage with formal and preventive routes to rescue. This raises a critical question: what features of the French insolvency regime have enabled such high MSME engagement, despite the absence of a dedicated small business procedure?

Part of the explanation lies in the long-standing rescue orientation of French insolvency law. Since the 1980s, reforms have explicitly moved away from a purely sanction- or liquidation-driven model towards one that prioritises business preservation and jobs. Reforms in 1984–198546 reconfigured the system around the rescue of viable enterprises, encouraging early action and confidential negotiations with creditors. The 1994 reform47 introduced a clearer legal basis for the ad hoc mandate and strengthened amicable debt renegotiation, while recalibrating the position of secured creditors. The 2005 law “for the safeguard of enterprises”48 further consolidated this trajectory by creating the modern safeguard procedure for debtors in difficulty but not yet cash-flow insolvent and introducing an updated version of the conciliation (Ghio 2019; Omar 2014). Subsequent reforms in 201049 and 201450 developed accelerated safeguard variants to facilitate the swift implementation of conciliation-based agreements. More recently, the 2021 reform implementing Directive 2019/102351 enhanced France’s preventive rescue framework by introducing classes of creditors and a cross-class cram-down mechanism, thereby strengthening the tools available to preserve viable businesses while maintaining the core architecture of early intervention (Ghio 2019).

Today, the most distinctive aspect of the French system is this proactive, preventive role played by commercial courts and associated bodies. Court presidents routinely offer “prevention meetings” (rendez-vous de prévention)—free, confidential, and anonymous appointments in which business owners can discuss difficulties at an early stage. These meetings serve as low-threshold diagnostic tools, enabling problems to be identified before they escalate into formal insolvency. When signs of distress emerge,52 court presidents may also initiate “awareness meeting” (entretien de prise de conscience) (French Commercial Code, Article L611-2), inviting corporate directors to discuss their situation and potential solutions. In 2024 alone, 16,108 prevention meetings were recorded, leading to the opening of 8773 amicable procedures53—a direct pipeline from early conversation to structured intervention.

This judicial activity is embedded within a broader web of institutional and professional actors.54 Chambers of Commerce (Chambre de Commerce et d’Industrie),55 regional economic agencies, and business federations (such as the Confédération des petites et moyennes entreprises)56 actively disseminate information about rescue tools and refer distressed firms to appropriate channels. Commercial court registrars and consular judges contribute to outreach by organising information sessions, producing plain-language guides, and engaging with local business communities. Corporate Restructuring and Business Difficulty Prevention Commissioners (Commissaires aux restructurations et à la prévention des difficultés des entreprises), supported by the Ministry of Economy, work directly with companies to identify suitable interventions, often drawing on intelligence from tax and social security authorities. Their work is reinforced by data-driven instruments such as the “Weak Signals” (Signaux Faibles) tool, which aggregates administrative and financial data to flag firms showing early signs of vulnerability and trigger targeted outreach.57

At local level, MSMEs can access support from Prevention Information Centres (Centres d’Information sur la Prévention des difficultés des entreprises),58 which provide free, confidential advice, and from Accredited Prevention Groups (Groupements de Prévention Agréés),59 which facilitate data sharing among participating companies to identify emerging risks. Parallel mechanisms, such as the Credit Mediator (médiateur du credit)60 and departmental committees for financing problems (Comités départementaux d’examen des problèmes de financement des entreprises—CODEFI),61 offer mediation with banks and financial institutions to maintain or restore credit lines. The cumulative effect is a decentralised but coordinated network in which multiple actors—courts, public agencies, professional bodies, and mediators—share responsibility for early detection and guidance (Soinne et al. 2021, p. 152ff).

The impact of this ecosystem is visible in levels of awareness and expressed willingness to use rescue procedures. A 2021 survey of French MSMEs (6-249 employees) found that 92% could identify at least one restructuring tool. Familiarity with specific procedures was also high: 97% recognised liquidation and rehabilitation, 91% conciliation, 78% safeguard, and 44% the ad hoc mandate. Importantly, 77% of respondents indicated that they would consider resorting to one of these mechanisms if their business encountered difficulties.62 These figures suggest that, unlike in Ireland, rescue is not a hidden or specialist option; it seems to form part of the ordinary informational background of running a business.

