On 7 December 2022, the European Commission published a proposal for a directive for the harmonisation of certain aspects of insolvency laws across EU member states. One of the key elements of this proposal is the introduction of harmonised pre-pack proceedings aimed at increasing the efficiency of business sales in insolvency proceedings. This should facilitate sales of those businesses that are considered "going-concerns", and should in turn preserve more value and lead to higher proceeds for the insolvency estate than a piecemeal liquidation.
Essentially, the proposal foresees two phases of a pre-pack proceeding. In the so-called preparation phase, the debtor must prepare the sale by conducting a competitive, transparent and fair sale process. To ensure that the sales process complies with these pre-requisites, a court-appointed monitor oversees this process. In the subsequent liquidation phase, the pre-packed sale will then be implemented in a streamlined way.
While pre-pack proceedings are already widely used in some European countries, the vast majority of EU members states completely lack any such formalised proceedings to implement pre-pack sales.
This guide provides a brief overview of the status quo of pre-pack proceedings in Austria and outlines the expected impact proposed pre-pack proceedings would have on the prevailing system in place.
Existing Framework in Austria
Under Austrian law no formalised pre-pack proceedings as envisaged by the proposal exist. This particularly applies to the phase before the commencement of insolvency proceedings. Within the confines of general insolvency and corporate law, a company and its management are more or less free to navigate through this preparation phase. As soon as insolvency proceedings have commenced, the procedures foreseen in the Austrian Insolvency Act (Insolvenzordnung) come into play. While the Insolvency Act does not address pre-pack deals, the existing framework already enables an efficient and streamlined implementation of business sales in the course of insolvency proceedings.
As Austrian law does not regulate a formalised preparation phase for insolvency proceedings, any such preparatory measures are left to the discretion of a debtor. This also applies for the preparation of a business sale to be implemented in the course of an insolvency proceeding. Depending on available time and resources (both of which are naturally scarce in crisis situations), the debtor (and the advisors) may therefore engage in a preliminary auction process, search and negotiate with potential buyers and allow them to engage in (limited) due diligence exercises. Ideally, this process will result in letters of intent or even offers submitted by potential buyers. It may also be advantageous to already brief critical business partners about intentions to sell the company’s business in the course of an insolvency proceeding. All these preparatory actions must then be cast into the insolvency petition. Here it is particularly important to “sell” the preferred bidder and the pre-packed deal to the future administrator (and the other insolvency organs). As general insolvency and corporate law apply throughout the pre-filing phase, the debtor and its directors must always be aware of their general obligations in crisis situations under these laws (e.g. insolvency filing obligations or equal treatment of creditors in case the debtor is already illiquid or over-indebted) to avoid potential civil or even criminal liability.
Once the insolvency petition is filed and insolvency proceedings are opened, (with the exception of debtor in possession proceedings) an insolvency administrator takes over the control over the insolvent company and is in charge of the sale of any assets that form part of the insolvency estate. In doing so, the administrator is bound by the provisions of the Insolvency Code, which in relation to business sales provides a formal framework aimed at safeguarding a transparent sales process and transaction certainty:
- At the outset of the insolvency proceeding, various provisions are in place that prohibit the immediate sale of a company’s business. This enables the debtor to offer an insolvency plan (Sanierungsplan) and restructure the company. During this initial phase, a business sale is only possible if it is in the mutual interest of all insolvency creditors.
- Before a business sale can go ahead, the administrator must assess whether the sale of the whole business of the insolvent company by means of an asset deal is the best choice to maximise proceeds for the insolvency estate (by comparing this option to other possible liquidation scenarios). The administrator is not obliged to sell to a preferred bidder suggested by the debtor in the insolvency petition, and the administrator can also decide not to engage in a business sale at all.
- The intended sale of a company’s business must be published in the database of notifications (Ediktsdatei) for at least 14 days. Additionally, the administrator will also try to use other channels to attract and reach more bidders (the complexity of the sales processes arranged by the administrator will depend on the size of the deal). Mainly, no bidder is granted exclusivity.
- Interested bidders are then, after (if requested) being allowed to conduct a short high-level due diligence, invited to send binding offers to the administrator.
- The preferred offer must then receive the approval of the creditors’ committee (Gläubigerausschuss), which will ensure that the sale process was fair and transparent, and the sale is in the best interest of the creditors (e.g. “phoenix sales” will be critically questioned and reviewed).
- The debtor must also be consulted and be given the opportunity to comment on the business sale.
- Finally, the insolvency court must consent to the business sale. Before providing its approval, the court will assess whether all formal requirements have been fulfilled and whether the sales process was appropriate (the latter is the case if according to the court the purchase price is appropriate).
- Even though not explicitly required under applicable law, administrators will in most cases also obtain an expert business valuation on the different offers (and allow the court and the creditors’ committee to do so).
- After having obtained these approvals, the formal transaction documents are signed between the administrator and the buyer and (subject to the fulfillment of certain necessary – especially regulatory - conditions precedent) the transaction is closed.
What must change
As Austria does not have formalised pre-pack proceedings, this section of the proposal would necessitate numerous changes or additions to the existing framework. In particular, the liquidation phase as foreseen in the proposal is completely new to Austrian law. Also, the liquidation phase involves currently unknown innovations (e.g. automatic transfer of contractual relations to the pre-pack buyer or a sale without auction solely based on the statement of the administrator). Overall, the proposed pre-pack proceedings will be (and already is) a controversial topic among Austrian scholars, lawmakers and practitioners. Even though there are numerous provisions of the proposal that require further refinement (e.g. stronger involvement of creditors throughout the pre-pack proceeding, mitigation of any risk of misuse, cost/timing issues – as already outlined, both of which are scarce in a crisis situation – in the preparation phase), pre-pack proceedings are generally welcomed since they potentially provide another efficient instrument to ensure the continuity of a business in insolvency proceedings. Its application in other jurisdictions has shown that it can be a valuable asset to achieve this. As the current Austrian framework – especially a restructuring by insolvency plans – has proven highly successful and efficient in practice, the challenge will be the integration of the pre-pack proceeding into the current framework in a way that avoids it being seen as an unnecessary “alien object”, but rather as the valuable addition it can potentially be.
For more information on this proposal and its impact in Austria and other EU member states, contact your CMS client partner or these CMS experts.
This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.