The Pre-pack Directive proposal: a guide to possible pre-pack proceedings in Slovenia

On 7 December 2022, the European Commission published a proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of the insolvency law. The intention of this Directive Proposal is to make insolvency proceedings more predictable and efficient within the EU.

Most importantly, the Directive Proposal introduces a mandatory inclusion of a new restructuring instrument to Slovenian insolvency law: what is known as a ‘pre-pack proceeding’, which is a fast-track liquidation proceeding that:

• in the preparation phase allows for a sale of debtor’s business as a going concern, in whole or in part, free of debt and liabilities; and
• in the liquidation phase ensures that the sale of debtor’s business is approved and completed, that proceeds are distributed to the creditors, and that the debtor is liquidated in an insolvency proceeding.

In 2013, a proceeding with similar elements to a pre-pack proceeding was implemented into Slovenian insolvency law. For a compulsory settlement proceeding, which is a kind of court restructuring of an insolvent debtor, the law introduced a possibility of a restructuring via spin-off. A compulsory settlement proceeding with an option of restructuring via a spin-off includes the implementation of the process of spinning off the healthy core of the debtor company into a newly created company at the same time that the bankruptcy proceeding opens against the parent company.

The goal of this law was to preserve the healthy core of an insolvent company and ensure continuation of the business while preserving the functional role of the company's assets and organisation of its business.

Such restructuring is carried out in a compulsory settlement proceeding on the basis of a financial restructuring plan (usually negotiated with the creditors), which is confirmed by the required majority of the creditors. The shareholders of the newly established company are either the parent company (in which case the shares are sold later in the ongoing bankruptcy proceedings in a public auction) or secured creditors (in the event the secured assets are transferred to the new company and the increase of share capital is carried out with the spin-off into a new company). 

The most important difference between the proposed ‘prepack proceeding’ and the existing option of court restructuring via a spin-off into a compulsory settlement is that creditors in a ‘prepack proceeding’ do not have a right to vote or co-decide on the sale of debtor’s business in the preparation phase.

Creditors only have a right to be heard by the court before the sale of the debtor’s business is approved or executed. Secured creditors also have the right to participate in the bidding process in ‘pre-pack proceeding’ where they can offer the amount of their secured claims as consideration for the purchase of assets over which they have security.

One of the main principles of the existing Slovenian insolvency law is the effective protection of creditors’ rights and interests. From the moment the debtor becomes insolvent, the creditor's interest prevails.

Even though in ‘pre-pack proceedings’ the principle for selection of the best bid for the sale of a debtor’s business should be in the creditor’s best interest, creditors do not have an active role in the preparation phase.

In the existing insolvency system, creditors are active participants in pre-insolvency and insolvency proceedings and have many rights, such as initiating bankruptcy proceedings against a debtor, voting on the compulsory settlement, voting on the proposed financial restructuring plan, etc. In addition, key information about the debtor must be transparent and accessible to the creditors.

In Slovenia, ‘pre-pack proceedings’ as proposed by the Directive Proposal cannot be directly integrated into any of the currently available pre-insolvency or insolvency proceedings. When transposing the Directive Proposal (if it is indeed passed at all), the legislator could implement each phase of the pre-pack proceeding in different and already existing proceedings (e.g. implement the preparation phase as part of the preliminary insolvency proceedings and the liquidation phase as part of the bankruptcy proceedings) or lawmakers could implement the pre-pack proceedings as an entirely new proceeding.

The main challenge will be how to limit the role of creditors in the preparation phase of a ‘prepack proceeding’.

In our view, creditor participation and better and more detailed safeguards in prepack proceedings would not just reduce controversy around the proceedings, but ensure the support of the main business stakeholders, which will be important in the continuation of operations.

For more information on this EU's proposed Directive and prepack proceedings in Slovenia, contact the authors Maja Erker Žgajnar, Head of Banking & Finance, Restructuring and Insolvency CMS Slovenia, and Neža Vončina or your CMS client partner.

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.