The contrasting experiences of Ireland and France show that the availability of legal tools, in itself, does not determine MSMEs’ access to rescue. Where Ireland created an MSME-specific procedure but achieved limited uptake, France achieved comparatively high use of restructuring without bespoke legislation. These divergences point to an essential insight: law operates within behavioural, informational, and cultural environments that shape whether it is used in practice

Section 4 therefore examines the non-legal factors that influence MSME behaviour. It then illustrates these dynamics through comparative experience, including the United States, which demonstrates how aligning legal design with behavioural and institutional support can meaningfully increase MSME participation in restructuring.

4. Beyond Structure: When Legal Design Is Not Enough

Ireland’s experience with SCARP illustrates the limits of legal design in addressing MSME inaccessibility. Even a well-drafted, simplified procedure—aligned with international best practice—cannot, on its own, overcome the deeper behavioural, institutional, and cultural obstacles that shape MSME responses to distress. In short, legal reform can create pathways but cannot, by itself, generate the conditions under which MSMEs feel able, willing, or equipped to use them. This section argues that the persistent exclusion of MSMEs from formal rescue mechanisms is not simply a matter of legal architecture but a multi-layered systems problem. Law interacts with emotion, trust, professional intermediaries, and institutional capacity. When these elements are weak or absent, legal tools remain unused, regardless of their formal quality. Accordingly, legal frameworks must be embedded in systems of trust, visibility, and support if they are to translate into meaningful access to rescue.

France (and the United States, as will be shown below) provides contrasting illustrations of how behavioural, institutional, and cultural dynamics can either reinforce or undermine the accessibility of rescue frameworks. France shows how a dense ecosystem of courts, intermediaries, and outreach bodies can normalise engagement even in the absence of bespoke MSME procedures. By contrast, the United States demonstrates that even a highly simplified legal tool—Subchapter V—can gain traction because it is embedded within a supportive professional landscape and a cultural narrative that treats restructuring as a legitimate business strategy rather than a moral failure. Together, these examples underscore a central insight of this section: the rescue culture to which the EU aspires cannot be legislated into existence; it must be socially produced, institutionally supported, and behaviourally enabled.

4.1. Behavioural and Cultural Barriers

Legal exclusion is not only structural; it is also behavioural. A growing body of socio-legal and empirical research shows that small businesses often avoid formal insolvency procedures not because the law is unavailable, but because they do not perceive it as a viable or acceptable solution. Shame, stigma, misinformation, and fear of reputational damage all contribute to a pervasive reluctance to seek help (Ghio, forthcoming, 2025; Ghio and Thomson 2023, 2024, 2025; McIntyre 1989; Sullivan et al. 2006; Efrat 2006). As a result, the behavioural dynamics surrounding distress can be as determinative of outcomes as the content of the law itself. MSME owners typically have strong emotional ties to their business. Financial distress is experienced not just as a commercial risk but as personal failure. This sense of shame—reinforced by cultural norms and media narratives—encourages silence and delay (Ghio, forthcoming). Entrepreneurs internalise blame, postpone engagement with legal processes, and often wait until recovery is no longer possible (Ghio, forthcoming).63 Shame, therefore, functions as an anti-rescue force: it drives lateness, secrecy, and disengagement at precisely the moment when early intervention is most critical.

Cognitive biases (Tversky and Kahneman 1974, 1991; Kahneman 1979; Kahneman et al. 1991) intensify the problem. MSME owners tend to be overconfident, underestimate risk, and resist external advice (Harner 2011; Douglas 2009; Hmieleski and Baron 2009). Legal and procedural illiteracy is widespread (Ghio and Thomson 2023, 2025; Insolvency Service 2023). Even when procedures like SCARP exist, many directors simply do not know that they are available—or believe that they are not meant for “people like them” (Tribe 2009; ICAWE 2017). This informational gap operates not as a simple lack of knowledge, but as a cognitive framing problem: directors understand insolvency law as something distant, punitive, or designed for larger firms.

Trust in institutions (Popelier et al. 2022; Callens and Bouckaert 2019; Rousseau et al. 1998; Möllering 2006; Mayer et al. 1995; Hough et al. 2010; Tyler and Sevier 2013) is a further obstacle. Where insolvency institutions are seen as punitive, bureaucratic, or irrelevant, small-business owners are less likely to engage with the system (García-Posada and Mora-Sanguinetti 2014; Mayr et al. 2023). Professional intermediaries—such as accountants, solicitors, or local advisors—play a crucial role in shaping perceptions, yet many themselves lack awareness or confidence in recommending rescue procedures (Ghio 2025). Thus, even highly simplified rescue tools risk being filtered through intermediaries who cannot or do not make MSMEs aware of their options.

