Proposal for European rules on pre-pack proceedings should be supported

International

On 7 December 2022, the European Commission published the Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law. This Proposal is intended to harmonise the insolvency laws of EU member states in order to make insolvency proceedings more predictable and efficient. The Proposal also includes a number of principles the pre-pack proceedings in each member state must meet.

The Proposal defines pre-pack proceedings as:

“expedited liquidation proceedings that allow for the sale of the business of the debtor, in whole or in part, as a going-concern to the best bidder, with a view to the liquidation of the assets of the debtor as a result of the established insolvency of the debtor.”

The explanatory memorandum to the Proposal states the following about pre-pack proceedings:

“In a pre-pack proceeding, the sale of the debtor’s business (or part of it) is prepared and negotiated before the formal opening of the insolvency proceedings. This makes it possible to execute the sale and obtain the proceeds shortly after opening the formal insolvency proceedings intended to liquidate a company.”

This part of the Proposal is of great importance for insolvency practice because it provides for the introduction of pre-pack proceedings in all member states. For a careful settlement of bankruptcies, it is important that debtors in every member state have access to these proceedings. This prevents forum shopping and contributes to legal equality. In addition, it is important that the Proposal sets a number of minimum requirements for pre-pack proceedings at the European level, which increases the quality of the national statutory regulations.

Court of Justice of the EU (CJEU) case-law has created uncertainty regarding the feasibility of pre-pack proceedings because there is a risk of a transfer of business or undertaking within the meaning of Directive 2001/23/EC. If that is the case, the party purchasing the business will take on all employees of the transferring party by operation of law. This may affect the conclusion of the transfer or the purchase price.

With the Proposal, the European Commission is taking an important step forward in the development of the pre-pack proceedings as a method to limit the harm or loss of parties involved in bankruptcies, such as debtors, employees and customers. The Netherlands was one of the front-runners in the development of legislation on pre-pack proceedings. Informal pre-pack proceedings existed in the Netherlands. Eight of the 11 District Courts informed the debtor fearing bankruptcy of the identity of the appointed bankruptcy trustee should the debtor file a bankruptcy petition. This "prospective bankruptcy trustee" would be able to prepare the bankruptcy proceedings (i.e. an immediate sale of the assets). In the Netherlands, there have been about 100 cases of informal pre-pack between 2012 and 2017.  On 21 June 2016, the Dutch House of Representatives passed the Continuity of Enterprises Act I (Wet continuïteit ondernemingen I). The Continuity of Enterprises Act I provides a legal basis for the pre-pack practice developed in Dutch legal practice. However, the CJEU’s judgment in 'Smallsteps' brought pre-pack practice to a standstill in the Netherlands, including the debate on the Continuity of Enterprises Act I in the Dutch Senate. In its judgment in Smallsteps, the CJEU held that the exception to the employment protection of Article 3 and 4 of Directive 2001/23 included in Article 5(1) of Directive 2001/23 applies only when the main objective of the insolvency or similar proceedings is the liquidation of the assets of the transferor and not the preservation of the business. According to the CJEU, if the transfer of the business is prepared in pre-pack proceedings down to its last detail in order to enable a swift relaunch of the business’s viable units after the declaration of insolvency, the requirement that the proceedings are being initiated with a view to liquidation is not met. The CJEU also held that in the Dutch context, the requirement that these proceedings are under the supervision of a public authority is not met either.

In its judgment in 'Heiploeg', the CJEU once again answered the question to what extent the pre-pack proceedings, as described in the judgment of the Supreme Court of the Netherlands in referring that case to the CJEU for a preliminary ruling, meet the exception requirements of Article 5(1) of Directive 2001/23. In this judgment, the CJEU repeated that the application of the exception provision of Article 5(1) of Directive 2001/23 depends on whether the situation involves bankruptcy proceedings that were initiated with a view to the liquidation of the assets of the transferor or with a view to the continuation of the activities. The CJEU held that it is an established fact that in this case the transfer of the business concerned took place in the context of bankruptcy proceedings intended to liquidate all the assets (i.e. of the business of the transferor). The wording of Article 5(1) of Directive 2001/23 shows that the exceptional situation does not apply only to businesses whose activities ended before or after the transfer. This exception is intended to rule out the serious risk of a general decrease in the value of the transferred business or general deterioration of the living and working conditions of the employees. For this reason, it should be possible to transfer a business subject to the deviation laid down in the aforementioned provision. Because Article 5(1) of Directive 2001/23 does not pertain to the period prior to bankruptcy or insolvency proceedings, it is irrelevant to the application of this criterion whether the transfer was prepared before the initiation of the bankruptcy proceedings. According to the CJEU, when the primary objective of pre-pack proceedings, followed by bankruptcy proceedings, is to obtain the highest possible payment for its joint creditors after the declaration of insolvency and after liquidation, these proceedings jointly, in principle, meet the second condition set out in Article 5(1) of Directive 2001/23. It must be established not only that the primary objective of these proceedings is to achieve the highest possible payment to the joint creditors, but also that the implementation of the liquidation through a transfer of the business or a part thereof as a going concern, as prepared in the pre-pack proceedings and implemented following the bankruptcy proceedings makes it possible to achieve this primary objective. Finally, the CJEU ruled that the conditions of Article 5(1) of Directive 2001/23 can be satisfied when bankruptcy proceedings are prepared in pre-pack proceedings, provided that the pre-pack proceedings are governed by statutory or regulatory provisions.

The judgment in Heiploeg demonstrated that pre-pack proceedings, once provided for by law, can fall under the scope of the exception of Article 5(1) of Directive 2001/23. From the perspective of the parties involved in the bankruptcy, who benefit from having the harm or loss limited as much as possible and seeing the highest possible proceeds, it is good to see that EU law wants reinstate the pre-pack practice through the Proposal after the same EU law saw it unseated earlier.

I refer to the attached article published in the Dutch review Tijdschrift voor Insolventierecht (2023, 3/14), 'Proposal for European rules on pre-pack proceedings should be supported'. In this article, I have discussed and commented the Proposal. I also have given a number of suggestions for additional provisions with reference to the Dutch proposal for pre-pack legislation:

This article was first published in Tijdschrift voor Insolventierecht:

M.R. van Zanten, 'Proposal for European rules on pre-pack proceedings should be supported' published in May 2023 in Tijdschrift voor Insolventierecht, number 3 (Special), 2023/14, p. 99-108, available here: https://nvrii.nl/wp-content/uploads/2023/05/TVI_2023_03_V2A_congresversie.pdf

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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.