Public discourse, media framing, and anecdotal experience perpetuate the sense that insolvency is a process of punishment, not of recovery (Ghio, forthcoming). For example, debtors are routinely described as having “failed”, their businesses as having “collapsed” or “gone wrong”. These are not neutral descriptors; they carry powerful emotional and moral undertones that frame insolvency as a form of personal or ethical failing.64 Additionally, terms such as “bankruptcy”, “failure”, and “rehabilitation” carry symbolic associations with disgrace, collapse, and personal inadequacy. “Bankruptcy”, derived from the Italian banca rotta, or “broken bench”, originally described the destruction of a merchant’s trading bench, symbolising commercial ruin (Treiman 1938, p. 189). In modern parlance, it evokes incompetence and social unravelling (Fletcher 1990, p. 33). Such linguistic associations deepen the emotional risks of seeking help, transforming legal processes into perceived moral judgements.

Similarly, “rehabilitation”, borrowed from the criminal justice lexicon, implies that the debtor has deviated from a normative path and must be restored to economic and social conformity (Cullen and Gilbert 2012; Robinson and Crow 2009; Raynor and Robinson 2009). “Rehabilitation” is frequently associated with terms such as “reintegration”, “resettlement”, and “re-entry”—all of which share the prefix “re”, denoting a return to a prior or proper state. According to the Oxford Dictionary, “rehabilitation” is the “process of returning something to a healthy or good way of life”; Merriam-Webster defines it as “the process of restoring someone […] to a useful and constructive place in society” or “the restoration of something damaged or deteriorated to a prior good condition”.65 Thinking of insolvency rehabilitation in this way casts the debtor as damaged, deviant, or deficient—someone who must be restored to normative, law-abiding behaviour. It is, fundamentally, a behavioural concept, suggesting that legal and procedural responses are not just about managing debt but about correcting moral or personal failure (Robinson and Crow 2009). In this environment, financial distress is not just a problem to be solved but also a source of embarrassment to be hidden (Martin 2005, p. 38). This framing heightens the emotional cost of seeking help and magnifies the stigma associated with formal intervention.

The EU has recognised these dynamics in various policy documents, including the Entrepreneurship Action Plan (European Commission 2004), the Communication on “Overcoming the stigma of business failure—for a second chance policy” (European Commission 2007), and the Recommendation on a New Approach to Business Failure (European Commission 2014), which have all cited reputational and psychological barriers as obstacles to rescue. Yet, these insights have not been translated into sustained action. No EU-wide education campaigns were launched. No significant investment in training, outreach, or public narrative change followed. As a result, the cultural underpinnings of SME exclusion go unchallenged. The gap between the EU’s diagnosis and its implementation is therefore stark: stigma is acknowledged in principle but remains without meaningful policy response in practice.

The EU’s failure to address these behavioural realities reveals the limits of its legalistic approach. The rescue culture is not just a matter of procedural design; it is about changing how small business failure is understood, communicated, and managed. Until that shift occurs, the majority of MSMEs will continue to face a system that is not built for them. Legal reform can open the door to rescue, but behavioural change is what allows MSMEs to walk through it.

4.2. The United States: Legal Simplification in a Supportive Ecosystem

The United States provides a complementary illustration of how legal design can expand MSMEs’ access to rescue only when paired with strong institutional scaffolding, a mature professional community, and a cultural ethos that normalises business failure as part of entrepreneurial activity. Like Ireland, the US long struggled with the mismatch between traditional restructuring procedures and the realities of small businesses. Unlike Ireland, however, the US embedded its simplified MSME procedure—Subchapter V of Chapter 11—within a long-standing, highly professionalised, and culturally visible insolvency ecosystem, enabling the procedure to take root. This makes the US experience particularly instructive for the EU: it shows both the promise of simplification and the continuing need for institutional and cultural support.

The US has long served as a reference point for European insolvency reform, being regarded globally as a leader in corporate rescue. Warren and Westbrook (2009, p. 604) have remarked that “[i]n the pantheon of extraordinary laws that have shaped the American economy and society and then echoed throughout the world, Chapter 11 of the US Bankruptcy Code deserves a prominent place.” Directive 2019/1023 itself drew heavily from Chapter 11’s core architecture (McCormack 2021, para. 1.39ff).66 If the EU is to address the specific needs of MSMEs, it should not only revisit Chapter 11’s logic but also examine the US response to small-business exclusion.

Historically, Chapter 11 of the US Bankruptcy Code was regarded as an effective rescue mechanism (Whitford 1994; Zukin 2005; Warren and Westbrook 2009), but it was also widely recognised as structurally ill-suited to the needs of MSMEs. Designed with large public companies and large manufacturing firms in mind, Chapter 11 became overly complex, expensive, litigation-heavy, and procedurally burdensome for firms with simple capital structures and fewer creditors.67 The absolute priority rule, which often wipes out equity ownership in reorganisations, left little incentive for small-business owners to pursue this path. As Douglas Baird observed (Baird et al. 2007, pp. 19–20), “the vast majority of financially distressed small businesses never file for Chapter 11. Over a million small businesses close each year, but there are only 10,000 Chapter 11 filings per year.”

As a result, MSMEs were effectively left with only two options: selling their going concern assets through a “363 sale”68 or liquidating. Both routes tended to reinforce secured-creditor control and rarely preserved the business as a continuing enterprise (Morrison 2009, pp. 256, 300).69 Judge Thomas Small’s “fast-track” Chapter 11 pilot in North Carolina (Small 1993) demonstrated that simplified, collaborative processes could increase accessibility and reduce professional costs. These experiences fed into national reform conversations (Lawless and Ferris 1997; Blum 2000; Morrison 2009; Lawton 2012), and both the National Bankruptcy Review Commission70 and the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 ultimately recommended the creation of a dedicated small business procedure.71

(i)

These efforts culminated in the Small Business Reorganization Act in 2019,72 which came into force in February 2020 and introduced Subchapter V of Chapter 11. Subchapter V was designed to “streamline the process by which small business debtors reorganize and rehabilitate their financial affairs”,73 benefitting not only the debtor but also employees, suppliers, and communities that depend on the firm.74 Its design directly addressed known behavioural, structural, and financial barriers to MSME rescue. Key features include: The ability for owners to retain equity even when debts are not fully repaid (a deviation from the absolute priority rule);

(ii)

Elimination of US Trustee fees and reduction in court involvement;

(iii)

A mandatory 90-day timeline to file a plan, increasing procedural efficiency;

(iv)

Fewer procedural requirements, such as no mandatory creditors’ committees and reduced disclosure obligations;

(v)

Prohibition on creditor-initiated rival plans;

(vi)

A court-appointed Subchapter V trustee, whose role is not to liquidate assets but to assist in plan development, mediate disputes, and facilitate consensus—effectively reducing the adversarial nature of the process.75

The effects of these features have been significant. Subchapter V filings reached levels in 2023, accounting for nearly 44% of all Chapter 11 filings and approximately 12% of all business bankruptcy cases.76 This was an extraordinary uptake for a procedure only a few years old. The ABI’s Task Force Report (2023–2024)77 concluded that Subchapter V “is working as Congress intended” (p. 1), with strong confirmation rates, reduced costs, and broad practitioner support. Empirical research shows that Subchapter V more than doubles the likelihood of successful reorganisation and reduces confirmation times by approximately 42% compared to standard Chapter 11 (Hotchkiss et al. 2024, p. 9).

However, the same Task Force highlights important limits. The most significant is the debt cap, currently USD 3,024,725 (down from the temporarily increased USD 7.5 million). The ABI recommends restoring the higher cap permanently, as it would allow many more small and medium-sized firms to enter the process. The debt cap thus functions as a structural gatekeeper: the lower it is set, the more MSMEs remain excluded from a framework specifically designed to assist them. “More than a quarter of Subchapter V debtors would not have been eligible for Subchapter V under the lower cap” (p. 10), underscoring that eligibility thresholds are not peripheral; they determine the reach and relevance of the procedure.

Beyond eligibility, Subchapter V illustrates a broader lesson: legal simplification succeeds only when situated within a robust institutional and cultural ecosystem. In the US, this environment pre-dated Subchapter V and continues to shape its success.

Bankruptcy courts constitute a core element of this ecosystem. The US benefits from a highly specialised bankruptcy judiciary whose work focuses exclusively on insolvency matters. Judges receive regular training through institutions such as the Federal Judicial Center, helping ensure expertise, consistency, and procedural predictability. This level of specialisation reduces the uncertainty that often deters MSMEs in other jurisdictions, making jurisdictions and judicial engagement more intelligible.

The Office of the United States Trustee78 provides another layer of institutional support. Although Subchapter V eliminates most trustee fees, the US Trustee system continues to issue public guidance, monitor professional conduct, and maintain procedural oversight. Even in its lighter form, this supervisory presence contributes to debtor confidence by signalling that the process is structured, regulated, and credible (p. 892).

Professional intermediaries also play a critical role. Experts report that small-business owners often do not contact insolvency specialists directly. Instead, they usually turn first to their lawyer, accountant, or tax professional, who then directs them to a restructuring expert.79 This referral chain effectively functions as an early warning system and lowers the behavioural costs of seeking help. It stands in contrast to many EU jurisdictions where frontline advisors lack insolvency knowledge, resulting in informational bottlenecks.

This professional infrastructure is supplemented by a wide network of community-based institutions, including Small Business Development Centers,80 legal-aid organisations,81 pro bono bankruptcy clinics82 and law school bankruptcy programmes. These organisations contribute to raising awareness, assisting underserved communities, and reducing the informational asymmetries and procedural fear that often deter MSMEs from seeking help.

Nevertheless, even in this supportive environment, behavioural dynamics continue to influence MSME engagement. Insights from within the US bankruptcy system suggest that many small-business owners delay seeking help, holding on to a belief that conditions will improve—a form of “terminal euphoria.”83 Others wait until a crisis point—such as a judgement, garnishment,84 or threatened eviction—before contacting advisors.85 These patterns reflect familiar dynamics of avoidance, overconfidence, and residual embarrassment. Although the US system benefits from comparatively low levels of stigma (Tajti 2018; Ghio and Thomson 2023), it has not disappeared completely, and it still plays a role in deterring timely engagement.

Yet, the US benefits from a more visible and culturally accepted understanding of restructuring (Tajti 2018; Ghio and Thomson 2023). High-profile Chapter 11 filings are widely covered in the media and are often framed as strategic tools rather than moral failures.86 Advertising by consumer bankruptcy lawyers also contributes to public awareness.87 The result is a cultural climate in which restructuring is broadly intelligible and far less hidden from view than in most EU Member States and where bankruptcy is widely understood not as a moral failure but as a commercial risk (Tajti 2018; Ghio and Thomson 2023, p. 406).

The US experience demonstrates that Subchapter V succeeds not simply because it is simpler, cheaper, or procedurally lighter, but because it is deployed within a supportive institutional and cultural environment that makes restructuring credible, familiar, and intelligible. The debt cap remains an important limitation, and behavioural barriers are not completely absent, but even with these constraints, the procedure has dramatically expanded MSMEs’ access to rescue. The lesson for the EU is clear: simplification without institutional and cultural reinforcement risks reproducing the SCARP paradox—effective tools on paper, weak engagement in practice.

5. Reimagining Rescue in the EU: A Forward-Looking Agenda for MSME Inclusion

The preceding sections reveal that MSME exclusion from EU rescue frameworks is not accidental. It is the product of structural legal misalignment, weak institutional scaffolding, and persistent behavioural barriers. Ireland demonstrates that even a simplified procedure cannot achieve its aims when introduced into a still-emerging institutional ecosystem, low public awareness, and entrenched behavioural hesitancy. France shows the opposite dynamic: a jurisdiction without simplified procedures but a powerful institutional ecosystem that actively pulls MSMEs into rescue, generating high levels of engagement despite the absence of an MSME-specific legal instrument. The United States illustrates a third model: where legal simplification embedded within a dense network of specialist courts, trustees, intermediaries, and a culturally familiar second-chance narrative can transform small-firm access to restructuring.

Taken together, these insights confirm that the EU’s rescue deficit is not fundamentally a doctrinal problem. It is a systemic one. MSME exclusion arises from the interaction of legal design, institutional capacity, professional behaviour, and cultural attitudes. Any meaningful reform must address these layers together.

Before turning to specific areas of reform, it is important to clarify the nature and scope of this section. The proposals advanced here are not intended as legislative drafts, nor do they claim to be empirically validated across jurisdictions. They should instead be understood as conceptual building blocks—preliminary sketches of what an MSME-inclusive rescue environment might look like if law, institutions, and culture were redesigned with small-firm realities in mind. Their purpose is not to prescribe a fully operational framework but to spark conversation, stimulate comparative research, and lay the groundwork for future experimentation in EU and national policy.

Against this background, this section develops an agenda grounded in three mutually reinforcing pillars: structural adaptation (designing law to fit small-firm realities); institutional scaffolding (building pathways that make rescue visible and accessible); and cultural legitimacy (changing how business failure is understood and narrated).

5.1. Structural Adaptation: Designing Law to Fit Its Users

A central lesson from international institutions is that insolvency regimes must be tailored to the users that they are meant to serve. International guidance from the World Bank (2017), UNCITRAL (2021), OECD (2023), and IMF (Diez et al. 2021) highlights that systems built on large-firm assumptions—complexity, extensive documentation, creditor coordination, reliance on professional advisors, and court-centred processes—will remain inaccessible to small businesses unless simplified, modular, and low-cost alternatives are introduced (Davis et al. 2018; Gurrea-Martinez 2021).

At present, the EU rescue architecture assumes that firms have accountants, legal advisors, credit relationships, audited statements, and the liquidity to fund professional support. These assumptions may hold for large enterprises, but they do not reflect the reality of MSMEs, many of which operate informally, lack formal documentation, and have limited or no access to specialised advice.

The EU has so far treated MSME accommodation as optional. Directive 2019/1023 allowed Member States to adopt MSME adaptations but did not make them mandatory. This stance has resulted in a patchwork of national approaches and, in many cases, no reforms at all. The subsequent 2022 Proposal for a Directive harmonising certain aspects of insolvency law confirms this problem: although the Commission originally included a chapter on MSMEs (focused narrowly on liquidation, however), it was removed by the Council and not reintroduced by the Parliament. This silence is not evidence of consensus against MSME reform; it reflects the political difficulty of legislating for a highly localised, institution-dependent area at EU level.

France demonstrates convincingly that a decentralised, ecosystem-driven approach can generate high MSME engagement even without a bespoke statutory procedure. But France’s success also shows why EU-level optionality is insufficient. Leaving MSME inclusion entirely to national discretion risks reproducing the very unevenness that harmonisation aims to address. Member States with strong institutional capacity, active commercial courts, and dense intermediary networks will continue to deliver meaningful access to rescue, while others will struggle to build similar pathways. This unevenness is not simply a technical variation; it sits uneasily with the EU’s broader ambition to foster a coherent rescue culture across the internal market.

The issue is therefore not whether the EU should impose a uniform MSME procedure—it should not, given the intensely local nature of small-firm distress. Rather, the EU should ensure that all Member States adopt credible, functional mechanisms that make rescue a realistic option for MSMEs within their local institutional and economic context. This may mean simplified procedures in some jurisdictions, strengthened preventive ecosystems in others, and hybrid models elsewhere. What matters is the shared commitment, not the identical form.

5.2. Institutional Scaffolding: Building Pathways to Access

If structural adaptation concerns the design of legal tools, institutional scaffolding concerns the pathways through which users encounter, understand, and ultimately access those laws. International guidance emphasises that insolvency frameworks do not operate in isolation; their effectiveness depends on the institutional environment in which they are embedded (World Bank 2017; Davis et al. 2018). The French and American experiences show that institutional architecture is often more decisive than statutory content.

The EU’s current framework underestimates this dimension. Directive 2019/1023 focused primarily on harmonising procedural rights—stays, cram-down, and plan confirmation standards—while saying little about the infrastructure required to make these rights meaningful for the ordinary small firm. The Directive presumes that debtors already interact with advisors, creditors, and institutions in ways that make rescue a plausible pathway. This presumption is rarely borne out in practice for 99% of firms.

Institutional analysis should not be supplementary but foundational. Reformers must examine courts not only for delays but also for the types of cases that judges handle, their familiarity with business realities, their ability to manage reorganisation plans, and the level of digitalisation and case-management support available. They must assess the capacity and incentives of insolvency practitioners, many of whom lack the training or business model to handle MSME cases affordably. And they must scrutinise public creditors, especially tax authorities, whose participation or withdrawal often determines whether a restructuring is feasible.

France’s experience has shown that an institutional ecosystem—not merely legal form—can be the decisive factor that brings MSMEs into rescue. Its commercial courts, prevention meetings, registrars, chambers of commerce, local networks, economic mediators, CODEFI committees, data-driven early warning systems, and interconnected advisory bodies collectively create an environment in which firms encounter the rescue system before a crisis becomes terminal. Distress becomes visible, and help becomes proximate. Institutions act as early navigators, translators, and gatekeepers. What makes the French powerful is not their legal sophistication but the fact that distressed MSMEs are found, contacted, supported and advised.

Ireland shows the inverse dynamics: SCARP is legally well-crafted, but it enters an institutional void. Professional advisors (particularly local accountants and solicitors) have, to this day, relatively low awareness of the procedure. Prevention mechanisms are limited. Courts play a non-structured early-intervention role. Local chambers and business associations are not systematically integrated.

International experience consistently confirms this pattern. The World Bank emphasises that “[s]trong institutions and regulations are crucial to an effective insolvency system […] The integrity of the insolvency system is the linchpin for its success” (p. 9).88 However, a lot of national systems lack the institutional readiness, trained personnel, administrative capacity, and professional intermediaries necessary to make restructuring a usable option (p. 3).

A future EU approach should therefore push Member States not only to map their institutional ecosystem but also to strengthen the relational infrastructure that connects MSMEs to rescue. This includes ensuring coordination between courts and insolvency agencies; establishing predictable, transparent positions for public creditors; investing in judicial and practitioner training; and empowering intermediaries with clear, accessible guidance. These reforms need not be uniform; local institutional environments vary widely. However, without this institutional grounding, initiatives aiming to create a rescue culture will continue to generate procedures that exist on paper but not in practice.

5.3. Cultural Legitimacy: Changing Narratives, Reducing Stigma, and Enabling Help-Seeking

Even when law is tailored and institutions are aligned, cultural and behavioural barriers can undermine MSMEs’ access to rescue. Section 4 discussed how shame, stigma, and avoidance can delay help-seeking, sometimes fatally. These behavioural patterns are deeply entrenched across Europe. The EU has recognised these dynamics in policy documents for nearly two decades (European Commission 2007) but has not operationalised them. A true rescue culture will be more difficult to implement in jurisdictions where stigma, mistrust, or reputational fear are embedded in business culture.

A forward-looking EU agenda must therefore take into account the need for a dissemination strategy, public education, and patient engagement with stakeholders. In this view, implementation is not simply the moment at which a law enters into force; it is a long-term process of building familiarity, trust, and visibility.

This resonates with the French experience, where the preventive system works not because of legal simplicity but because of sustained cultural and institutional engagement. It also mirrors the United States, where bankruptcy is widely understood as a strategic tool and where public-facing institutions—courts, trustees, legal clinics, and small business development centres—normalise help-seeking behaviour.

A future EU directive cannot legislate cultural change, but it can require that Member States develop strategies to address it. This may include public education campaigns, accessible guidance for MSMEs, partnerships with chambers of commerce and local business networks, early warning systems calibrated to behavioural realities, and the anonymised publication of success restructuring stories. By integrating behavioural insights into implementation, Member States could gradually shift the perceptions that currently dissuade MSMEs from seeking timely assistance.

Behavioural change is slow but essential. If rescue remains socially stigmatised, no amount of legal or institutional reform will suffice. The EU is well-positioned to lead on cultural reframing, using its convening power to create shared narratives across member states.

5.4. From Ambition to Action: Steering and Supporting National Implementation

Even the most carefully designed EU agenda will fail without meaningful national implementation. Member States vary significantly in administrative capacity, judicial resources, political priorities, and the maturity of their insolvency ecosystems. These differences shape whether MSMEs encounter functional access points. For this reason, the EU’s role cannot stop at articulating principles; it must also create the conditions under which Member States can translate those principles into workable national pathways.

One avenue is benchmarking and transparency. By systematically collecting and publishing data on MSMEs’ rescue uptake, the EU could create a factual baseline against which national performance becomes visible. A regular scoreboard comparing the use of restructuring tools, the duration and outcome of proceedings, and the proportion of MSME cases ending in liquidation would not only shed light on divergent national realities but also generate a form of constructive peer pressure. Visibility alone can be a catalyst for reform, especially in areas where political attention is otherwise limited.

A second avenue lies in technical and financial assistance. Many Member States lack the institutional infrastructure to design or operate MSME-appropriate rescue mechanisms. The EU could help address this through targeted assistance—support for judicial and practitioner training, investment in digitalisation of court and administrative systems (Baeck et al. 2025; Lawless 2024), and expertise-sharing on early warning tools or local mediative initiatives. Existing programmes, such as the Technical Support Instrument, offer effective vehicles for this.89

A third, more ambitious avenue concerns incentive-compatible funding. The Commission could offer targeted support to member states for reform design, training, and system digitalisation. Funding could be channelled through the Structural Reform Support Programme or similar mechanisms. Third, conditional funding. EU funding instruments—such as the Recovery and Resilience Facility or the European Social Fund—could include conditionality linked to MSME rescue reform. Member states demonstrating tangible progress in simplifying procedures and building support ecosystems could receive priority access to funds.

Together, these mechanisms could help translate EU ambition into national action. Without them, MSME rescue is likely to remain uneven across the Union, shaped by national disparities that sit uneasily with the EU’s stated ambition to foster a (preventive) rescue culture. The time to act is now. Recent research confirms that MSMEs remain both economically indispensable and structurally fragile. As post-pandemic financial pressures converge with inflation, energy shocks, and geopolitical instability, MSMEs have been disproportionately affected by successive shocks. Insolvencies among MSMEs rose sharply from 2022 onward, with 2024 registering the highest levels since 2018.90 (Kononov 2025). Research predicted that this rise in business insolvencies would put over 1.6 million jobs at risk in Europe and North America alone.91

6. Conclusions

This paper has argued that despite rhetorical commitments to building a “rescue culture”, MSMEs remain largely excluded from Europe’s restructuring landscape. The analysis shows that this exclusion is not accidental. It is the product of a deep and persistent misalignment between legal design, institutional capacity, and the behavioural realities of small-firm distress.

EU restructuring frameworks—most notably Directive 2019/1023—have undoubtedly modernised the legal architecture of European insolvency law. Yet their operational assumptions remain calibrated to the needs and capacities of larger firms: access to professional advice, creditor coordination, formal governance structures, and the administrative resources required to navigate complex procedures. For the overwhelming majority of MSMEs, these assumptions simply do not hold. As a result, the rescue culture championed in EU policy documents has developed in form but not in function.

The comparative evidence underscores this conclusion. Ireland’s SCARP reform illustrates that simplification alone does not generate engagement. Behavioural inertia, informational deficits, and stigma remain deeply rooted. France’s success in generating healthy MSME participation without MSME-specific law, on the other hand, highlights the importance of institutional outreach, early engagement, and cultural trust. The United States offers yet another model—where legal reform is nested within a professional and cultural infrastructure that encourages use.

Across these jurisdictions, a common lesson emerges: law does not operate in isolation. Rescue procedures succeed when they are embedded in an ecosystem that makes them visible, intelligible, and trustworthy. Where institutions are engaged, intermediaries are well-informed, and cultural narratives are supportive, MSMEs will use rescue tools. Where these conditions are absent, even good legal design may fail to generate meaningful access.

For the EU, the implication is clear. The challenge is not the absence of procedures but the absence of a design centred on MSMEs as primary users. The next phase of EU insolvency reform must therefore move beyond doctrinal harmonisation and address the systemic foundations of MSME exclusion. This requires structural adaptation to small-firm realities, institutional scaffolding capable of supporting early and accessible engagement, and cultural strategies to reduce stigma, normalise help-seeking, and counteract behavioural barriers.

Crucially, this agenda does not require a uniform EU-wide MSME procedure. Small-firm distress is local, shaped by national institutional capacity, professional ecosystems, and business culture. Designing an MSME-appropriate rescue framework is inherently difficult. As the opposition to Title V of the 2022 proposal demonstrated, even well-intentioned reforms face political, institutional, and conceptual challenges. One of the most contentious issues is the question of eligibility: who should be treated as an MSME for the purposes of restructuring and support? Europe’s business landscape includes overlapping and hybrid forms—small companies whose owners provide personal guarantees, sole proprietorships legally indistinguishable from the individual, and partnerships operating in practice as small enterprises. Any effective reform strategy must therefore grapple with this diversity rather than assume a neat divide between incorporated and unincorporated business forms. Acknowledging these complexities, however, reinforces rather than undermines the core argument of this paper: that the current framework does too little to accommodate the realities of the majority of Europe’s businesses, and that meaningful progress requires both legal simplification and institutional imagination.

What the EU must ensure, however, is that every Member State provides a credible, functional pathway to rescue for MSMEs—whether through simplified procedures, strengthened preventive institutions, local intermediaries, or hybrid models suited to local conditions. Without such a shared commitment, uptake will continue to vary widely across the Union, undermining both the coherence of EU insolvency policy and the credibility of its rescue culture.

Finally, this paper acknowledges that further empirical work could deepen and refine the analysis presented here. Future research might include experimental or quasi-experimental assessments involving MSME—for example, testing whether simplified legal drafting, early warning tools, or free advisory support measurably influence firms’ willingness to seek restructuring. Such studies would provide important behavioural insights into how institutional design affects help-seeking and would offer a valuable evidence base for future EU and national reforms.

Insolvency should not be a death sentence for MSMEs. With the right tools, infrastructure, and cultural legitimacy, it can become what it was always meant to be: a second chance. The EU has the means—and the mandate—to make this vision a reality.